Michigan Estate Planning Blog

To Protect Your Heirs From Themselves: Inherited IRAs And Trustee Guidance Mid-Michigan

Sometimes all you want to do is just give away an asset to your heirs, let them do with it as they wish, and let life teach them the folly of shortsightedness if they are not good stewards. Then again, simply letting them fail in the "school for hard knocks" can be such an awful waste and not all heirs learn best by failure. This is especially true in the case of an inherited IRA. You may have many assets to leave behind for your heirs. However, an IRA is unique enough to be easily squandered in taxes, as MarketWatch noted in a recent article appropriately titled “Protect your heirs from an IRA tax trap.” IRAs are some of the most common high-value assets. That noted, because they are such unique accounts, there are some equally unique rules regarding inherited IRAs that are either amenable to diligent financial planning or a short-term high of a cash-out. When an IRA is inherited, the inheritor can elect to take regular distributions (much like the retiree who earned the funds in the first place) that will stretch over the life of the IRA. This can maximize the long-term value of the IRA and minimize the taxation. Alternatively, the inheritor can elect to immediately cash out the IRA and foot the tax bill on the whole sum. This will limit the value of the IRA now and maximize the taxation, limiting growth and the true benefit to the IRA in the first place. Either way, how do you make sure the inheritor will make the right decision? The original article has some options for you to consider. This is important if your IRA is going to be a large part of the inheritance you leave. Basically, to avoid a disaster that cannot be undone, make sure there is someone there to speak up when needed and to exercise authority over the decision. You can either name a trust as the beneficiary of the IRA, giving a trustee discretion, or you can actually structure the IRA to be a Trusteed IRA. Each option requires sound legal and financial planning advice, as the rules are some of the most complex in the entire tax code. How does IRA distribution planning fit into your overall estate plan? Is the IRA the only asset you worry about or is there more to protect? With careful legal structuring, an entire estate plan can work to protect your heirs from themselves.

Reference: MarketWatch (April 28, 2013) “Protect your heirs from an IRA tax trap”

For more information, see www.jerryreiflawyer.com

 

To Protect Your Heirs From Themselves: Inherited IRAs And Trustee Guidance Saginaw, MI

Sometimes all you want to do is just give away an asset to your heirs, let them do with it as they wish, and let life teach them the folly of shortsightedness if they are not good stewards. Then again, simply letting them fail in the "school for hard knocks" can be such an awful waste and not all heirs learn best by failure. This is especially true in the case of an inherited IRA. You may have many assets to leave behind for your heirs. However, an IRA is unique enough to be easily squandered in taxes, as MarketWatch noted in a recent article appropriately titled “Protect your heirs from an IRA tax trap.” IRAs are some of the most common high-value assets. That noted, because they are such unique accounts, there are some equally unique rules regarding inherited IRAs that are either amenable to diligent financial planning or a short-term high of a cash-out. When an IRA is inherited, the inheritor can elect to take regular distributions (much like the retiree who earned the funds in the first place) that will stretch over the life of the IRA. This can maximize the long-term value of the IRA and minimize the taxation. Alternatively, the inheritor can elect to immediately cash out the IRA and foot the tax bill on the whole sum. This will limit the value of the IRA now and maximize the taxation, limiting growth and the true benefit to the IRA in the first place. Either way, how do you make sure the inheritor will make the right decision? The original article has some options for you to consider. This is important if your IRA is going to be a large part of the inheritance you leave. Basically, to avoid a disaster that cannot be undone, make sure there is someone there to speak up when needed and to exercise authority over the decision. You can either name a trust as the beneficiary of the IRA, giving a trustee discretion, or you can actually structure the IRA to be a Trusteed IRA. Each option requires sound legal and financial planning advice, as the rules are some of the most complex in the entire tax code. How does IRA distribution planning fit into your overall estate plan? Is the IRA the only asset you worry about or is there more to protect? With careful legal structuring, an entire estate plan can work to protect your heirs from themselves.

Reference: MarketWatch (April 28, 2013) “Protect your heirs from an IRA tax trap”

For more information, see www.jerryreiflawyer.com

 

Fiscal Cliff Deal Opens Door to Last-Minute Charitable Contributions

If you are past age 70-1/2, you probably already know that you must take required minimum distributions (RMDs) from your traditional IRA, and that you must pay income taxes on those distributions (this does not apply to Roth IRAs). What you may not know is, if you are charitably inclined, the American Taxpayer Relief Act (commonly referred to as the Fiscal Cliff Deal) allows you to avoid income taxes by directing those RMDs to a qualified charity with an IRA Charitable Rollover. The rule applies for 2013, and includes a small window of opportunity for 2012 donations as well. We have had this deal before, but Congress let it expire at the end of 2011. So, it’s likely that most people already took their 2012 RMDs, as required by law, before December 31st. If you didn’t, though, Congress has given you until January 31st, 2013 to make a charitable contribution that can satisfy all or part of your RMD for 2012. Confused? You may want to read more about it in the Forbes article, “Fiscal Cliff Deal Allows Giving IRA Assets to Charity.” If this giving strategy sounds appealing to you, bear a few things in mind: • To qualify, your donations must be directed from your IRA to the charity, and cannot be distributed to you first. Ask the account custodian to send the distribution directly to the charity. • Your donations cannot go to donor-advised funds, supporting organizations or private non-operating foundations. Otherwise, the money can go to any organization to which you can make a gift that would qualify as a charitable deduction on your tax return.

Reference: Forbes (January 2, 2013), “Fiscal Cliff Deal Allows Giving IRA Assets To Charity

For more information, go to www.jerryreiflawyer.com

 

ESTATE LAW / IRA INHERITANCES

Surviving spouses have a number of pressing issues to consider after the death of a spouse. It always has been that way. Now, however, their lot is even more difficult as more is at stake, to include mistakes regarding IRA gotchas. Unfortunately, not giving due attention to an inherited IRA can be a very costly mistake. The problem is the IRA rollover penalty. The Wall Street Journal rates it as one of the biggest mistakes a surviving spouse can make. The standard advice is to roll over a decedent’s IRA into your own IRA. However, especially in light of current events, this might be a rule of thumb to avoid until you’ve weighed your own options. IRAs are tricky and getting increasingly trickier. Not to mention the reality that an ever increasing amount of personal wealth is being held and passed down in the form of IRA investments at this time of incredible market volatility. If you are at or over age 59, then an IRA rollover may not be a bad idea (since you’ll have access to the IRA funds shortly). Nevertheless, a great many spouses will receive an IRA before that age and it’s not usable wealth to cover all sorts of new expenses, unless you pay the 10% to make early withdrawals. Instead, the IRA could simply be inherited and remain in the name of the decedent. On the downside, this approach would require taking regular and taxable withdrawals on the account right now. In general, a great deal of thought should go into how to best “inherit” an IRA. The Wall Street Journal article goes on to mention a few other survivor mistakes, along with some interesting statistics about IRA rollovers.

Reference: The Wall Street Journal (November 12, 2011) “Survivors’ Biggest Mistakes”