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Do You Own an IRA or 401(k)?

Even with the many concerns over retirement accounts in America, it’s undeniable - IRAs and 401(k)s represent a lot of personal wealth for everyday Americans. That means retirement accounts are assets uniquely worthy of particular attention, to plan for when it comes to their role in your estate plan. Indeed, amongst households with $100,000.00 or more to invest, 60% of the household’s assets are in an IRA or 401(k). 

So, how ought retirement accounts factor into your estate planning? Who will inherit them? The answer is not a simple as you may think. Truth be told, the problem with retirement accounts is the crazy quilt of laws governing their distributions, and moreover, different laws apply to 401(k)’s and IRAs. 

The inheritance of retirement accounts is a lively topic and the The Wall Street Journal has recently offered a piece on the issue. While I recommend the full article for your reading file, let’s review a few of the highlights here.

With 401(k)s, the overarching rules are in place thanks to the federal Employee Retirement Income Security Act (ERISA). If you are married, the 401(k) automatically passes to your spouse and does so regardless whether your spouse is listed as the designated beneficiary, unless your spouse waives his or her right to your 401(k). By the way, if you have a premarital agreement, your intended spouse cannot effectively waive rights in your 401(k) until after you are actually married. Plan (and/or update your plan) accordingly.

What if you have children from a former marriage and you want to include them as beneficiaries along with your current spouse? Consider “rolling” your 401(k) into an IRA and making the beneficiary designations per your wishes. You may want to consider this even if your children are beneficiaries under your will and trust. Why? The beneficiary designations on file with the retirement plan administrator trump any arrangements that are set forth in your will and trust. In fact, the U.S. Supreme Court has ruled that, despite any state law to the contrary, your ex-spouse will inherit your 401(k), if he or she is the last designated beneficiary on file with the plan administrator.

IRAs are governed by state law and that, by and large, makes them easier to deal with. Without the inflexibility of the ERISA laws, when it comes to your IRA it’s all about who is named as the beneficiary (unless there is a state law to the contrary). One thing remains consistent, however. The beneficiary on file with the plan administrator takes precedence over any provisions in your will and trust. There are some exceptions to this general rule. One such exception is that New York State (and many other states) don’t allow you to completely disinherit a spouse. Another exception is that we also have laws that automatically disinherit an ex-spouse as beneficiary, unless you’ve completed the extra paperwork to confirm your intent to include your ex-spouse as beneficiary.

So what is the bottom line surrounding retirement accounts? Retirement accounts are important assets for many Americans. Given the complex tangle of laws that control your options, it is essential that you consult with competent legal counsel and coordinate the distribution of your retirement accounts as part of your overall estate planning. Be sure to consult an estate planning attorney licensed to practice in your state of residence, as state property laws may need to be evaluated, too.

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Pitfalls of Owning Assets in Joint Name

Estate planning can be daunting. Once you get past the fact that your very mortality (and morbidity) is the triggering event, estate planning means making a tally of all you own and (in fact more importantly) how you own it. Yes, there are many degrees of ownership and each can make for some difficult wrinkles. 

One common phenomenon is joint ownership between generations (parent and child or grandchild). Not only is it common, but it can make for some unintended problems. Forbes recently ran a piece on some of these problems and the five reasons to avoid such ownership form. Let’s review some of the high points, but I would recommend reading the full article.

Joint ownership oftentimes is an attempt to simplify things, or at least that is why people use it as a means of holding title. Perhaps they want to simplify practical day-to-day financial management. Aging parents needing such help may add an adult child’s name to a bank account or investment, either for direct aid or for just assisting in managing the accounts or assets. Likewise, it could be done as an attempt to avoid probate. Adding the adult child’s name to the account, investment, or real estate as a form of will-substitute (a so-called “poor man’s will”). Of course, these are only simple solutions, and although it may actually work if things go off without a hitch, they could also lead to disaster. 

One problem to remember is joint-ownership is a two-way street. That means that adult child joint owner has equal ownership rights to the assets and so do any of that adult child’s financial predators. The adult child may have their own creditors that they owe money to, may be facing a bitter divorce, or may be sued for damages in civil court. In addition, while no parent would anticipate it, the adult child may use the jointly owned bank account for a “quick loan” when they are running a little short of cash. Any of these unintended consequences can not only jeopardize the financial independence of an aging parent, but can cause hard feeling among other adult children who may (or may not) be joint owners with their parent. 

Another problem, especially from an estate planning perspective, is that joint ownership as a stop-gap or a will-substitute is not really estate planning and may run afoul of the parent’s actual estate distribution wishes. For example, the adult child who has joint ownership doesn’t have to share such assets upon the parent’s death. As you can imagine, it is very easy for such cases to spill over into family squabbles and even prolonged court-cases.

Sometimes joint ownership seems like a good idea and a quick fix to avoid probate. And, sometimes it is. But, before you go out and title all of your assets in joint name, consider the drawbacks. 

In the end, an estate planning attorney can help you determine whether joint ownership is appropriate under your unique circumstances. Remember: Look before you leap. The protection of your assets and family relationships are at stake.

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Creative Planning for Special Needs

Estate planning is never easy, if only because it means thinking about protecting your loved ones when you’re no longer around. It’s tough enough making plans to protect self-sufficient heirs who take care of themselves and an inheritance. However, it can be a real challenge when planning for heirs with special needs for a variety of personal and legal reasons. Unfortunately, as The Wall Street Journal Online recently pointed out, with the economy and politics as they are, there are new concerns to bear in mind as you plan.

Both the State and federal budgets are strapped for cash and the burden is falling on Medicare and Medicaid. It’s up to the Congressional Special Committee to consider the future of Medicare now, but many Medicaid programs already are feeling the squeeze with tighter income restrictions for benefits and services.

Of course, much of the disabled population (12% of the overall population) relies on state and federal services that they couldn’t afford in the private market. To plan for an heir with special needs, then, means planning to provide for them without risking their main sources of care. Now, more than ever, that means a “supplemental needs trust,” tailored to provide the inheritance as a safety net without endangering the continuation of public benefits.

The other major issue, and a related one, is housing. Many Americans with special needs live in group-housing programs. These programs are, in turn, subsidized by government agencies, but are increasingly unable to meet demand because they are becoming cash-strapped. For one, the same political/economic pressure is keeping those agencies from expanding.

At the same time, there simply are more prospective residents due to lengthening life expectancies. The US would have had to expand its residential-services capacity by 28% to meet the demand as of two years ago. Clearly, housing has been an issue and it will only get worse in the future.

Amidst all of this uncertainty, you still need to plan where your loved one will live. This might mean another form of trust. For example, a “Qualified Personal Residence Trust” (QPRT) would provide that you live in your home until your death, but that your family member with special needs would live there (without disqualifying ownership). Great care would need to be given in the preparation of such an arrangement. Also, it may be possible to provide a home to shelter several persons with special needs. For example, say several families pool resources, or even to leave a home to a non-profit that can convert the home into a new group home. The options are limited only by your creativity (or the creativity of your attorney).

Ultimately, the best plan will depend on your own unique family circumstances, as well as the current state and federal laws governing benefits and services. Unfortunately, according to a recent study by ARC, an advocacy group, only one-third of those affected actually have a plan to control what happens when the caregiver grows old and after they are gone.

Bottom line: Remember to engage qualified legal counsel to help you navigate the regulatory minefields.

Trust Planning can Provide a Wealth of Options

While planning for your estate addresses many concerns, likely providing your loved ones is at the top of the list. But what if you can’t fully trust your loved ones to use your gifts wisely and to take care of themselves responsibly? One common alternative is to cut those problem cases out of the will through disinheritance. Nevertheless, as a recent New York Times article points out, those problem cases are all the more reason to make proper estate plans to protect your legacy and to use the inheritance to promote positive change.

Problem cases for inheritances aren’t all “problem” children. You know, the gamblers, the drug addicts, and the habitually irresponsible within our families. Oftentimes, the risks to an inheritance do not necessarily originate with the problem child, rather the problems find the child… and their inheritance. Classic examples of inheritance predators include divorces, lawsuits and bankruptcies.

Indeed, much of the time the concern is just over the possibility of future problems, ones you can’t foresee while planning your estate today, especially when you’re planning with young children in mind. However, the form of the inheritance can help curb present problems and work to avoid future ones by instilling character.

How can you do it? The most powerful tool is the trust for a variety of reasons. At the most basic level, the trust allows limits. Regardless whether money is the cause of the problems, it’s certainly not going to help. A trust can limit the access your loved one has to the money, while still ensuring it is available when they truly need it.

Within the concept of a trust, there are many varieties and options to address nearly every concern. For example, there is the “incentive trust.” This trust still restricts funds, but will make funds available if the beneficiary meets certain stated objectives. A classic example may be remaining drug-free for a certain number of years. On the other hand, it can be a character-building trigger like admission to a certain college or graduation from one. In short; the triggers can be just about anything. Experience has demonstrated, however, that this approach is most effective when you are upfront now about rules of the road regarding the correlation between future conduct and availability of the funds. Take the opportunity to pass along your positive values, rather than just set up a future gotcha program for a loved one to “game” after you are gone.

For those planners who take a uniquely long view, there also is the option of the “dynasty trust.” It has all of the benefits of a trust, but extends those benefits across as many generations as possible, for as long as the funds last (according to current law), and, quite literally, works to form dynastic wealth. That means that using one properly can mean protecting the family assets from problem inheritors for several generations. 

Navigate Through the Medicare Maze

Following up on my last post, did you know Medicare’s annual election period starts tomorrow? It runs from October 15 through December 7, to be precise. Now is the time to evaluate your options. Should you stick with your current plan, or is it time to make a change? Would you be better off using Medicare classic or is a Medicare Advantage Plan the ticket?

This is not planning that you should take lightly, especially when it comes to Medicare Advantage plans. According to a recent article on MarketWatch many seniors simply end up paying too much. Why? Because they either didn’t take the time to evaluate their options, or they didn’t understand the consequences of their decision.

About 1 in 4 of all Medicare recipients are signed up through a Medicare Advantage plan – about 11.7 million Americans – and for good reason. Under the right circumstances a Medicare Advantage plan can be much cheaper than pairing Medicare classic with Medigap and prescription drug plans. You just have to choose wisely.

Plans vary in many ways, some great and some small, and, without realizing it, you could choose a plan that makes your prescriptions cost several times what another plan would offer. The article’s most telling example is that “people in one Georgia zip code who take 70 mg tablets of osteoporosis drug Fosamax once daily may have annual expenses ranging from $2,661 to $9,032 — depending on which Medicare Advantage plan they pick.”

I can understand and appreciate that it’s easy to get confused. You can easily suffer option overload, especially for the 25% of the nation that has 30 or more plan options. To narrow things down, keep a few things in mind. First, how important is your doctor to you? Advantage plans don’t let you choose your doctor. Why? They work as managed-care policies, either health maintenance organizations (HMOs) or preferred provider organizations (PPOs), and specify the networks. So, if you like your own doctor, then you might consider only those plans where your doctor is within the plan network. Realize, however, that keeping your own doctor may come at a price.

When it comes to cost (the second and most important detail after choice of doctor) you want to keep updated and run the numbers every year. Plans can change every year by tweaking co-payments here or altering premiums there, not to mention the fact that you might find yourself taking changing prescriptions from year to year. You need to examine all the changes and actual prices for your prescriptions to get a true picture of your costs. By the way, when comparing costs, the Medicare website can be helpful with its plan finder tool. Atlernatively, you also can consult experts like those at the Medicare Rights Center or a local organization.

Do you understand Medicare benefits?

It’s no secret that Medicare is a difficult system to understand. Unfortunately, it’s a fact of life for our nation’s seniors. As a result, Medicare is something we all have to work to understand. For many of us, though, there is at least one more resource available to many of us, according to a recent article – “Medicare, Now Less Complicated” – by SmartMoney.

The problem with so many Medicare informational resources is that you have to read through tomes of legalese, sift through graphs and charts, and, in the end, you still haven’t figured out the answer to your question. Good news: A new program called “Seniors Out Speaking”, or SOS, is a peer-advice program through which volunteer seniors teach other senior about Medicare. It’s a program of the Medicare Rights Center, and it’s currently operating here in New York. (It is also operating (or soon to be) in Kansas, Maryland and New Jersey, Alabama, Florida, Maine and Wisconsin).

Although SOS currently doesn’t exist everywhere, the Center hopes to expand its support. The Center believes the program can be easily replicated in communities across the country. As a result, a generation hitting retirement all at once will be able to help each other through it.

More information on Medicare itself can be found on the Medicare Rights Center website. Also, it might be worth looking into your local community events calendar to see if there are any seminars or programs in your area.

Attention all women!

Estate planning is the personal responsibility of every adult American. Of course, certain people have special concerns when it comes to estate planning and this is especially true for women. Deborah L. Jacobs has written in Forbes about the case for women to come to grips with estate planning.

Estate planning tends to have a disproportionate effect on women. Why? They tend to live longer than their mates (among all Americans 65 and older, 42% of women are widowed compared to just 14% of men). They also tend to marry older men and tend to have lower lifetime earnings. As a result, women are more likely to be alive when the estate plans of their spouses go into effect.

As the surviving spouse, often all of the marital assets owned by a couple are transferred to the wife. This forces many women to take on new responsibilities regarding their personal finances and their estate planning. Ms. Jacobs has some very practical advice for women, including encouraging them to talk about estate planning. Whether that conversation is with a spouse, an adult child, or a parent, she offers suggestions in all three cases.  

Estate Planning Alphabet Soup

Unfortunately, estate-planning opportunities tend to be hard to time. Practically speaking, you tend to not be “done” with your estate when the law creates a planning window. Certainly, that was the joke in 2010 when the estate tax lapsed and it become “the year to die.” (Just ask the family of George Steinbrenner!)

As I (and many others) have noted previously, both 2011 and 2012 are incredibly favorable years for gifting. While the law (and other factors) have made these scant two years such a great window, you may feel that your not yet ready to part with the assets of your estate you might otherwise want to gift. Thankfully, there are a number of legal “tools” that allow you to give without giving up (at least not yet) such assets.

I was surfing the internet and found an excellent article in The Des Moines Register regarding this issue (Retained Income Trusts Benefit Heirs). In fact the article provided a brief overview of those legal tools I thought it you might enjoy.

Bottom line: The solution to giving without giving up may be accomplished via a class of trusts called “retained interest trusts.” Why this name? Because, literally, you retain an interest in the assets and the type of interest retained, in turn, determines the exact kind of trust. As with most things in life, each flavor of trust has its own strengths, weaknesses, and a terrible acronym.

The GRAT, or “Grantor Retained Annuity Trust” is the most commonly talked about these days for a number of reasons (like those in this recent article). Essentially, a GRAT allows you to retain an interest in the assets in the form of an “annuity” that will provide a steady income to you.

The GRUT, or “Grantor Retained Uni-Trust” allows you to keep an interest in the assets in the form of a regular payment, which is a “fixed percentage” of the value of the assets in the trust. This means if the value of the assets appreciates, so to will your regular payment.

Then there’s the GRIT or “Grantor Retained Income Trust,” which allows you to retain an “income” from the assets. Note: This generally is less flexible when it comes to giving to heirs, except when it is used to give away a residence. (This trust is often used in Medicaid planning situations.) A GRIT can also be set up as a QPRT, which is a “Qualified Personal Residence Trust.” With a QPRT the asset is a residence and the income to be retained is the “right to live there.” In other words, putting your home into a QPRT is giving the home away, but without the hassle of moving (yet.)

In all cases, whatever you would give away to your loved ones outright is, instead, put into the trust. You retain the respective interest in the asset and name your heirs as beneficiaries, effectively transferring the asset and taking advantage of a good estate planning opportunity well before your time. In all cases, though, a great deal depends on your specific situation and certainly qualified legal counsel will be required to assess how to best weave the plan together (not to mention in implementing the appropriate trust).

 

Asset Protection Pointer: Start Yesterday

We tend to think of the law as a rigid structure, unless of course it’s bending to help us. On the other hand, the law also might bend against us… and that can be rather unsettling, especially when you are a debtor attempting to protect your assets.

Unfortunately, it seems creditors win most of the asset protection cases brought to court. In fact, a review of such cases suggests that courts have a bias in favor of creditors over debtors. Jay Atkinson at Forbes recently weighed in on why that is so and offers a glimpse into the politics and psychology of the court. Since asset protection is often a component of a good estate plan, I thought you might find it instructive.

Truth be told, assessing the value of asset protection is not something that can be done by merely scanning a record of court wins and losses for debtors and creditors. Why? Consider this: Creditors, by nature, tend to be the litigants who are after something. That means they can call it quits if they feel their legal position is not particularly strong. And if that is the case, they are more likely to pursue an out of court settlement.

Debtors, however, have to stay on the defensive no matter how much ground they’re forced to surrender. This means that most of the court precedents and legal interpretations are going to be pro-creditor, because the only way the court can affect change is by coming to a decision. If the decisions are always victories for creditors, then it follows that the precedents will also be pro-creditor. As Atkinson concludes: “The cases that are ‘good’ for debtors usually settle; the cases that are ‘good’ for creditors will probably go to a decision and thus ‘make law.’” That is about as well-summarized as I have seen on this topic. 

Atkinson has some more to say, particularly on the topic of judicial psychology, but the main lesson here: Court is not a “friendly” place for debtors. Indeed, as Atkinson points out, proper asset protection is really all about avoiding court or the need for a court decision. Simply put, proper asset protection is about proper planning and having it completed far ahead of time. 

 

Steps to consider when you inherit a retirement account.

Inheriting something is not the same as knowing what to do with it, and that can be especially true if you inherit a retirement account. I recently found an article from Forbes offering seven steps to take if you have recently received an inheritance, or if you know that you will receive an account in the future. Likewise, if you are planning on leaving a retirement account or if you want to keep your beneficiary in the know, these are some of the things to discuss with them. Without further ado, here is a slightly re-tooled list of ideas:

1. Find out if a required minimum distribution (RMD) needs to be taken for the year you receive it. If the account is tax-deferred (like a traditional IRA or 401k) and the owner was at least 70½ then you need to contact the account custodian to be sure that it has been taken and to take it yourself if needed.
2. If there are multiple beneficiaries, consider splitting the account into separate IRAs for each beneficiary. This can help avoid investment disputes and allows the younger beneficiaries greater leverage in stretching out RMD’s.
3. If there are secondary beneficiaries you may decide to disclaim the IRA, especially if it’s not something that you need or if it will be a tax burden, and in that way pass it on to the next listed beneficiaries.
4. You need to figure out when to begin taking RMD’s. If you’re not the spouse of the deceased, this means re-titling the account to reflect that it is yours by way of a beneficiary inheritance. If you are the spouse this either means waiting until your spouse would have begun taking them (when they would have turned 70½) or rolling it into your own IRA and treating it as your own.
5. Determine if you want to keep the account with the current institution. Some institutions may not allow you to take distributions over your own lifetime and therefore you may want to move it. In that case it is often best to open an account at another institution and ask them to transfer the account (rather than taking it out yourself and trying to move it over, as that can be risky.)

Name your own beneficiaries and secondary beneficiaries, ensuring the protection of the account and giving flexibility to your heirs.