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The SECURE Act: Your Retirement and Estate Plan

One of the major places many of my clients save is in retirement accounts.  This may be in a 401k, IRA, 401a, or 403b, among others.  Unless set up as a Roth account, when money is taken out of these accounts, income tax will have to be paid.  Because this is one of the largest tax implications my clients will see in their estate plans, it’s an important subject.

I’m writing about this now because the Setting Every Community Up for Retirement Enhancement Act of 2019, otherwise known as the SECURE ACT, went into effect January 1, 2020.  This act brings many changes for retirement plans and if you have a significant amount of money in retirement accounts, it will affect your estate plan.

If you inherited a retirement account prior to January 1, 2020, you were able to rollover the inherited money into your own Inherited IRA.  However, every year the IRS requires you to take out a small amount of money from the account which you would pay taxes on.  The benefit here is that it is based on your age and could be taken over your lifetime.  Thus “stretching” the money and taking out a smaller amount each year, and ultimately paying less on taxes.

However, under the new law, retirement accounts inherited after January 1, 2020 will now have to distribute entire account within 10 years of the year of death of the owner of the account.  There are some exceptions to this new rule, but the important aspect of this law is that it is a major tax change.  Because it is such a large change, we sent out letters to our clients letting them know about this change.

Even before this law went into effect, we often recommended clients keep retirement money away from trusts, which are taxed at higher rates.  Every client we see gets a personalized recommendation on how to list beneficiaries on retirement accounts.  Now, with this tax change, we are recommending all our trust clients to review how their retirement account beneficiaries are listed.  In addition, for our clients that list their trust as the beneficiary on retirement accounts, we are recommending updating their trusts to account for these changes.

So, do you know how you have your beneficiaries listed on your retirement accounts?

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Trusts: Do you need a Trust?

Often times people know someone who have a trust and so they think they need one too.  Not every estate plan needs to have a trust.  Every family has different circumstances, so just because your friend has a trust doesn’t necessarily mean that you need a trust.

There are some benefits of having a trust in addition to a will.  Assets held in trust avoid probate.  However, a trust is not the only way to avoid probate.  Proper beneficiary designations on all assets can also avoid probate. Therefore, if you’re only creating a trust because you think you need one to avoid probate, you might reconsider.

However, if you want to control your money after you’re gone, a trust is the easiest way to do so.  If you don’t want your child to receive a big inheritance all at once, a trust can be set up to distribute the inheritance over time, at ages that you decide.  You might choose to leave a certain amount upon the child’ s graduation from college, and then give a certain percentage of the inheritance when they are 25, or 30, or whatever age you feel appropriate.  If there are drug or alcohol abuse issues, a trust can help control how money is spent for a beneficiary.  A trust may help protect assets from a divorce. If you have a child with special needs, a trust is a good tool to provide for your child.

If you have young children a trust can help provide for them and can avoid probate for a conservatorship.  A minor can’t just be given all the assets, so by creating a trust, a trustee will be able to distribute money for the child until they are old enough to handle the money themselves.

It generally costs more to set up a trust.  If your circumstances warrant having a trust the extra cost shouldn’t deter you.  However, if there isn’t as much of a reason to control the assets, and you properly title all assets with beneficiaries, the cost maybe an unnecessary expense.

It is a good idea to speak with an attorney who can ask questions about your family circumstances to help you determine whether or not a trust would be needed to meet your needs and wishes.  They will be able to help you understand the pros and cons of implementing different estate planning tools.

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What Next? After Executing Your Estate Plan

Congratulations on getting your things in order.  The process of estate planning is often one many people avoid because they just don’t want to think about it.  You have been responsible and met with an attorney to prepare your estate plan and have signed and finalized all your documents.  You may think you’re done and not think about it again.  However, there are still some things you should consider after executing your documents.

If during the process of creating your estate plan, you didn’t speak with your family about your plan, now would be a good time.  If you speak to them now, there are less likely to be family disputes because everyone is aware of your intentions. It is also good for the family to know there is a plan, so they know to look for it if needed.

When you receive the original documents from your attorney, you should place them somewhere safe.  A good idea is a fire-safe if you have one.  Be sure that someone you know and trust knows how to get into that safe.  A will must be admitted to the Probate court within one year of death.  If no one knows you had an estate plan or where to access the will, it will be as if you never created a will and your assets could pass through intestate law.  This could mean the people you intended to inherit may not.

You have placed your documents somewhere safe and spoken to your family. What’s next? I would strongly recommend keeping track of how your assets are titled including any beneficiaries.  If you purchase a new car you will want to remember to add beneficiaries to your title using a transfer on death designation or TOD.  If you purchase a new home, open new bank accounts, get new life insurance, open a new retirement account, etc., you will want to remember to add beneficiaries to those assets so they can avoid going through probate.

If you have any major life changes, divorce, death, etc., it is always a good idea to review your plan with an attorney to make your sure documents don’t need any updates based on those changes.  It is always a good idea even without any of those major life changes to review your plan at least every five years.

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But Chances Are So Small – Estate Planning – Burkhardt Law Firm

The number one reason I hear for why people they don’t think they need an estate plan is: “Well, my spouse is named as a co-owner on everything I own or is a beneficiary on everything I own and the chances of us dying at the same time is small.”  Well, even if you are right and you and your spouse don’t pass at the same time and your beneficiary designations avoid probate, there are reasons why you still need an estate plan.

Things can fall through the cracks, and you may forget to put a beneficiary designation on a new asset, or there may be other unforeseeable assets that don’t have a beneficiary designation and will therefore go through Probate.  A will is a good way in those circumstances to be able to tell the Probate court what to do with those assets.  A will can waive bond and ask for independent administration which can reduce the cost and time if assets have to go through Probate.

A good estate plan does not only plan for death, it is also a plan for when you are living but incapacitated.  An estate plan may include both a medical power of attorney/heath care directive and a financial power of attorney.  These documents are utilized while you are still alive.

If you have retirement accounts, your spouse cannot be an owner of your account.  They can be a beneficiary, but that beneficiary designation does not give them any rights to access your account or funds from the account until you have passed away. If you to need to access money from your retirement account and are not capable of making financial decisions the only way to do that is through a financial power of attorney.  A financial power of attorney will allow someone of your choosing to make financial decisions and access funds when you are not capable.  If you do no not have a financial power of attorney, there may be a delay and added cost if someone has to go through the court system for conservatorship in order to access the funds. This is just one of many reasons a financial power of attorney is an important document to make part of your estate plan.

The other document utilized as part of an estate plan during your life is the medical power of attorney/heath care directive.  If you are not capable of making medical decisions for yourself a medical power of attorney will allow a person of your choosing to make medical decisions on your behalf.  Do you have specific wishes for end of life? Would you want treatments like feeding tubes to be removed if the doctor did not believe you would have significant recovery?  It is important to make your wishes known and this can be done through a medical power of attorney/heath care directive.

Even if you are not concerned about assets passing through Probate, I strongly suggest considering an estate plan so that you can have access to funds when needed through a financial power of attorney and to make your end of life wishes known through a medical power of attorney/heath care directive.

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Not Just One – Using One Beneficiary, Instead of Multiple

In the past month, I’ve talk to two different clients who have listed one person as a beneficiary on an asset when the asset is meant to go to multiple people or another person entirely.  If you have done this, please stop reading, and go change it right now!

Now the most common place I see this is for minor children.  Parents will put the person who is supposed to use the money for the child as the beneficiary on life insurance.  Now, I really dislike this for two major reasons.  First, that person is the legal owner of the money and does not have a legal obligation to use it for the child.  Well, if you trust that person enough with the money, hopefully that’s a non-issue.  But even if that’s not an issue, what happens if that person inherits the money then dies?  Chances are it will not go back to the children, but rather a spouse or that person’s children.  Just best to avoid by planning properly for minor children.

The other time I see people do this is for real estate.  They want to avoid a beneficiary deed where all the beneficiaries (and their spouses) must sign and make decisions together; instead they put one person on the beneficiary deed and tell them their wishes.  But the problem is that person has no legal obligation to share the money as instructed.  Further, while there may not be a tax consequence, there are likely extra tax returns that should be filed (which probably won’t be).  In the end, it causes a bigger mess than just creating a proper estate plan with a trust.

Finally, the biggest asset this is a problem with is traditional retirement money.  Instead of listing all the beneficiaries on an IRA, I had a client only list one sibling and ask them to share that money among all eight siblings.  Again, this person has no legal obligation to share, which makes me wary, but even more importantly there is likely to be a tax problem here.  Traditional retirement money has not had income tax taken out of it yet and so when the account is liquidated, income tax is paid at that time.  So, if a person inherits the retirement money, then liquidates it to divide it, that person will be paying a lump sum of taxes.  Instead, by listing all intended beneficiaries, each beneficiary will have the option to retain the retirement money as an inherited IRA, and only pay taxes in small amounts each year.  A much more tax efficient option.

So, if you have set up your plan listing one person instead of all the intended beneficiaries, you might want to reconsider your plan and even start thinking about a trust.

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Trust versus Beneficiary Designations

At least three times a week I am asked the difference between a will and a trust.  There are a few differences, but first I always like to point out that a will requires probate to be effective.  So, when planning for a client, I don’t often like to compare a will and trust, but rather a trust and beneficiary designations.

You can use both beneficiary designations and a trust to avoid probate, but the main reason a people choose a trust is control.  To me, control is the best reason to plan with a trust.  Legally, a trust is an entity that separates the control of assets from the use or benefit of those assets.

For families with minor children, I almost always recommend a trust.  Without a trust, even using beneficiary designations, you cannot avoid probate.  Minors cannot be in control of their own money, so a trust allows a legally responsible adult to make decisions over the assets for the benefit of the children.  It then sets up ages or life events when the children get the money.

Another common reason I recommend trusts are when there is real estate involved.  In Missouri, if a person has their name on real estate, their spouse also must sign off on any real estate transactions even if the spouse is not on the real estate.  So, if a person leaves real estate to someone through a beneficiary deed (the way to put beneficiaries on real estate), everyone on the deed plus their spouses will need to sign for the property when it is inherited.  Often, my clients would rather not involve the spouses or even have all beneficiaries make decision on the property.  Instead, they do a trust where one person makes decisions on the real estate and multiple people have the use or receive the proceeds.

One of the final reasons clients use a trust is to control how the money is paid out.  If a beneficiary is not responsible enough or has an addiction where the money would be harmful if the beneficiary had full access to the money.  In those situations, the trust can allow another person to use the money for the beneficiary or to give out money in regular installments like an allowance.

There are, of course, other reasons I consider trusts.  Family dynamics, contingencies, real estate.  However, when it comes down to it, the reason my clients choose a trust over a will or, more appropriately, beneficiary designations is it gives them control over how the money will be left.

 

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Don’t Forget…. To Title Your Assets!

I meet with most of my estate planning clients three times and in each of those meetings I (try to) emphasize that an estate plan is truly controlled by how assets are titled. Of course the legal documents are important, I wouldn’t have a job if they weren’t. But the documents I create don’t mean anything unless we know how the assets are titled.

This is because it is really how an asset is titled that determines where the asset goes and if it will have to go through probate.

If there is a co-owner with a right of survivorship (this is generally called Joint Tenants with Right of Survivorship or JTWROS), then the property passes to the co-owner. This is also where trusts fall. In order for the trust to control, the title must be in the name of the trust and the trust must be the owner. The new owner under this ownership will have control and ownership completely outside of probate.

If there isn’t a trust as the owner or there isn’t a co-owner, then you look to see if there are beneficiaries. If there are beneficiaries, then they then own the property. And when I say beneficiaries, I also include Transfers on Death (TODs) and Payable on Death (PODs) designations. Again, these beneficiaries take ownership without probate.

It is only after ownership or beneficiaries that a will would control. If there are no co-owners and no beneficiaries, then whomever would get the property under the will is the new owner. However, a will must go through probate to transfer the property to the new owner.

And finally, if there are no co-owners, no beneficiaries, and no will, then intestate law controls and heirs get the asset. But again, the heirs would have to go through probate to gain access to the asset.

So, do me a favor, if you or a loved one has assets you’re worried about going through probate, CHECK HOW THEY’RE TITLED!

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Blended Families – Accidental Disinheritance – Burkhardt Law Firm

This week I presented at a personal finance college class and a topic that always seems to engage the students is what I refer to as accidental disinheritance. Unfortunately, I’ve seen this come up in several instances, but the most common occurs in blended families.

Husband and Wife both had children before they were married. Because they’re married, they’ve set up all of their assets jointly or have their spouse as the beneficiary on their individual assets. This is normal for most families, but the outcome isn’t always as expected.

When Husband passes, everything passes to Wife as intended, but it’s when Wife passes, that the family realizes things weren’t set up as intended. When Wife received the assets, Wife did not include H’s children as beneficiaries or did not put down beneficiaries at all. In either situation the outcome is the same, Husband’s children are not included. According to Missouri law, a widow’s assets go to her children alone, step-children are not included in intestate law. So, Husband’s children don’t even have a legal right to challenge Wife’s estate unless they were included in her will. And even if they are in the will, if she listed her children as the only beneficiaries, the beneficiary designations control over the will.

I like to believe in these situations that if Wife were informed, she would do everything correctly and Husband’s family wouldn’t have need to call me. But, of course, I get the phone call after the fact, and Wife has passed accidentally disinheriting Husband’s family. Or in some situations, Husband and Wife have met with an attorney and have set up their plan, but because they don’t fully understand the mechanics of the documents things go wrong.

For this reason, it’s extremely important that clients understand their documents and how they work. Especially in blended families, where when things go wrong, accidental disinheritance can happen.

 

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Lineal Descendants Per Stirpes

There is a common legal phrase in the estate planning world: “Lineal Descendants Per Stirpes” or “LDPS.” And there’s a few reasons I am writing about it today. First, I use the phrase on a very regular basis, so it’s an important concept. But secondly, it has uses outside of just a legal document, like a will, and can help avoid probate if a person’s estate plan does not include a trust.

Lineal Descendants Per Stirpes allows an inheritance to automatically pass to a person’s descendants. This is extremely useful if there are multiple beneficiaries and their children should receive their share if they are not alive. Essentially, if a person is listed as a beneficiary and they pass, with the LDPS designation, their share automatically is divided to their descendants.

There are a few uses for the Lineal Descendants Per Stirpes designation. The first is within wills and trusts. Using LDPS allows for a long list of contingent beneficiaries without naming them all. Generally, I prefer using specifics, however, in the case of grandchildren or nieces and nephews who may not be born yet, the LDPS is a great way to provide for contingencies.

Even more importantly than within a will or trust, LDPS is a great way to provide for contingencies on a non-probate transfer (TODs, PODs, beneficiary designations, etc.). For example, a car uses the TOD designation, but does not allow for contingent beneficiaries. Using LDPS after the beneficiary would allow it to automatically transfer to that person’s children if the original beneficiary passes.

Lineal Descendants Per Stirpes is a mouthful and a fairly complicated legal tool, but it has significant uses in an estate plan. If you have questions on how to use LDPS in your plan, please feel free to give us a call.

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The Hierarchy of Estate Planning

After writing every month for the last 3 plus years, I sometimes find new topics to blog about difficult. But I often try and reflect on the most common topics that my clients have brought up over the last month. And this month I spent a lot of time explaining what I call the hierarchy of estate planning.

This is certainly not an official term or a concept I’ve seen discussed a lot, but I think it describes some of the concepts of estate planning quite well. What I’m really referring to is what controls a plan. Now, I’ve discussed this before and it also ties into the concept of inconsistency within an estate plan, but hopefully I can explain it just one more way for it to make sense.

How assets are titled control an estate plan. I break it down into four categories:

1 – Ownership/Titling

2 – Beneficiaries

3 – Wills

4 – Intestate Law

To determine how an asset would pass upon a person’s death, first look at who owns the property and how it is titled. If there is a co-owner with a right of survivorship (this is generally called Joint Tenants with Right of Survivorship or JTWROS), then the property passes to the co-owner.  This is also where trusts fall.  In order for the trust to control, the title must be in the name of the trust and the trust must be the owner.

If there isn’t a trust as the owner or there isn’t a co-owner, then you look to see if there are beneficiaries. If there are beneficiaries, then they then own the property. And when I say beneficiaries, I also include Transfers on Death (TODs) and Payable on Death (PODs) designations.

It is only after ownership or beneficiaries that a will would control. If there are no co-owners and no beneficiaries, then whomever would get the property under the will is the new owner.

And finally, if there are no co-owners, no beneficiaries, and no will, then intestate law controls and heirs get the asset.

So if you are trying to determine who would get an asset upon someone’s passing, take a look at the hierarchy of estate planning and figure out which category would control.

Burkhardt Law Firm

Phone: (314) 518-1581
Email: mburkhardt@burkhardtlaw.com
Address:
2333 Grissom Dr., Suite 107
St. Louis, MO 63146