Barnes Lipscomb & Stewart PLLC

IRS Postpones Required Withdrawals from Inherited Retirement Accounts

“Withdrawals from traditional inherited retirement accounts are treated as income by the IRS, so the timing of these distributions matters for tax strategy.”

The latest from the IRS is good news for people who have inherited retirement accounts since 2020, according to The Wall Street Journal article “Heirs Get More Time to Keep Their Money in Inherited Retirement Accounts.” The IRS announced it was postponing enforcement of a law originally passed in 2019, then revisited in February 2022 when the IRS proposed a change to rules mandating RMDs.

The 2019 law required retirement account heirs to empty IRAs within ten years instead of over their expected lifetimes. This was a major change, eliminating the stretch IRA, which had been enjoyed for many years. The stretch IRA allowed IRA beneficiaries to keep money in inherited IRA accounts for extended periods, allowing the IRA to grow tax-free and giving heirs advantageous flexibility with the accounts.

In 2022, the IRS proposed rules mandating annual withdrawals during the ten-year period if the original account owner had started taking RMDs before they died. This put estate planning concerning IRAs in a tailspin. Most IRA heirs planned on letting the assets in the accounts grow for ten years, then emptying the account at the ten-year mark.

The IRS was apparently listening, since the proposed rules led to a great deal of complaints from both taxpayers and the financial services sector. The rules were already confusing, the proposed rules were even more restrictive, and no one knew what to do.

The recent announcement from the IRS said it won’t impose any penalties for missing the RMDs until the details of how inherited (or beneficiary) IRAs are finalized. The reprieve has been extended to December 31, 2024. Penalties are expensive, so this announcement has been met with great relief from IRA heirs and estate planning attorneys alike.

To illustrate, let’s say a 66-year-old person inherited a parent’s $200,000 IRA in 2020. If it weren't for the IRS relief through 2023, they would have had to use $26,000 of the IRA so far to pay taxes on the RMD, and the 2024 RMD would have been about $9,000.

The issues aren’t just for heirs knowing what to withdraw from accounts. For those with IRA accounts they plan on leaving to heirs, changing distribution rules may impact how they use or bequeath IRAs. Does it make more sense to convert a traditional IRA to a Roth IRA, where taxes are paid upfront and the distribution of beneficiary accounts is considerably less restrictive? Or should they spend the entire IRA and save other assets for heirs?

Estate planning attorneys will continue to help people navigate this and other IRA-related estate planning matters. The rules may change again. However, keeping your estate plan up to date to take advantage of changing rules is the best approach to safeguarding your legacy.

Reference: The Wall Street Journal (April 17, 2024) “Heirs Get More Time to Keep Their Money in Inherited Retirement Accounts”

How Younger Adults Take Charge of Estate Planning

“Conventional wisdom casts trusts, wills and estate plans as the exclusive domain of the ultra-rich. Supporting this notion, data reveals that two-thirds of Americans lack an estate plan, a figure that climbs higher to 80% among Gen-Zs.”

However, recent anecdotal trends show a new, positive shift among millennials or Gen-Z individuals. According to a recent article from Forbes, “Why Gen-Z Is Suddenly Creating Wills And Trusts—And You Should Too,” within recent months, more and more millennials and Gen-Zers who are being told to create an estate plan are actually going ahead and doing so.

The article says Gen-Zers and millennials have become the “quiet leaders” of estate planning. Several things are driving this shift:

Digital Assets. Younger people, even those of modest means, have significant digital assets, including cryptocurrencies, online businesses and many social media accounts.

COVID. Living through a global pandemic and experiencing the unexpected loss of family members raised awareness relatively early in their adult years of the repercussions of not having an estate plan.

Changing Family Structures. “Modern Family” is more than entertainment. Today’s family is more likely to be different than the traditional family structure of the past, and clear directives are needed to prepare for asset distribution.

Valuing Philanthropy. Younger adults are more aware of the role nonprofits play, whether in their immediate communities or globally. They are also more likely to give a portion of their estate to nonprofit organizations.

Financial Savvy. Younger adults are more candid than past generations with their peers about money and how to protect it through estate planning as part of money management and investment strategies.

Having an estate plan can protect a legacy for family and children, while not having one could mean giving half of your estate to the government in taxes. An estate planning attorney can help to avoid or minimize probate, a court process requiring your will to become a public document. Probate can delay the distribution of property and can be costly.

Another reason to have a will is to minimize family conflict. Your family won’t be left guessing how you want your assets to be distributed. It is also less likely that there will be family fights or misunderstandings after you’ve passed.

Estate plans are not just for wealthy people but anyone who cares enough about their family to protect them. Younger adults embracing estate planning is a good sign for the future.

Reference: Forbes (April 17, 2024) “Why Gen-Z Is Suddenly Creating Wills And Trusts—And You Should Too”

What will Happen to O.J. Simpson’s Assets?

“The public is now likely to get a closer look at Simpson’s finances, and the families are likely to have a better shot at collecting—if there is anything to collect.”

A wrongful death lawsuit in 1997 found O.J. Simpson liable for the deaths of ex-wife Nicole Brown-Simpson and her friend Ron Goldman. Yet, their families have received little of the $33.5 million judgment levied by a California civil jury. According to an article from The Washington Post, “If O.J. Simpson’s assets go to court, Goldman, Brown families could be first in line,” we may find out soon whether or not Simpson had done any estate planning.

If Simpson had only a will, the estate would go through the probate process in court. Probate laws vary from state to state, but generally, the estate is filed in the person’s state of residence. Simpson resided in Nevada but might have owned assets in California or Florida, where he resided at different times. If that’s the case, separate probate cases will also be opened in those states.

The Nevada probate rule requires an estate to go through probate if its assets exceed $20,000 or the decedent owns any real estate. Probate must take place within 30 days, so things may happen quickly.

If no documents are filed, creditors can file claims to recover assets. The Goldman and Brown families may not be alone in filing for assets, but they’ll undoubtedly have a higher visibility than a credit card company or bank.

In California, the law holds that creditors with a judgment are considered to have “secured debt” and take priority over other creditors. In one instance, a family was awarded $9 million by a jury, but the debtor subjected them to a prolonged series of appeals and delays. When the debtor died, the estate paid the $9 million plus accrued interest of $3 million.

Did Simpson leave an estate big enough to cover his debts? At the time of the civil lawsuit, the court seized many of Simpson’s possessions. He was forced to auction his Heisman Trophy, which brought $230,000. He claimed to only have income from pensions, one from the NFL and the other a private pension.

Whether Simpson had a structured estate plan with trusts could affect how his creditors will be compensated. The creation and funding of the trusts will also affect their accessibility. Irrevocable trusts are robust legal entities but may not always be 100% impenetrable.

A transfer of assets made to avoid paying creditors is considered fraud, so any trust could be deemed invalid. If this occurs, the Goldman and Brown families may file separate lawsuits to attach assets in the trust.

You don’t have to be famous to have creditors trying to get assets from your estate. Seeking advice from an estate planning attorney about structuring your estate to shield inheritances from creditors is always advisable.

Reference: The Washington Post (April 12, 2024) “If O.J. Simpson’s assets go to court, Goldman, Brown families could be first in line.”

How are Retirement Plans Handled in an Estate Plan?

“Many an estate plan has gone awry due to a misunderstanding of how retirement plan benefits work or a failure to consider retirement plan beneficiary designations as part of an overall estate plan.”

If you have recently completed your estate plan, Kudos! But if you haven’t updated an estate plan, or worse, don’t have one at all, and haven’t reviewed retirement assets in years, your heirs may be in for some unpleasant surprises. The recent article from Whittier Daily News, “Are your retirement and estate plans at odds? Tips to fix that,” provides essential details.

Whatever directions you provide will not affect the beneficiary designations on your retirement accounts. You may have wanted your spouse to receive all your assets after your death, but this won’t happen if the named beneficiary is someone else, such as a child or former spouse.

Pension and other retirement plans are subject to a host of federal regulations. Upon death, pension funds typically go to a surviving spouse. The surviving spouse is not allowed to designate anyone else as the beneficiary, even if a part of the surviving spouse’s retirement plan is deemed community property in your state.

IRAs and pension funds require careful planning to ensure distributions align with your wishes. Federal law governing qualified retirement plans requires a married spouse's consent to name anyone else as a beneficiary. Suppose the estate planning goal is to have the assets in the retirement account pass to biological children, not the spouse. In that case, an updated beneficiary designation form and the correct spousal release forms must be updated. A pre- or post-nuptial document will not suffice for this to be enforceable.

This is why all accounts or assets where beneficiaries can be named need to be reviewed whenever an estate plan is created or revised. This issue becomes particularly critical for blended families.

Suppose your trust contains language leaving retirement assets to your children. In that case, even if it contains great detail about the accounts and how you’d like the assets to be distributed, it won’t matter if the beneficiary designation names another person.

Trusts need careful construction to prevent children from being disinherited. Often, the answer is to have a single trust designed to “split” into two trusts upon the first spouse's death. These are known as “A/B” trusts. The surviving spouse’s share is held in Trust A, while the decedent’s share of the trust is held in Trust B and accessible to the surviving spouse. When the second spouse dies, whatever assets are held in Trust B are distributed to the stated beneficiaries. Other estate planning solutions are available when concerns about the surviving spouse arise within the trusts.

A final note: if you fail to complete beneficiary designation forms for retirement plans, the assets may need to go through probate. Distribution of the retirement plan assets will be governed by the retirement plan document, which includes language for a default beneficiary. Usually, the default beneficiary is your estate.

Consult with an estate planning attorney to ensure that your estate plan and retirement plan work together to achieve the desired results.

Reference: Whittier Daily News (April 7, 2024) “Are your retirement and estate plans at odds? Tips to fix that”

What Estate Planning Documents do I Need?

“Incapacity can happen to anyone at any time, but your risk generally increases as you grow older. Consider what would happen if, for example, you were unable to make decisions or conduct your own affairs.”

People think estate planning is only about a will, but it’s much more. Estate planning protects and preserves assets after you’ve passed. Still, it also protects property and your wishes while you are living, explains a recent article, “Do You Have These Key Estate Planning Documents?” from Cape Gazette. There are four documents every adult should have, no matter their age or stage in life. They include Power of Attorney, Advance Medical Directives, Last Will and Testament, and a Letter of Instruction. An estate planning attorney can help create all these documents for you.

What would happen if you were severely injured or became suddenly ill and needed someone to be able to run your household, pay your bills, and access your financial assets? A Power of Attorney authorizes another person to make financial and legal decisions on your behalf. The person doesn’t have to be a family member but needs to be someone you trust completely.

There are two types of POAs: an immediate POA, which is effective as soon as it is executed, and the other is a springing POA, which is not effective until a court decides you are incapacitated. Your estate planning attorney will help you decide which is best for your circumstances.

Additionally, you’ll want to have an Advance Medical Directive. This document expresses your wishes for medical treatment and allows you to appoint another person to make critical decisions if you are incapacitated. Without one, decisions will be made by someone appointed for you, which may or may not align with your personal values.

There are a few different types of medical directives. The Living Will concerns the specific medical treatment you would want in the event of a terminal illness or injury. A Healthcare Proxy allows another person to make medical decisions on your behalf. The DNR—Do Not Resuscitate is a legal order signed by you and your treating physician to tell healthcare professionals and first responders not to perform CPR or other treatments to bring you back to life in a medical crisis.

A Last Will and Testament lays out how you want your property distributed and serves several other purposes. Parents of minor children use their wills to name guardians who would raise their children in the event of both parents’ deaths. The will is also used to name an executor who will manage all the tasks accompanying death: paying estate and income taxes, selling a residence, paying creditors, distributing assets, and more.

A Letter of Instruction or Letter of Intent is not a legal document but a wise adjunct to your other estate planning documents. It can provide funeral and memorial instructions, explain why your estate plan was structured as it was, or simply express your feelings. The letter will not override instructions in your will but can be used to underscore your wishes.

Reference: Cape Gazette (April 12, 2024) “Do You Have These Key Estate Planning Documents?”

What Questions to Ask before a Mid-Life Marriage?

“Getting married in middle age or beyond, is not only a significant personal milestone, it’s also one of the biggest financial decisions of your life.”

Today’s wedding couple is as likely to be 30 or 50 years old as they are to be in their twenties. This trend underscores the importance of having open discussions about finances and retirement before exchanging vows. A recent article from Next Avenue, “The Talk Over-50s Should Have Before Tying the Knot.” Whether you’re getting married for the first time or the second, being closer to retirement has major financial implications.

The most important thing is to disclose each person’s financial situation completely. For some people, this includes their retirement goals and lifestyle choices. What are the potential healthcare issues? Is there debt to be considered? How are each managing their investments?

If both people own homes, a plan for going forward needs to ask a simple question: where will the couple live? Will one sell their home or turn it into a rental property? If it is sold, will the seller retain all the income, or will they buy into ownership of the joint residence? Emotional attachments to homes can make this a difficult discussion, but it needs to be addressed.

Getting married changes each spouse’s legal status, meaning estate plans must be updated. If both have an existing estate plan, it needs to be reviewed. Powers of Attorney, Healthcare Proxy, and other estate planning documents must also be updated.

While reviewing and revising estate plans, don’t neglect to check on any accounts with named beneficiaries. More than a few ex-spouses have received insurance proceeds or accounts because someone neglected to update these accounts. The named beneficiary overrides anything in your will, which is critical to updating the estate plan.

If you both have children from prior marriages, meeting with an estate planning attorney to determine how to manage property distribution is another critical step before getting married. You may wish to create and fund trusts before marriage, so assets remain separate property. There are as many different types of trusts as there are family situations, from keeping assets separate to providing for a surviving spouse while ensuring biological children receive their inheritance (SLAT), or family trusts where assets are moved into the trust for the surviving spouse to allocate assets to heirs based on their needs.

Social Security planning should also be part of the discussion. If one spouse is a widow who was receiving survivor benefits, they could lose those benefits when they get married.

Talk with an estate planning attorney before getting married to fully understand your situation and ensure you and your spouse are ready for the changes and challenges of your senior years together.

Reference: Next Avenue (March 14, 2024) “The Talk Over-50s Should Have Before Tying the Knot”

What Is the Primary Purpose of a Revocable Trust?

“Revocable trusts are much more common than irrevocable trusts because they provide many important estate planning benefits.”

There are many basic tools of estate planning, which become more effective when they are coordinated and complement each other. For asset protection and tax planning, aligning strategies is critical for success, says a recent article from Kiplinger, “Revocable Trusts: The Most Common Trusts in Estate Planning.” The benefits of revocable trusts include letting the grantor—the person making the trust—have control of assets.

As the name implies, revocable trusts are more flexible than irrevocable trusts. The grantor of a revocable trust may change the terms of the trust whenever they wish, transfer property in and out of the trust, and change beneficiaries at will.

A revocable trust has many benefits. One benefit is that assets placed in a trust are not subject to probate when the estate is settled, keeping the terms of the trust and the nature of the assets private. A revocable trust allows for a step-up in basis, which can reduce or, in some cases, eliminate capital gains taxes.

The language of the trust provides instructions for managing and disposing of the assets upon the grantor’s death. A revocable trust can also be designed to protect assets for beneficiaries, set certain conditions for asset distribution, or require the funds to be used for specific costs, like education or home purchase.

There are some limitations to be aware of, which should be discussed with your estate planning attorney. If the goal is to protect assets for the grantor, an irrevocable trust is better. For example, if the grantor was involved in litigation and lost, a revocable trust’s assets could be recovered as part of the judgment. This is because the grantor still has control of the assets.

If the assets were in an irrevocable trust, the grantor would have no access to them, which adds a layer of protection.

The grantor needs to consider trading control of and access to assets for protection from court judgments and creditors.

You and your estate planning attorney should discuss which trust is better for your situation. A revocable trust is an excellent tool for estate planning, but an irrevocable trust provides more protection and can potentially shield assets from taxes.

Many people of modest means find that a revocable trust serves their interests well. In contrast, people with higher estate values find a combination of revocable and irrevocable trusts allows them to structure trusts to meet their goals.

Reference: Kiplinger (April 4, 2024) “Revocable Trusts: The Most Common Trusts in Estate Planning”