Author: heschlawadmin

SPECIAL NEEDS TRUSTS: Pt. 3 – Pooled Trust Mistakes

Aside from the individually structured first and third party special needs trusts, a pooled SNT is a trust that is for multiple individuals with special needs. A pooled SNT is a trust that is established and managed by a non-profit organization. It is a trust that pools together all of the assets of the disabled individuals that have accounts through the trust, as well as assets acquired through outside donations, and makes distributions to the beneficiaries based on their individual shares of the trust’s assets. Pooled SNTs are a way to relieve family members of the job of being the trustee and allows professionals to handle the tedious responsibilities of being the trustee. Some important aspects that set apart pooled SNTs from first and third party SNTs are:

  • Pooled SNTs do not have any age limits;
  • The disabled person is able to be one of the grantors of the trust; and
  • Any excess funds at death are generally kept by the non-profit.

While there are many benefits of being a part of a pooled SNT, there are many mistakes to avoid when planning to join a pooled SNT. One of the first mistakes that people make when pursuing admission to a pooled SNT is not seeking legal advice on the issue. There are many different types of pooled SNT, and all vary from the type of care they give, to the ways they handle the trust’s assets. It is vital to have an experienced legal professional help plan which trust is best for the unique needs of the disabled person. Another mistake that family members of the disabled person’s family must avoid is failing to update their own estate planning documents. Failing to update your own estate plan to make the disabled person’s pooled SNT one of the beneficiaries of your will, trust, life insurance, or retirement accounts will cause an unnecessary delay in the beneficiary receiving the money.

One of the biggest mistakes that people in this situation make is failing to plan at all. While you are alive, you may be the primary caregiver as well as the trustee of a disabled person’s SNT, whether a first party SNT or a third party SNT. But, what will happen to their care and financial security after you pass? It is essential to have a seamless plan in place to allow the disabled person to continue receiving the necessary funds and care they need to live a comfortable life. A pooled trust may be the best tool for that plan, and may be worth pursuing.

A pooled SNT may be the best plan for preserving a disabled person’s assets and ensuring quality care. If a member of your family is disabled, and has not already set up an SNT, call Bill Hesch, attorney, CPA, and financial planner, to find out if a pooled SNT would be in their best interest, or to receive a second opinion on your existing SNT plan.

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

 

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

SPECIAL NEEDS TRUST MISTAKES: Pt. 2 – Third Party Trust Mistakes

A Third Party Special Needs Trust is created for the benefit of a disabled person, which ensures that the disabled person will have proper care. The Third Party SNT is funded with assets typically by family and friends of the disabled person. Unlike the First Party SNT, the property is never owned by the disabled person, and there is also no payback of Medicaid or any other government benefits. When properly planned, a Third Party SNT can provide greater flexibility than a First Party SNT, and can be a very useful mechanism for providing proper care for a person with special needs.

While every state has its own requirements for Special Needs Trusts, generally, Third Party SNTs are more flexible because there are no age requirements. They also do not have to be monitored by the Probate Court in the county of their residence, and may be either revocable or irrevocable. As long as there is careful planning and proper management, there is no repayment of any governmental funds, like Medicaid.

There are common mistakes that must be avoided to ensure that the Third Party SNT works properly and will not have adverse effects on the disabled person or trustee. One of the first mistakes is improperly transferring property into the trust that may disqualify government benefits or require the trust to payback the state funds. It is essential that the property in the trust is never owned by the disabled person, and he or she have no legal right to the property. Transferring property, including money, that can be traced back to the disabled person can be considered a “step-transfer,” and would result in Medicaid and other state funds to be repaid, which could cost thousands of dollars.

Another common mistake is making the primary caregiver the trustee. The trustee position for any SNT is a demanding job, and mistakes must be avoided. Caregivers already have plenty of responsibility looking after the person with special needs. Adding to the stressful job of being primary caregiver to the trustee of the SNT, may result in careless mistakes with the transfer of money to the disabled person. For example, a disabled person on SSI cannot receive money for rent, food, and clothing. Thus, the trustee must keep accurate records to document the purpose for each distribution to the disabled person, and avoid having to repay the government for an improper SSI distribution. Also, by having the trustee and caregiver roles assumed by different people, an important check and balance is put on the primary caregiver and trustee.

A third common mistake is having a disabled person as a beneficiary of a Crummey Trust. In a Crummey Trust, the beneficiary has Crummey Powers, which allow for a Grantor to gift property under the annual gift tax exclusion, and the beneficiary is given the right to withdraw the gift for 30 days. However, the beneficiary of a Third Party SNT should not be given such right since a disabled beneficiary of a Third Party SNT would possibly be required to repay the government benefits received by them, to the extent of the withdrawal power.

Third Party SNTs are very useful vehicles to help fund the care that a disabled person desperately needs. They are a flexible and efficient way to help the disabled person financially and keep their government benefits if drafted and managed properly. If you have a member of your family who has special needs, and want the ability to provide them with financial assistance without adversely affecting their governmental benefits, please contact Bill Hesch, attorney, CPA, and financial planner to get started, or for a second opinion.

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

 

SPECIAL NEEDS TRUST MISTAKES: Pt. 1 – First Party Mistakes

A First Party Special Needs Trust is set up for the benefit of a person with special needs, and is funded with the disabled person’s own property. Different rules apply when a Third Party SNT that is set up by family members for the benefit of the disabled person. Typically, a First Party SNT is used in two common scenarios: the disabled person receives a lawsuit settlement for damages, or when the disabled person inherits money or property from family, who did not set up a Third Party SNT.

When a disabled person owns property outright, the person may face difficulty receiving government benefits. This is where a First Party SNT comes in; it allows the disabled person to have access to their property, while the trust retains ownership of it, which improves the disabled person’s ability to receive government funding. When formed properly, the First Party SNT is a useful vehicle for ensuring proper care for a person with special needs.

Although every state has different rules that must be met when forming a First Party SNT, the requirements are generally:

  • The trust is irrevocable
  • The trust is set up by a parent or guardian in court
  • The beneficiary of the trust is under the age of 65
  • The assets in the trust must have been owned by the beneficiary
  • Benefits received through Medicaid must be repaid after the beneficiary passes away

Proper planning is essential to ensure that all of these requirements are met and that the First Party SNT operates effectively. If the First Party SNT is not formed properly, there may be several problematic issues that arise. One of the worst problems is the disabled person losing their governmental benefits, like SSI or Medicaid. This can result as a flaw in formation or in improper management by the trustee of the SNT. Proper planning is also essential to avoid issues with Medicaid repayment after the death of the beneficiary. When formed correctly, the assets of the trust will be used to repay the costs of Medicaid. However, if the trust is not formed or managed correctly, repayment can be an unnecessary burden on the beneficiary’s estate. Likewise, the trustee of the First Party SNT may face personal liability if the funds were not managed or accounted for properly. All of these consequences can be mistakes of poor planning and management of the First Party SNT.

If you or a member of your family has special needs and will be receiving money from a lawsuit for damages, or inheriting money from your family, who have not set up a Third Party SNT, please contact Bill Hesch, attorney, CPA and financial planner for a second opinion to avoid the common mistakes that are typically made, due to lack of proper planning.

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

New End of Life Law

Medical/Physician’s Orders for Scope of Treatment

Kentucky and Indiana (Ohio Pending)

Did you know that in the last month of life over 50% of Americans go to the emergency room and that 50% to 75% of them get admitted? However, some people might not want to spend the last month of their lives in a hospital. Hospitalization is expensive and usually not considered an ideal place to die. You can avoid these unwanted end of life experiences through proper advance care planning.

The newest tool for advance care planning is medical or physician’s orders for scope of treatment. Nationally this new tool is being referred to as a POLST, which stands for Physician’s Orders for Life-Sustaining Treatment.  The National POLST Paradigm is an organization started in Oregon that helps push for the adoption of medical order documents across the country. Over 22 states have endorsed the POLST program, and 25 others are developing similar programs. Kentucky and Indiana are two such states. In Kentucky, these documents are known as MOST or Medical Orders for Scope of Treatment. In Indiana, they are known as POST or Physician Orders for Scope of Treatment. However, Ohio has not been successful in passing a POLST initiative. Ohio’s MOLST (Medical Orders for Life-Sustaining Treatment) bill has passed the Ohio Senate and has been referred to committee in the House. These documents go by a few different names depending on the state, but generally, they do the same thing.

POLST type documents are meant to encourage patients and their health care professionals to talk about what a patient wants at the end of life. The MOST document, unlike a living will, is a doctor’s orders. The fact that they are orders instead of a legal document leads to increased compliance by emergency medical personnel and hospital staff. Unlike a living will, MOST documents are filled out jointly by the patient and their physician. The purpose of this joint involvement is informed, shared decision-making between patients and healthcare professionals. The conversation involves the patient discussing his/her values, beliefs and goals for care, and the healthcare professional presents the patient’s diagnosis, prognosis, and treatment alternatives, including the benefits and burdens of life-sustaining treatment. Together they reach an informed decision about desired treatment, based on the patient’s values, beliefs, and goals for care.

However, MOST documents are not recommended for everyone. They are highly recommended for patients for whom their health care professionals would not be surprised if they were no longer living within a year. Patients should, however, have in place a living will and possibly a MOST document. The MOST document allows for a patient to dictate how they will spend their final days. The MOST document makes sure that everyone in the healthcare field knows exactly what the patient’s wishes are and that they follow those wishes.

Conversations about end of life planning are difficult. However, if you don’t have them it can be even more difficult for your family to figure out your wishes. Have these conversations with your family members and consider putting in place a living will and if necessary a medical order for treatment document. If you need help putting these documents into place or have any questions feel free to reach out to our office.

 

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning. He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas. His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer: Bill Hesch submits this blog to provide general information about the firm and its services. Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel. While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog. Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

For more information on POLST visit:

http://polst.org/

ABLE Accounts

Last month we told you about Special Needs Trusts, which are an important tool in planning for the support and care of a disabled person. Today, we will continue that conversation and tell you a little about how you can use both a Special Needs Trust and an ABLE Account to plan for the support and care of a disabled person.

ABLE Accounts have been talked about on our blog in the past, but here is a little refresher. ABLE Accounts are available in both Kentucky and Ohio, through the National Achieving a Better Life Experience (“ABLE’) Act. ABLE Accounts allow for a disabled person to save and invest money without losing eligibility for certain public benefits programs, like Medicaid, SSI, or SSDI. Additionally, earnings in your ABLE Account are not subject to federal income tax, so long as you spend them on “Qualified Disability Expenses.” Some examples of “Qualified Expenses” include education, housing, transportation, employment support, health prevention and wellness, assistive technology and personal support. However, ABLE Accounts have limited deposits of $15,000 a year, lifetime funding limits, and a medicaid payback provision. Additionally, the onset of the disability must have occurred prior to age 26. These restrictions on ABLE Accounts make planning all the more important.

So you might be asking, which planning tool do I need? A Special Needs Trust or an ABLE Account? The answer could be both. ABLE Accounts allow for more accessibility of funds, with a prepaid debt card feature. The card does not pull money directly out of your ABLE Account. Instead, you get to choose a specific amount of money to load onto your card. This way, you can better control budgets and plan for your Qualified Disability Expenses. They also allow the disabled person to easily receive and save funds from employment without affecting government benefits. If a disabled person is able to work, SSI limits benefits for that person if they have a balance in personal bank account exceeding $2,000. ABLE Accounts allow a person on SSI to work and retain income without diminishing their maximum SSI benefit. However, the money in an ABLE Account will be counted as a resource for SSI purposes if the balance increases over $100,000.

Unfortunately, the funds placed in a ABLE Account are not protected long term because of the medicaid payback provision upon the account holders death. If a family member, by gift or inheritance, plans to leave money for a disabled person the Special Needs Trust is the preferred planning tool. The Special Needs Trusts discussed last month can hold unlimited funds while also allowing for the disabled person to continue receiving SSI.

There are many considerations to look at when trying to protect government benefits for a disabled person and making sure to plan properly is so important. The rules for both Special Need Trust and ABLE Accounts are very complex and it is highly recommended that you work closely with your attorney, CPA, and financial advisor.

 

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning. He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas. His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer: Bill Hesch submits this blog to provide general information about the firm and its services. Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel. While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog. Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

Providing For and Protecting a Disabled Child

Do you have your disabled child written into your will? Or are they disinherited and you are relying on their siblings to take care of them? This is potentially problematic and you should consider a Special Needs Trust.

Both of these methods of attempting to care for a disabled child, after your death, have undesirable risk. If your child is receiving Supplemental Security Income (SSI), Medicaid, or other needs-based state or federal government funds, leaving your child assets in your will can cause them to become disqualified for this type of government assistance. If you are disinheriting your disabled child in anticipation that your other children will see to it they are taken care of, you are also taking on risk. The other children do not have any obligation to provide top-notch care for their disabled sibling. One way to eliminate these risks and make sure that your disabled child is provided and protected for long after you are gone, is to set up a Special Needs Trust.

Special Needs Trusts are a unique way to make sure that your disabled child’s comfort, dignity, and joy are maintained while also making sure that your child does not lose out on government benefits. A properly constructed Special Needs Trust is not counted as an asset as applied to eligibility for government benefits. This means that your disabled child will be allowed to receive things like, social security and Medicaid for food and shelter, and the trust will be able to provide for things like, medical and dental expenses not covered by third parties, clothing, electronic equipment, training programs, education and education supplies, treatment and rehabilitation, private residential care, telephone, cable, internet, transportation, vacations, participation in hobbies and sports, and much more. As long as the trust is paying for things other than housing and food, items that social security and other government assistant programs are meant to provide, the special non-support needs paid for by the trust will not be considered income to the disabled child. Setting up as Special Needs Trust can be a great way to ensure that your child is taken care of in the future.

Planning for the provisions and protection of a disabled child can be difficult for a parent after they are gone but it is not impossible. Through proper planning, your child can receive the benefit of your estate while still maintaining government benefits.

 

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning. He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas. His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer: Bill Hesch submits this blog to provide general information about the firm and its services. Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel. While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog. Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

Top 10 Year End Tax Planning Mistakes

#10 – Failure to rebalance your stock portfolio’s asset allocation and harvest capital losses to minimize 2017 recognized capital gains. Beginning in 2018, under the new tax law proposals, taxpayers will no longer be able to choose stocks with a higher tax basis to sell.

Taxpayers will be required to use the FIFO method, first-in first-out method for identifying the cost basis for stocks being sold. This method usually results in lower cost basis for stock being sold and thus higher taxes! December, 2017 is the last month in which taxpayers have a choice in determining which stocks to sell at a higher tax basis.

#9 – Failure to purchase furniture, equipment, tools, computers and other fixed assets by December 31, 2017. If business owners plan to purchase those assets during the first six months of 2018, they should consider purchasing those assets in December, 2017. In doing so, business owners may save more taxes on those purchases because tax rates for business owners are expected to be lower in 2018.

#8 – Failure to set up your solo 401k plan or other retirement plan by December 31, 2017! Some retirement plans can be set up by the due date of your tax return but other retirement plans are required to be set up by the end of the year. Keep in mind that your company can set up a retirement plan in December and have until the due date of the tax return in 2018 in which to fund the contributions to the plan.

Contact your CPA to advise you on what type of retirement plan would be most advantageous for you as a business owner in order to maximize the contributions to be made by the business for the owner and to minimize the contributions to the plan for your employees. Plan design is very important!

#7 – Failure how to fully pay your 2017 state and local taxes by December 31, 2017. Under the new tax law proposals, state and local income taxes will no longer be deductible in 2018. Therefore,  you should be estimating how much your 2017 state and city tax liabilities will be and make sure that you make estimated payments by the end of the year to pay those tax liabilities in full.

However, if you are subject to Alternative Minimum Tax (AMT) , then you would not need to pay your state and local taxes in December since you will not get any tax benefit in doing so for 2017.

On the other hand, if you are in Alternative Minimum Tax, you may want to accelerate income into 2017 since that additional income may not increase your taxable income. Your CPA should be contacted to make your projected 2017 tax computations for AMT and regular tax purposes.

#6 – Failure to meet with your CPA and estimate your 2017 taxable income and determine whether you expect 2018 to be better or worse. It is imperative that you review year-end tax saving strategies in December, 2017 with your CPA to take advantage of the Trump tax law proposals that we expect to be effective January 1, 2018.

After you meet with your CPA, if you need a second opinion or do not fully understand the tax planning strategies being recommended to you, call Bill Hesch, attorney, CPA and financial advisor to get a second opinion at 513-509-7829. Peace of mind is only a phone call away.

#5 – Failure to review your choice of entity with your CPA! The question is whether under the new tax law to be effective in 2018, should you continue to be a sole proprietor, partnership, S corporation or C corporation for your business? Keep in mind that the decision to terminate or make an S election for 2018 must be filed with the IRS by March 15, 2018. However you should be reviewing the new tax law with your CPA as soon as it becomes final. We are expecting Congress to pass the new tax legislation by Christmas, 2017.

#4 – Failure to review your divorce decree and identify whether it would be advisable for you to pre-pay 2018 alimony payments in December, 2017. Under the new tax law proposals, alimony payments may not be deductible beginning in 2018. You may also need to contact your divorce attorney to review your divorce decree and identify what changes, if any can be made to your divorce decree as a result of the changes in the tax laws in 2018. It may be advisable to agree to share the additional tax savings for 2017 between the two parties for the 2018 alimony payments made in December, 2017.

In addition, if alimony payments are no longer deductible and alimony received is no longer includible in income, the change in the tax law will penalize the person making the alimony payments in future years and benefit the person receiving the alimony payments. Due to the change in the tax laws, the party paying the alimony may want to consult with their divorce attorney to see if the divorce decree could be amended for the change in the tax consequences to both parties.

#3 – Failure to prepay your 2017 tax return preparation fees by December 31, 2017. Under the new Trump tax law proposals, tax return preparation fees will no longer be tax deductible in 2018. It may also be advisable to pay not only your 2017 tax return preparation fees but also 2018 estimated tax return preparation fees too.

#2 – Failure to maximize your charitable donations in 2017! The new tax laws are expected to lower personal tax rates in 2018. Therefore by paying Charities your expected donations for 2018 through 2020, in 2017, you will save more taxes. However if you do not want to make a large donation to your charities covering future years, it may be advisable to make a significant charitable donation to a Greater Cincinnati Foundation Donor Advised Fund. In doing so, you or your designated family member will be able to direct what payments will be made to what charities in future years out of your Donor advised fund.

Due to the increase in the standard deduction for single persons to $12,000 and married couples to $24,000, individuals may not get a tax benefit from charitable donations in future years. Beginning in 2018, with the changes in itemized deductions, most taxpayers will only get deductions for real estate taxes, mortgage interest and charitable donations.

Mortgage interest on home equity loans will not be tax deductible beginning in 2018.  Taxpayers should pay all interest owed on their home equity loan by 12/31/2017.  Also, they should consider restructuring that debt into a loan that is tax deductible beginning in 2018.

The higher standard deduction may result in many taxpayers not getting a tax benefit from their donations beginning in 2018. Therefore it may be advisable to make a significant donation to your Greater Cincinnati Foundation Donor Advised Fund by the end of December, 2017, to make the donations that you would be making over the next three to five or more years.

#1 – Failure of cash basis taxpayers to prepay 2018 operating expenses in December, 2017 and defer income from 2017 to 2018. The proposed tax law changes will typically result in business owners having lower tax rates in 2018. Therefore by taking deductions in 2017 or deferring income to 2018, business owners will pay less taxes in 2017 when the tax rates are higher. It is advisable to meet with your CPA to review the tax rules for accelerating deductions and deferring income so that your tax savings are protected from IRS challenge.

Two Common Pitfalls for Traditional IRA Beneficiary Designations in Blended Familis

Baby Boomers Beware!

I have found over the years that many of my baby boomer estate planning clients share the same common facts: (1) their IRAs, 401(k)s, or other qualified retirement accounts are typically their largest asset; and (2) they increasingly have blended families – meaning, they are in their second or third marriage and have children from prior relationships.  Since most baby boomers’ largest assets are their IRAs, they need to be careful when designating their beneficiaries for these accounts.  This becomes especially important when the account owner has a blended family.  Failing to properly plan their IRA beneficiary designations can result in the accidental disinheritance of a child, create unnecessary legal fees, and trigger significant income tax consequences for their family. Unfortunately, most IRA account owners are unaware of the complicated rules surrounding beneficiary designations and so the estate plan they thought was in place does not become a reality.  This article will address common pitfalls for IRA beneficiary designations for blended families.

Pitfall 1: The Account Owner Names His or Her Spouse as Beneficiary

Most commonly, an IRA account owner will designate his or her spouse as beneficiary.  In some situations, this designation works just fine, but other times, and especially for those in blended families, naming the spouse as beneficiary will make their estate plan inconsistent with their overall estate planning goals.

When a surviving spouse inherits an IRA, they can choose how the IRA is paid out, including, but not limited to: (1) rolling it over into their own IRA; or (2) cashing it in, paying taxes, and spending the proceeds at their discretion.  To learn more about the different options surviving spouses have, please click here. Surviving spouses also have the opportunity to designate their own beneficiary on their inherited IRA.  Oftentimes, a surviving spouse will designate a beneficiary who is inconsistent with those who the account owner originally intended, such as the surviving spouse’s new spouse or to the surviving spouse’s own children.  The surviving spouse has no obligation to leave the IRA asset to any of the account owner’s children from a prior relationship.  Most baby boomers with blended families want to provide for their own children upon the death of their surviving spouse, but are unaware that simply naming their spouse as beneficiary of the IRA could compromise their estate planning goals if their surviving spouse leaves the IRA to someone other than their own children.  An IRA account owner can avoid this problem by setting up a trust and naming the trust as the IRA beneficiary instead of the surviving spouse.  This solution is discussed in further detail below.  IRA account owners are encouraged to consult with their attorney, CPA, and financial advisor to determine if naming their spouse as their IRA beneficiary is an appropriate option to meet their estate planning goals.

Pitfall 2: The Account Owner Names His or Her Trust as Beneficiary

Naming a trust as the IRA beneficiary instead of their spouse is a typical option for clients in blended families who want to ensure that their IRA will pass down their blood line.  A typical trust for a baby boomer client provides that upon the first spouse’s death, the trust provides for the surviving spouse, and upon the survivor’s death, the remaining assets are distributed to the designated children and stepchildren in equal shares.  As long as the IRA account owner’s children are beneficiaries under the trust, naming the trust as the IRA beneficiary will ensure that his or her children from a prior relationship will not be left out.  This prevents the spouse from inheriting the IRA outright and leaving it to someone other than the account owner’s children.  However, naming a trust as the beneficiary of an IRA comes with its own faults, as discussed below.

The biggest problem with naming a trust as IRA beneficiary is that if the trust is not drafted properly to optimize tax deferral for IRAs, there could be significant income tax consequences for the account owner’s family. There are certain requirements a trust must have to qualify as a designated beneficiary of an IRA to receive favorable tax treatment. If these specific requirements are not met, the trust will not receive a favorable “stretch” payout method option that individual beneficiaries otherwise enjoy.  The stretch IRA payout method “stretches out” the distributions from the IRA over the life expectancy of the oldest identifiable beneficiary of the trust, which in turn stretches out the annual income tax liability for each beneficiary.  When a trust is not drafted properly, the trust beneficiaries will be disqualified from receiving this favorable tax treatment. Instead, the beneficiaries are required to take either a lump sum distribution of the IRA or take distributions over a 5 year period.  For more discussion on payout options for trusts and other non-spouse beneficiaries, please click here.

Another issue that arises when an account owner names a trust as IRA beneficiary is that the account owner does not properly fill out the beneficiary designation form with the IRA custodian.  If proper language is not used on the beneficiary form, the account owner may encounter difficulty with the custodian accepting the designation.  Furthermore, depending on the language of the trust, if the trust is split into sub-trusts for the children and the sub-trusts are not specifically identified as the beneficiaries of the IRA, the children may not be able to use their own life expectancy for the tax-preferred stretch payout method.

It may seem simple in theory, but designating the right IRA beneficiary can be complicated. Baby boomers in blended families need to be aware of the consequences of naming the wrong beneficiary of their IRAs.  IRA account owners are encouraged to meet with their attorney, CPA, and financial advisor before naming their spouse or trust as their IRA beneficiary so that their IRA beneficiary designations will meet their overall estate planning goals.

 

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

Inherited IRA Options for the Surviving Spouse

Did you know that when you inherit an IRA you can limit your income tax liability by deciding how distributions are made to you?  Unfortunately, many IRA beneficiaries don’t know they have distribution options and so they cash in their inherited IRA and expose themselves to significant income tax liabilities.  The options available to IRA beneficiaries vary depending on if the beneficiary is a surviving spouse or a non-spouse and if the IRA is a traditional IRA or Roth IRA. This article will focus on the typical traditional IRA distribution options for a surviving spouse to limit the surviving spouse’s tax liabilities. Click here for options for non-spouse beneficiaries. Not all distribution options work best for every beneficiary, so beneficiaries are encouraged to consult with their financial advisor, CPA, and attorney to find out which option works best for them.

Option 1: Treat IRA as Own

One option surviving spouses have is treating the IRA as their own.  Surviving spouses can treat inherited IRAs as their own by naming themselves as the account owner or by rolling the inherited IRA into their own IRA account.  This is often the best choice if the deceased spouse was older than the surviving spouse because it allows the surviving spouse to delay taking the IRA’s Required Minimum Distributions (RMDs) until he or she reaches age 70½ rather than using the deceased spouse’s age. The benefits of this option are best described using an example: Husband dies at age 73 leaving his IRA to his wife who is age 62.  Wife subsequently chooses to roll over the IRA into her own.  Although Husband started taking his RMDs at age 70½, Wife is not required to take RMDs on the rollover IRA until she reaches age 70½.  This choice effectively resets the IRA’s RMDs using the surviving spouse’s younger age and offers the surviving spouse additional years of tax-deferred growth.

Option 2: Leave Ownership in Deceased Spouse’s Name

The second option for a surviving spouse beneficiary is leaving ownership of the IRA in the deceased’s spouse’s name, for the benefit of the surviving spouse.  This is often the best choice for a surviving spouse if the deceased spouse was younger than the surviving spouse.  If the surviving spouse chooses this option, the RMDs are determined using the deceased spouse’s age at the time of death instead of the surviving spouse’s age, which presents two possibilities:

(1) if the deceased spouse died after age 70½: the RMDs must be taken on the longer of   the deceased spouse’s life expectancy based on his/her previous RMD schedule or the     surviving spouse’s life expectancy; or

(2) if the deceased spouse died before age 70½: the surviving spouse can defer RMDs      until the deceased spouse would have been required to take them.

Keep in mind that in order for this option to work properly, ownership of the IRA must stay in the decedent-owner’s name, for the benefit of the surviving spouse beneficiary.  If the surviving spouse has already transferred the IRA ownership into his or her name, the surviving spouse will not receive the advantages of using this option.

Option 3: Rollover IRA with 5 Year Distribution

Another option for a surviving spouse beneficiary is to rollover the IRA into their name and cash out the IRA within five years of December 31 of the year following the deceased spouse’s date of death.  This option gives the surviving spouse access to money relatively soon and spreads out the tax liability over a five year period, rather than in one year if a lump sum distribution is taken.

Option 4: Lump Sum Distribution

A surviving spouse beneficiary also has the option to cash in the IRA and take a lump sum distribution; however, the spouse will be responsible for paying income taxes on the distribution in the year the distribution is made. This option gives the surviving spouse immediate access to money but can potentially subject the IRA income to higher tax rates.

The traditional IRA distribution rules and options for surviving spouse beneficiaries are complicated. If you are a surviving spouse and listed as the beneficiary of your deceased spouse’s IRA, meet with your CPA or tax attorney to decide what option will work the best minimize your taxes.

 

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)

Inherited IRA Options for the Non-Spouse Beneficiary

Did you know that when you inherit an IRA you can limit your income tax liability by deciding how distributions are made to you?  Unfortunately, many IRA beneficiaries don’t know they have options and so they cash in their inherited IRA and expose themselves to significant income tax liabilities.  The options available to IRA beneficiaries vary depending on if the beneficiary is a spouse or non-spouse, so this article will focus on the three distribution options non-spouse IRA beneficiaries typically have to limit their tax liabilities. Not all distribution options work best for every situation, so IRA beneficiaries are encouraged to consult with their CPA and attorney to find out which option works best for them.

Option 1: Rollover IRA with Five Year Distribution

If an IRA owner dies and designates a non-spouse beneficiary, such as a child, parent, sibling, or friend, the beneficiary can choose to rollover the IRA into their name, but the entire IRA must be distributed to the beneficiary within five years of December 31 of the year following the IRA owner’s date of death.  This option gives the non-spouse beneficiary access to money relatively soon and spreads out the tax liability over a five year period, rather than in one year if a lump sum distribution is taken.

Option 2: Stretch IRA

The second option for a non-spouse beneficiary is a stretch IRA.  With a stretch IRA, the non-spouse beneficiary receives the IRA’s annual required minimum distributions (RMD) over the beneficiary’s remaining life expectancy. The beneficiary’s remaining life expectancy is determined by the beneficiary’s age in the calendar year following the year of death and reevaluated each year.  For example, if the IRA owner dies and his 50-year-old daughter is the sole beneficiary, the daughter may choose to stretch out the IRA over her remaining life expectancy and will only receive the RMD each year.  Beneficiaries who elect this option are only responsible for paying income taxes on the RMD they receive each year.  This option has more favorable tax rules but limits the amount of money available to the beneficiary on an annual basis.

Beneficiaries who choose a stretch IRA need to be aware that ownership of the IRA must stay in the decedent-owner’s name, for the benefit of the beneficiary.  If the beneficiary has already transferred the IRA ownership into their name, the IRA will be subject to the IRA Rollover rules over a 5 year period.

Option 3: Lump Sum Distribution

A non-spouse beneficiary also has the option to completely cash in the IRA and take a lump sum distribution. The beneficiary will be responsible for paying income taxes on the distribution in the year the distribution is made.  This option gives the beneficiary immediate access to money but can potentially subject the IRA income to higher tax rates.

The IRA distribution rules and options for a non-spouse beneficiary are complicated. If you are the beneficiary of an inherited IRA, meet with your CPA or tax attorney to decide what option will work the best minimize your taxes.

 

Bill Hesch is a CPA, PFS (Personal Financial Specialist), and attorney licensed in Ohio and Kentucky who helps clients with their financial and estate planning.  He also practices elder law, corporate law, Medicaid planning, tax law, and probate in the Greater Cincinnati and Northern Kentucky areas.  His practice area includes Hamilton County, Butler County, Warren County, and Clermont County in Ohio, and Campbell County, Kenton County, and Boone County in Kentucky.

(Legal Disclaimer:  Bill Hesch submits this blog to provide general information about the firm and its services.  Information in this blog is not intended as legal advice, and any person receiving information on this page should not act on it without consulting professional legal counsel.  While at times Bill Hesch may render an opinion, Bill Hesch does not offer legal advice through this blog.  Bill Hesch does not enter into an attorney-client relationship with any online reader via online contact.)