Barnes Lipscomb & Stewart PLLC

How Can I Minimize Taxes During Retirement?

“Take time to consider the tax impact of your financial decisions and speak to a professional to make sure you don’t pay more than anticipated during your non-working years.”

During your working years, your actions to minimize taxes aren’t the same as those you’ll need after retirement. How you manage your tax liability may have an even bigger impact during your non-working years, says a recent article, “5 Ways to Minimize Taxes on Retirement Income,” from U.S. News & World Report. Re-evaluating finances and tax liabilities at retirement age can help minimize taxes for the coming decades.

Roth Conversion. Once you’ve turned 59 ½ years old and the account has been opened for at least five years, you may take withdrawals tax-free at any time with no taxes or penalties. The conversion takes planning to avoid pitfalls. First, you must be prepared to pay the taxes on the converted accounts. You’ll also need to be careful not to place yourself in a higher tax bracket. Converting to a Roth should be done when income is lower.

Delay Social Security Benefits. When you start taking benefits will impact whether the amount you receive could be subject to taxes. If you file taxes single and your income is more than $25,000, you’ll pay taxes on as much as 85% of your Social Security benefit! Married couples with income exceeding $32,000 will suffer the same tax fate. If possible, delay taking Social Security until after you reach Full Retirement Age (FRA) which is 66 or 67 for most people. If you can delay taking benefits until age 70, you’ll have reached the maximum benefits, but circumstances don’t always allow this.

Coordinate Estate Planning with Required Minimum Distributions (RMD). After age 73, you’ll probably need to start taking RMDs from traditional IRAs and 401(k)s. If you forget, there will be penalties. If you take the RMDs, you must pay taxes on the income. Talk with your estate planning attorney to explore how you might keep your withdrawals within lower tax brackets to reduce your tax liability.

Consider Low-Tax States. If retirement relocation is in your future, consider state tax laws in your decision-making. Some states don’t tax Social Security benefits, while others provide exemptions for pensions. You’ll want to investigate income, sales and property taxes. Your analysis should include an overview of all the factors. For instance, a state may not tax Social Security, but it might have higher property taxes.

Create a Trust. Creating a trust removes assets from your taxable estate. Depending upon the trust your estate planning attorney recommends, you may need an irrevocable trust, which gives the trust the assets and control of the assets to the trustee. Income generated by the assets in the trust may be taxed at a different rate than your income.  

Estate planning and tax planning intersect in many ways, so speak with an experienced estate planning attorney to see what strategies are available and which are best suited to your situation.

Reference: U.S. News & World Report (March 14, 2024) “5 Ways to Minimize Taxes on Retirement Income”

Why Estate Planning Is Essential for Small Business Owners

“Your business, likely your most valuable asset, deserves careful consideration within your estate plan to ensure a smooth transition of ownership and management in the event of incapacity or death.”

Estate planning should be a top priority for anyone who has built and grown a successful small business, especially if they intend to build generational wealth and create a legacy. The title of a recent article from Business Insider says it all: “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners.”

There are more complex issues for business owners than employees for estate planning. Therefore, be sure to work with an experienced estate planning attorney who will create a plan to protect you, your family and your business. As you go through the process, keep these basics in mind:

Last Will and Testament. This document is the foundation of an estate plan, providing directions to the state probate court regarding your wishes for distributing assets. It also names a guardian responsible for minor children upon your passing. If you don’t have a will, assets are distributed according to your state’s intestacy laws, typically based on kinship. You can update and change your will throughout your lifetime, and it should be reviewed every three to five years.

Revocable Living Trust. Having a revocable living trust gives you more control over assets, which could be necessary to distribute business assets. A revocable living trust can be altered while you are living, so changes in your business can be reflected in the directions in the trust.

Financial Power of Attorney. This document is critical if you are the business owner who performs most of the financial tasks of your business. When a business owner becomes incapacitated, having someone named Power of Attorney gives the POA the ability to pay bills, make bank deposits and withdrawals, file business and personal taxes and make any other financial decisions you wish. POA can be limited if you only want someone to pay bills, or they can be broad, allowing the agent to do anything you would do to keep the business running while you are incapacitated. Your estate planning attorney can craft a POA to suit your needs.

Business Succession Plan. A business succession plan should be in place as soon as your business gains traction and becomes successful. Distributing shares of the business after you pass is fine. However, what if your heirs don’t have a clue how the business works? Do you want them to sell it after you pass or maintain it for the next generation? A succession plan requires the help of an estate planning attorney, CPA and financial professionals to create a management team, define roles, set performance guidelines, etc.

Digital Estate Plan. We spend so much time online. However, few have plans for our digital assets. If your business is online, has a website, and uses social media, online finances, and cell phones, you need a digital estate plan to identify assets and provide instructions on what you want to be done with those assets after you have passed.

Review Beneficiary Designations. Any account that can name a beneficiary, such as retirement plans, investment accounts, or life insurance policies, must be reviewed every few years or whenever a trigger event, including birth, death, divorce, or remarriage. Upon your passing, these assets will be passed directly to the beneficiary. Be sure the person you named twenty years ago on your life insurance policy is still the right person to receive proceeds upon your passing.

An experienced estate planning attorney can review your current estate plan to ensure that it covers all bases for you and your business.

Reference: Business Insider (March 22, 2024) “You might not want to think about estate planning, but as a financial planner, I know it’s essential for small-business owners”

Have You had the Estate Planning Talk with Your Adult Children?

“Estate planning can be a sensitive topic for families to talk about. Here's how to get past the awkwardness and discuss estate planning with your family.”

It’s easier to move a difficult matter forward when you have a plan, which is true when talking about estate planning with your family. Getting into the conversation can sometimes feel awkward. However, it’s best for all concerned to have open and honest discussions, according to a recent article, “How to Discuss Estate Planning with Your Family,” from Kiplinger.

If you have an estate plan, including a last will and testament, advanced care directive, living will, HIPAA release forms and other estate planning documents, make sure your family knows what documents you have prepared and where they are. Show them where your legal and financial records are kept, whether on your computer or filing cabinet.

Consider a kind of estate planning “boot camp” with the appropriate family members. They may not understand what a will does, how a trust works, etc. The more information they have about financial and legal matters, the better decisions they can make.

Connect family members with your advisors, including your estate planning attorney, financial advisor and CPA, so that they can work together after your passing.

How well do you expect family members to respond to this conversation? You know your family best, so be prepared—the daughter is prone to tears, and the son makes sarcastic comments—they will not suddenly become different people when the topic is estate planning.

The loss of a parent is a highly emotional time, and grief doesn’t always bring out the best in people. If you left a large inheritance and your children weren’t expecting it, will they know what to do? Or, if they expected a large inheritance and you decided to donate most of your wealth to charity, would they become embroiled in a legal battle with an organization that meant a lot to you? Having these difficult discussions in advance is better than leaving a legacy of surprise for loved ones.

If your children will be receiving different kinds of inheritance from you based on their individual circumstances, it is a great kindness to talk with them in advance about your reasoning. They may understand, or they may not. However, you may be able to prevent resentment and possibly litigation if they have an opportunity to learn about it from you directly while you are still living and when they can still ask questions.

Another topic requiring discussion is who you name to serve as executor. It may not be the oldest sibling, but it shouldn’t be the one who isn’t able to manage money or responsibilities. In some cases, a professional or family friend is better suited to serve as executor. Talk with your children about this decision to prevent any resentment between them.

These are not easy conversations, and they should be presented as ongoing discussions, so siblings or other family members feel they are included and respected. Your legacy and your family deserve as much.

Reference: Kiplinger (March 23, 2024) “How to Discuss Estate Planning with Your Family”

Have You had the Estate Planning Talk with Your Adult Children?

“Estate planning can be a sensitive topic for families to talk about. Here's how to get past the awkwardness and discuss estate planning with your family.”

It’s easier to move a difficult matter forward when you have a plan, which is true when talking about estate planning with your family. Getting into the conversation can sometimes feel awkward. However, it’s best for all concerned to have open and honest discussions, according to a recent article, “How to Discuss Estate Planning with Your Family,” from Kiplinger.

If you have an estate plan, including a last will and testament, advanced care directive, living will, HIPAA release forms and other estate planning documents, make sure your family knows what documents you have prepared and where they are. Show them where your legal and financial records are kept, whether on your computer or filing cabinet.

Consider a kind of estate planning “boot camp” with the appropriate family members. They may not understand what a will does, how a trust works, etc. The more information they have about financial and legal matters, the better decisions they can make.

Connect family members with your advisors, including your estate planning attorney, financial advisor and CPA, so that they can work together after your passing.

How well do you expect family members to respond to this conversation? You know your family best, so be prepared—the daughter is prone to tears, and the son makes sarcastic comments—they will not suddenly become different people when the topic is estate planning.

The loss of a parent is a highly emotional time, and grief doesn’t always bring out the best in people. If you left a large inheritance and your children weren’t expecting it, will they know what to do? Or, if they expected a large inheritance and you decided to donate most of your wealth to charity, would they become embroiled in a legal battle with an organization that meant a lot to you? Having these difficult discussions in advance is better than leaving a legacy of surprise for loved ones.

If your children will be receiving different kinds of inheritance from you based on their individual circumstances, it is a great kindness to talk with them in advance about your reasoning. They may understand, or they may not. However, you may be able to prevent resentment and possibly litigation if they have an opportunity to learn about it from you directly while you are still living and when they can still ask questions.

Another topic requiring discussion is who you name to serve as executor. It may not be the oldest sibling, but it shouldn’t be the one who isn’t able to manage money or responsibilities. In some cases, a professional or family friend is better suited to serve as executor. Talk with your children about this decision to prevent any resentment between them.

These are not easy conversations, and they should be presented as ongoing discussions, so siblings or other family members feel they are included and respected. Your legacy and your family deserve as much.

Reference: Kiplinger (March 23, 2024) “How to Discuss Estate Planning with Your Family”

Have You had the Estate Planning Talk with Your Adult Children?

“Estate planning can be a sensitive topic for families to talk about. Here's how to get past the awkwardness and discuss estate planning with your family.”

It’s easier to move a difficult matter forward when you have a plan, which is true when talking about estate planning with your family. Getting into the conversation can sometimes feel awkward. However, it’s best for all concerned to have open and honest discussions, according to a recent article, “How to Discuss Estate Planning with Your Family,” from Kiplinger.

If you have an estate plan, including a last will and testament, advanced care directive, living will, HIPAA release forms and other estate planning documents, make sure your family knows what documents you have prepared and where they are. Show them where your legal and financial records are kept, whether on your computer or filing cabinet.

Consider a kind of estate planning “boot camp” with the appropriate family members. They may not understand what a will does, how a trust works, etc. The more information they have about financial and legal matters, the better decisions they can make.

Connect family members with your advisors, including your estate planning attorney, financial advisor and CPA, so that they can work together after your passing.

How well do you expect family members to respond to this conversation? You know your family best, so be prepared—the daughter is prone to tears, and the son makes sarcastic comments—they will not suddenly become different people when the topic is estate planning.

The loss of a parent is a highly emotional time, and grief doesn’t always bring out the best in people. If you left a large inheritance and your children weren’t expecting it, will they know what to do? Or, if they expected a large inheritance and you decided to donate most of your wealth to charity, would they become embroiled in a legal battle with an organization that meant a lot to you? Having these difficult discussions in advance is better than leaving a legacy of surprise for loved ones.

If your children will be receiving different kinds of inheritance from you based on their individual circumstances, it is a great kindness to talk with them in advance about your reasoning. They may understand, or they may not. However, you may be able to prevent resentment and possibly litigation if they have an opportunity to learn about it from you directly while you are still living and when they can still ask questions.

Another topic requiring discussion is who you name to serve as executor. It may not be the oldest sibling, but it shouldn’t be the one who isn’t able to manage money or responsibilities. In some cases, a professional or family friend is better suited to serve as executor. Talk with your children about this decision to prevent any resentment between them.

These are not easy conversations, and they should be presented as ongoing discussions, so siblings or other family members feel they are included and respected. Your legacy and your family deserve as much.

Reference: Kiplinger (March 23, 2024) “How to Discuss Estate Planning with Your Family”

Do You Need Conservatorship or Power of Attorney?

“Several high-profile celebrities have recently sought a conservatorship for a family member including Jay Leno, his wife Mavis, and Cher for her son, Elijah Blue Allman, claiming they cannot adequately manage their affairs or make proper medical decisions.”

There’s a long list of celebrities involved with conservatorship matters, although the thirteen-year conservatorship of Brittany Spears may have gotten the biggest headlines. A recent Paso Robles Daily News article, “Conservatorship or power of attorney? The answer it: it depends,” explains the difference.

A conservatorship occurs when a court appoints a person, the conservator, to oversee decision-making for another person. A conservatee is a person who has been deemed unable to make decisions for themselves or to care for themselves. Different states have different names for this process; in some states, it’s known as guardianship, and the appointed person is the guardian, with the person under their care known as their ward.

There are several different forms of conservatorship. They include:

• Of the estate, where the conservator has full authority over the person’s finances. The person may retain their physical autonomy but cannot access finances. Trusts are not included in this arrangement.
• Of the person, if the person has been found unable to make decisions about their life and physical health, including medical care but not medication for psychiatric care.
• Some states have specific conservatorships/guardianships designed to provide care by a conservator/guardian for people with mental health disorders.

A Power of Attorney gives one person many of the same abilities as a conservator, minus the involvement and required reporting to the court. The person who executes the POA must be legally able to do so; they cannot be incapacitated. The POA is useful for someone who is undergoing surgery, for instance, and knows they will be incapacitated in the future for a certain amount of time but wishes to have someone else take care of their affairs.

Similarly, an Advanced Health Care Directive (AHCD) gives another person the authority to make medical decisions on behalf of another person. Like a POA, the AHCD doesn’t require going to court to be executed.

Planning ahead and creating a Power of Attorney, Advanced Health Care Directive (sometimes referred to as a Power of Health Care Attorney), and other estate planning documents is how a responsible person ensures that their family is ready if something unexpected occurs. An estate planning attorney in your state can create these documents as part of your estate plan.

Reference: Paso Robles Daily News (March 12, 2024) “Conservatorship or power of attorney? The answer it: it depends”

Does Your Estate Plan and IRA Align with the SECURE Act?

“Most dramatically, the Secure Act established a 10-year rule for withdrawing from inherited IRAs that eliminated the popular, but at times controversial, ability to “stretch” inherited IRAs for these beneficiaries.”

It’s known as the SECURE Act—“Setting Every Community Up for Retirement Enhancement” Act of 2019. Some consider it more unsettling than secure, since this law changed withdrawal and tax rules for inherited IRAs for non-spouse beneficiaries. However, as reported by Think Advisor’s article, “9 Things to Know About IRA Beneficiaries Under the Secure Act,” the law led to other significant changes in estate planning.

The biggest headline is the end of the lifetime stretch for IRAs. Beneficiaries who are not spouses and don’t fall into specific categories and inherit a traditional IRA in 2020 or later must empty the account within ten years.

There’s a little bit of a wrinkle in the ten-year distribution rule. The experts initially said that heirs could take out as much or as little as they wished within ten years, including waiting until the very end of the ten years; the proposed regulations used the phrase “during,” meaning throughout the ten years. The IRS did not issue regulations until 2022, so the IRS waived Required Minimum Distributions (RMDs) for 2021, 2022, and 2023. This includes accounts inherited in 2022.

There’s a separate set of rules for nonqualified trusts and charitable entities—not people—to be aware of. If a traditional IRA owner or plan participant dies before the original owner would have been required to take their RMDs, the account must be emptied within five years. If the original owner dies on or after their RMD date, the rules require RMDs to be taken over the decedent’s single life expectancy. An estate planning attorney can guide you in avoiding paying unexpected taxes or penalties in these cases.

For a surviving spouse, there are numerous choices. They can take withdrawals as per the solo beneficiary framework, elect to take a spousal rollover, use the life expectancy numbers, or take a lump-sum distribution. Every situation is different and needs to be evaluated to determine which is best for the spouse.

A spouse who inherits a traditional IRA can do a spousal rollover, transferring funds into a new or existing IRA. You can only do this if the spouse is the only beneficiary. This method lets the IRA continue to grow, which is an attractive option if the surviving spouse is younger than the deceased spouse. If the spouse is under 59 ½, they’ll be subject to the regular IRA distribution rules.

There's a separate rule for spouses who are more than ten years younger. They’ll have to use the IRS joint and last survivor table. There’s no 10% early distribution penalty if they withdraw funds. One fine point: the account name must include the deceased owner's name to be sure it’s an “inherited” or “beneficiary” IRA.

If a minor inherits the IRA, they are considered a minor until they turn 21. They must also be the minor child of the original owner—not a nephew, niece, or family friend. The ten-year rule kicks in once they become a legal adult at age 21.

Disabled and chronically ill IRA beneficiaries are subject to separate rules. However, there are nuances to be aware of. They must have a condition and are unable to live a “normal” life (working, two activities of daily life, etc.). Their condition or disability must be one expected to result in death or long continued and indefinite duration.

Speak with an estate planning attorney before putting IRA assets into a trust. In most cases, trusts are not permitted to own IRAs if the original IRA owner is living. Certain trusts don’t qualify as eligible or non-eligible designated beneficiaries.

Reference: Think Advisor (March 11, 2024) “9 Things to Know About IRA Beneficiaries Under the Secure Act”

Do You Need Conservatorship or Power of Attorney?

“Several high-profile celebrities have recently sought a conservatorship for a family member including Jay Leno, his wife Mavis, and Cher for her son, Elijah Blue Allman, claiming they cannot adequately manage their affairs or make proper medical decisions.”

There’s a long list of celebrities involved with conservatorship matters, although the thirteen-year conservatorship of Brittany Spears may have gotten the biggest headlines. A recent Paso Robles Daily News article, “Conservatorship or power of attorney? The answer it: it depends,” explains the difference.

A conservatorship occurs when a court appoints a person, the conservator, to oversee decision-making for another person. A conservatee is a person who has been deemed unable to make decisions for themselves or to care for themselves. Different states have different names for this process; in some states, it’s known as guardianship, and the appointed person is the guardian, with the person under their care known as their ward.

There are several different forms of conservatorship. They include:

• Of the estate, where the conservator has full authority over the person’s finances. The person may retain their physical autonomy but cannot access finances. Trusts are not included in this arrangement.
• Of the person, if the person has been found unable to make decisions about their life and physical health, including medical care but not medication for psychiatric care.
• Some states have specific conservatorships/guardianships designed to provide care by a conservator/guardian for people with mental health disorders.

A Power of Attorney gives one person many of the same abilities as a conservator, minus the involvement and required reporting to the court. The person who executes the POA must be legally able to do so; they cannot be incapacitated. The POA is useful for someone who is undergoing surgery, for instance, and knows they will be incapacitated in the future for a certain amount of time but wishes to have someone else take care of their affairs.

Similarly, an Advanced Health Care Directive (AHCD) gives another person the authority to make medical decisions on behalf of another person. Like a POA, the AHCD doesn’t require going to court to be executed.

Planning ahead and creating a Power of Attorney, Advanced Health Care Directive (sometimes referred to as a Power of Health Care Attorney), and other estate planning documents is how a responsible person ensures that their family is ready if something unexpected occurs. An estate planning attorney in your state can create these documents as part of your estate plan.

Reference: Paso Robles Daily News (March 12, 2024) “Conservatorship or power of attorney? The answer it: it depends”

Does Your Estate Plan and IRA Align with the SECURE Act?

“Most dramatically, the Secure Act established a 10-year rule for withdrawing from inherited IRAs that eliminated the popular, but at times controversial, ability to “stretch” inherited IRAs for these beneficiaries.”

It’s known as the SECURE Act—“Setting Every Community Up for Retirement Enhancement” Act of 2019. Some consider it more unsettling than secure, since this law changed withdrawal and tax rules for inherited IRAs for non-spouse beneficiaries. However, as reported by Think Advisor’s article, “9 Things to Know About IRA Beneficiaries Under the Secure Act,” the law led to other significant changes in estate planning.

The biggest headline is the end of the lifetime stretch for IRAs. Beneficiaries who are not spouses and don’t fall into specific categories and inherit a traditional IRA in 2020 or later must empty the account within ten years.

There’s a little bit of a wrinkle in the ten-year distribution rule. The experts initially said that heirs could take out as much or as little as they wished within ten years, including waiting until the very end of the ten years; the proposed regulations used the phrase “during,” meaning throughout the ten years. The IRS did not issue regulations until 2022, so the IRS waived Required Minimum Distributions (RMDs) for 2021, 2022, and 2023. This includes accounts inherited in 2022.

There’s a separate set of rules for nonqualified trusts and charitable entities—not people—to be aware of. If a traditional IRA owner or plan participant dies before the original owner would have been required to take their RMDs, the account must be emptied within five years. If the original owner dies on or after their RMD date, the rules require RMDs to be taken over the decedent’s single life expectancy. An estate planning attorney can guide you in avoiding paying unexpected taxes or penalties in these cases.

For a surviving spouse, there are numerous choices. They can take withdrawals as per the solo beneficiary framework, elect to take a spousal rollover, use the life expectancy numbers, or take a lump-sum distribution. Every situation is different and needs to be evaluated to determine which is best for the spouse.

A spouse who inherits a traditional IRA can do a spousal rollover, transferring funds into a new or existing IRA. You can only do this if the spouse is the only beneficiary. This method lets the IRA continue to grow, which is an attractive option if the surviving spouse is younger than the deceased spouse. If the spouse is under 59 ½, they’ll be subject to the regular IRA distribution rules.

There's a separate rule for spouses who are more than ten years younger. They’ll have to use the IRS joint and last survivor table. There’s no 10% early distribution penalty if they withdraw funds. One fine point: the account name must include the deceased owner's name to be sure it’s an “inherited” or “beneficiary” IRA.

If a minor inherits the IRA, they are considered a minor until they turn 21. They must also be the minor child of the original owner—not a nephew, niece, or family friend. The ten-year rule kicks in once they become a legal adult at age 21.

Disabled and chronically ill IRA beneficiaries are subject to separate rules. However, there are nuances to be aware of. They must have a condition and are unable to live a “normal” life (working, two activities of daily life, etc.). Their condition or disability must be one expected to result in death or long continued and indefinite duration.

Speak with an estate planning attorney before putting IRA assets into a trust. In most cases, trusts are not permitted to own IRAs if the original IRA owner is living. Certain trusts don’t qualify as eligible or non-eligible designated beneficiaries.

Reference: Think Advisor (March 11, 2024) “9 Things to Know About IRA Beneficiaries Under the Secure Act”