Retirement Planning

For many Americans, retirement accounts comprise a substantial portion of their wealth. When planning your estate, it is important to consider the ramifications of tax-deferred retirement accounts, such as 401(k) and 403(b) accounts and traditional IRAs. (Roth IRAs are not tax-deferred accounts and are therefore treated differently). One of the primary goals of any estate plan is to pass your assets to your beneficiaries in a way that enables them to pay the lowest possible tax.

Generally, receiving inherited property is not a transaction that is subject to income tax. However, that is not the case with tax-deferred retirement accounts, which represent income for which the government has not previously collected income tax. Money cannot be kept in an IRA indefinitely; it must be distributed according to federal regulations. The amount that must be distributed annually is known as the required minimum distribution (RMD). If the distributions do not equal the RMD, beneficiaries may be forced to pay a 50% excise tax on the amount that was not distributed as required.

After death, the beneficiaries typically will owe income tax on the amount withdrawn from the decedent’s retirement account. Beneficiaries must take distributions from the account based on the IRS’s life expectancy tables, and these distributions are taxed as ordinary income. If there is more than one beneficiary, the one with the shortest life expectancy is the designated beneficiary for distribution purposes. Proper estate planning techniques should afford the beneficiaries a way to defer this income tax for as long as possible by delaying withdrawals from the tax-deferred retirement account.

The most tax-favorable situation occurs when the decedent’s spouse is the named beneficiary of the account. The spouse is the only person who has the option to roll over the account into his or her own IRA. In doing so, the surviving spouse can defer withdrawals until he or she turns 70 ½; whereas any other beneficiary must start withdrawing money the year after the decedent’s death.

Generally, a revocable trust should not be the beneficiary of a tax-deferred retirement account, as this situation limits the potential for income tax deferral. A trust may be the preferred option if a life expectancy payout option or spousal rollover are unimportant or unavailable, but this should be discussed in detail with an experienced estate planning attorney. Additionally, there are situations where income tax deferral is not a consideration, such as when an IRA or 401(k) requires a lump-sum distribution upon death, when a beneficiary will liquidate the account upon the decedent’s death for an immediate need, or if the amount is so small that it will not result in a substantial amount of additional income tax.

The bottom line is that trusts typically should be avoided as beneficiaries of tax-deferred retirement accounts, unless there is a compelling non-tax-related reason that outweighs the lost income tax deferral of using a trust. This is a complex area of law involving inheritance and tax implications that should be fully considered with the aid of an experienced estate planning lawyer.

If a person becomes mentally or physically handicapped to a point where they can no longer make rational decisions about their person or their finances, their loved ones may consider a guardianship or a conservatorship whereby a guardian would make decisions concerning the physical person of the disabled individual, and conservators make decisions about the finances.

Typically, a loved one who is seeking a guardianship or a conservatorship will petition the appropriate court to be appointed guardian and/or conservator. The court will most likely require a medical doctor to make an examination of the disabled individual, also referred to as the ward, and appoint an attorney to represent the ward’s interests. The court will then typically hold a hearing to determine whether a guardianship and/or conservatorship should be established. If so, the ward would no longer have the ability to make his or her own medical or financial decisions.  The guardian and/or conservator usually must file annual reports on the status of the ward and his finances.

Guardianships and conservatorships can be an expensive legal process, and in many cases they are not necessary or could be avoided with a little advance planning. One way is with a financial power of attorney, and advance directives for healthcare such as living wills and durable powers of attorney for healthcare. With those documents, a mentally competent adult can appoint one or more individuals to handle his or her finances and healthcare decisions in the event that he or she can no longer take care of those things. A living trust is also a good way to allow someone to handle your financial affairs – you can create the trust while you are alive, and if you become incompetent someone else can manage your property on your behalf.

In addition to establishing durable powers of attorney and advanced healthcare directives, it is often beneficial to apply for representative payee status for government benefits. If a person gets VA benefits, Social Security or Supplemental Security Income, the Social Security Administration or the Veterans’ Administration can appoint a representative payee for the benefits without requiring a conservatorship. This can be especially helpful in situations in which the ward owns no assets and the only income is from Social Security or the VA.

When a loved one becomes mentally or physically handicapped to the point of no longer being able to take care of his or her own affairs, it can be tough for loved ones to know what to do. Fortunately, the law provides many options for people in this situation.  
 

You may have seen the article in last weekend’s Star and Tribune detailing the changes to our statutory power of attorney document titled “Power-of-attorney law addresses ‘rampant’ abuse“ and wondered if the power of attorney document you have safely tucked away with your estate planning documents is still valid. 

First of all, few legal documents are more fundamental than a Power of Attorney (POA). In fact, every “legal” adult should have one. Like most legal tools, the POA can be tailored to fit nearly every need. The broadest POA is the “General Durable POA.” This gives the agent you appoint authority to do nearly every legal and financial act you can do for yourself, even when you are incapacitated. That is broad authority. In the wrong hands, it can be more than dangerous.  But, do not think that a power of attorney is not worth having because n the right hands, it can be a true blessing to allow a loved one to take care of your affairs when you are not able to. 

The POA discussed in the tribune’s article is the statutory power of attorney and some safe guards have been built into a new version of the document based on a law passed in April of this year.  Parts of the law become effective in August with the rest of the law becoming effective in January of next year.  The next time you update your estate planning documents, your statutory power of attorney may look a little different but this is an effort to better the procedure for allowing another individual to step into your financial shoes if you are incapacitated or geographically unable to act on your own behalf.  This document is an invaluable tool for a family member, close friend or relative to take care of your financial matters at a time when you cannot do so. 

 

It’s called your “golden years” but for many seniors and baby boomers, there is no gold and retirement savings are too often insufficient to maintain even basic living standards of retirees. In fact, a recent study by the University of Michigan found that baby boomers are the fastest growing age group filing for bankruptcy. And even for those who have not yet filed for bankruptcy, a lack of retirement savings greatly troubles many who face their final years with fear and uncertainty.
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Estate Planning Attorney with offices in Plymouth and Maple Grove Warns About The Importance of Matching Beneficiaries to Those Named in Your Will or Trust

As an estate planning attorney in Plymouth and Maple Grove, I have unfortunately seen many circumstances where a person goes through the time and expense of having an estate plan done, only to fail to update their beneficiaries on their financial or retirement accounts before they pass away.

An example of this would be Mary naming her brother Bill as the beneficiary of her life insurance policy in her trust, but at the time of her death, she had a different beneficiary named on the policy itself.

Just as life changes, so do your relationships, which can affect who you want to receive your assets --especially if you do not have children. Changing the beneficiary on assets such as bank accounts or life insurance policies is not uncommon, but you must remember to make sure that your will or trust reflects that change also.

Keeping your estate planning documents and beneficiaries up-to-date and coordinated is a quick and painless way to prevent legal headaches from occurring after you are gone.

Having two different named beneficiaries on two different documents can result in a lengthy and costly process to fix it – especially if each named person believes that they should be the one to inherit the asset.

The best way to avoid problems like this is to have a lawyer who focuses on estate planning and specifically, retirement planning to handle every aspect of your estate. If you are ready to get started, we invite you to call our office at 763-231-7884 to schedule a free consultation.