Estate Planning With 401(k), SEP, and 401(B) Plans

Many of you have retirement plans. If you are reading this article and don’t have a beneficiary designated, stop reading and go designate a proper beneficiary right now! This designation trumps your estate planning documents.

Who Can be Named as a Beneficiary?

  • Individual- 

    Naming an individual as beneficiary of a retirement plan helps protect the account from divorce, creditors and, in some states, bankruptcy and benefits from being subject to favorable tax treatment.

  • Estate-

    Retirement plans payable to an estate are subject to probate which can:

         delay the receipt of such funds

         potentially expose them to creditor claims,

         and necessitate the listing of such assets on the probate inventory

  • Charity-

    Benefits can be distributed to a charitable organization,

    In this plan, the charity receives the benefits free of income tax, as opposed to an individual beneficiary who must pay income tax on the benefits that he receives from a traditional requirement plan.

    Further, any benefits left to charity qualify for an estate tax deduction in a decedent’s estate. This is a win-win.

  • Trusts-

    A trust may be named as the beneficiary of a retirement plan, but it cannot be a Designated Beneficiary.

    However, the beneficiaries of a trust may be treated as Designated Beneficiaries if the trust meets certain criteria.

    The criteria are as follows:

    (i) the trust must be valid under state law;

    (ii) the trust must be irrevocable (either upon creation or upon the death of the owner);

    (iii) the beneficiaries must be identifiable from the trust instrument (essentially, the Internal Revenue Service needs to be able to identify the beneficiary with the shortest life expectancy); and

    (iv) proper documentation (a list of all of the beneficiaries of the trust or a copy of the trust instrument itself) must be provided to the plan custodian by October 31 of the calendar year immediately following the calendar year in which the plan owner died

    If you need help designating a beneficiary or drafting Wills and Trusts, please contact us today! Proper beneficiary designation can save you thousands in inheritance related investment losses.


5 Retiree Tax Updates from New Tax Laws

As a retiree, you deserve an easy-going, good life. Managing your retirement income  and understanding how the $1.2 trillion tax overhaul signed into law by President Trump may affect your retirement funds is important.  To save us all from boredom, we’ll stick to the five most important items of note (in our opinion).

These changes would be for next year’s taxes, to be filed in 2019. Tax returns for 2017 tax returns are due on April 17 . . .unless you extend.

5 Retiree Tax Updates Resulting From New Tax Law

Retirees will have to be more strategic about their IRA conversions

The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.

Check out this calculator to see if you’ll owe more or less next year: The Trump calculator — will you pay more or less?

And contribute to charity twice every two years

Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes.

Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit.

Personal income tax rates are changing, but still important

Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket.

It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.

Small businesses may not offer retirement accounts

Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts.

The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.

Some retirees may want to move

Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.

The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.

If you have questions about the tax plan or about estate planning in general, give us a call at 817.638.9016.

How to Inherit an IRA

For many, the most special person in their lives is their spouse. The tax code treats spouses in unique ways by granting them abilities unavailable to others. Inheriting an IRA is one of those times.

Your spouse has options when inheriting your IRA. Here they are:

The most often used spouses-only option is the ability to roll the IRA into their own name. This makes things very simple for the surviving spouse. By rolling into their own name, they call all the shots and the funds are treated as if they had always been in the spouse’s name.

Most surviving spouses do this reflexively as the default. It feels like a no-brainer.

However, there are circumstances in which other options should be considered. Three that we see a lot are a surviving spouse who is older than the deceased spouse, a surviving spouse who is under 59 ½ years old and a surviving spouse in a high marginal income tax bracket.

When the survivor is older than the deceased and rolls the IRA into their own name, the IRA is treated as if it were always the survivor’s so Required Minimum Distributions are based on the survivor’s higher age. RMDs will be larger if they had already begun or will start sooner if they had not already begun.

This can be addressed by taking the deceased’s IRA as an inherited IRA. The IRA stays in the deceased’s name and the surviving spouse is referred to in the title with wording like “spousal beneficiary”. RMDs will then be based upon the deceased’s birthdate and the Single Life table unless and until the funds are rolled into an IRA just in the surviving spouse’s name.

When it comes to retirement, 60s are the new 50s
When the survivor is under 59 ½ and rolls the IRA into their own name, the IRA is treated as if it were always the survivor’s so distributions could be subject to the 10% early distribution penalty. This too can be addressed by taking the deceased’s IRA as an inherited IRA. The survivor will be able to take distributions at will, pay the applicable taxes but avoid the 10% penalty. Once the survivor reaches 59 ½, they can roll the deceased’s IRA into their own IRA if they wish.

A surviving spouse in a high-income tax bracket with no need for the taxable income that comes from the IRA may prefer that lower income family members inherit the IRA money instead. The surviving spouse can disclaim their interest. The disclaiming spouse does not get to decide how the funds are distributed. The funds flow to the contingent beneficiaries as though the disclaiming spouse pre-deceased the original IRA owner. Anyone interested in disclaiming should consult a qualified attorney.

If you have questions about your IRA or an inherited IRA, please contact us today. 817.638.9016.