Some Assets Better Left Outside of Will – Annapolis and Towson Estate Planning

A will is a document of last resort to transfer assets. There are many ways to transfer assets that would preempt the terms of a will. AARP’s recent article entitled “The Legal Limits of Your Will” provides a list of some major assets that often fall outside a will’s scope, along with tips for getting them to the people or organizations you want.

Retirement accounts. Those named as beneficiaries will get those assets, no matter what the will says. That’s because a beneficiary designation already informed the plan administrator how to handle the asset after your death. There’s no need for probate court involvement.

Life insurance policies. A life insurance policy’s beneficiary listing, not the will, determines who gets the proceeds. However, some states automatically revoke the beneficiary designation of an ex-spouse on a life insurance policy.

Bank accounts. If an account is titled as transfer on death (TOD), payable on death (POD) or joint tenancy with right of survivorship (JTWROS), those designations generally override the will. The account’s signature card would show if any of these designations applies. Ask the bank to look up your card if you aren’t sure. For individual accounts titled TOD or POD, the beneficiary can go to the bank with a death certificate (or death certificates) and proof of identity to transfer or collect the funds. JTWROS accounts become the property of the surviving account holder, who will need to show the bank a death certificate for the other account holder.

Real estate. If two spouses own a home jointly with right of survivorship or as tenants by the entirety, the property automatically is transferred to the remaining spouse without a court’s involvement. Real estate can also be transferred outside a will in certain states through a TOD deed, in which you name the beneficiary on the property.

Trusts. Any asset in a trust isn’t governed by a will. Therefore, trusts are another tool for distributing assets outside of probate court. However, after a trust is created, you must retitle accounts, change beneficiaries, or take other measures so that each asset you want to put into the trust will actually end up there.

Reference: AARP (September 29, 2022) “The Legal Limits of Your Will”

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How Does Probate Court Work? – Annapolis and Towson Estate Planning

Probate court is where wills are examined to be sure they have been prepared according to the laws of the state and according to the wishes of the person who has died. It is also the jurisdiction where the executor is approved, their activities are approved, all debts are paid, and assets are distributed properly. According to a recent article from Investopedia “What is Probate Court?,” this is also where the court determines how to distribute the decedent’s assets if there is no will.

Probate courts handle matters like estates, guardianships and wills. Estate planning lawyers often manage probate matters and navigate the courts to avoid unnecessary complications. The probate court process begins when the estate planning attorney files a petition for probate, the will and a copy of the death certificate.

The probate court process is completed when the executor completes all required tasks, provides a full accounting statement to the court and the court approves the statement.

Probate is the term used to describe the legal process of handling the estate of a recently deceased person. The role of the court is to make sure that all debts are paid, and assets distributed to the correct beneficiaries as detailed in their last will and testament.

Probate has many different aspects. In addition to dealing with the decedent’s assets and debts, it includes the court managing the process and the actual distribution of assets.

Probate and probate court rules and terms vary from state to state. Some states don’t even use the term probate, but instead refer to a surrogate’s court, orphan’s court, or chancery court. Your estate planning attorney will know the laws regarding probate in the state where the will is to be probated before death if you’re having an estate plan created, or after death if you are the beneficiary or the executor.

Probate is usually necessary when property is only titled in the name of the decedent. It could include real property or cars. There are some assets which do not go through probate and pass directly to beneficiaries. A partial list includes:

  • Life insurance policies with designated beneficiaries
  • Pension plan distribution
  • IRA or 401(k) retirement accounts with designated beneficiaries
  • Assets owned by a trust
  • Securities owned as Transfer on Death (TOD)
  • Wages, salary, or commissions owed to the decedent (up to the set limits)
  • Vehicles intended for the immediate family (this depends on state law)
  • Household goods and other items intended for the immediate family (also depending upon state law).

Many people seek to avoid or at least minimize the probate process. This needs to be done in advance by an experienced estate planning attorney. They can create trusts, assign assets to the trust and designate beneficiaries for those assets. Another means of minimizing probate is to gift assets during your lifetime.  If you are interested in avoiding probate, contact us to speak with one of our experienced estate planning attorneys.

Reference: Investopedia (Sep. 21, 2022) “What is Probate Court?”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Penalties Hurt Retirement Accounts? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “3 Tax Penalties That Can Ding Your Retirement Accounts” says make one wrong move, and Uncle Sam may ask for some explanations. Let’s review the three biggest mistakes people make.

Excess IRA contribution penalty. Contributing too much to an individual retirement account (IRA) can mean a penalty from the IRS. You can do this if you contribute more than the applicable annual contribution limit for your IRA or improperly rolling over money into an IRA. The IRS states, “Excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax can’t be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS lets you remedy your mistake before any penalties will be applied. You must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

Taking money out too soon from a retirement account. If you withdraw funds from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty. However, there are several exceptions when you’re permitted to take early IRA withdrawals without penalties: if you lose your employment, you’re allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s, but again, there are exceptions to the rule that allow you to make early withdrawals without penalty. The exceptions that let you make early retirement plan withdrawals without penalty may differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Missed RMD penalty. Taxpayers were previously obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. However, the Secure Act of 2019 bumped up that age to 72.

The consequences of not making these mandatory withdrawals still apply. If you fail to take your RMDs starting the year you turn 72, you face harsh penalties. The IRS says that if you don’t take any distributions, or if the distributions aren’t large enough, you may have to pay a 50% excise tax on the amount not distributed as required.

Reference: Money Talks News (March 1, 2022) “3 Tax Penalties That Can Ding Your Retirement Accounts”

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Does a Beneficiary have to Pay Taxes on 401(k)? – Annapolis and Towson Estate Planning

There are many complicated rules for inheriting assets in the form of retirement plans, workplace plans and Individual Retirement Accounts (IRAs), says a recent article titled “How Much 401(k) Inheritance Taxes Will Really Cost You” from The Madison Leader-Gazette. Any assets passed from one person to another in the form of a 401(k) are taxable. You’ll want to be prepared.

How are Inherited 401(k)s Taxed?

The inheritance rule for 401(k) tax usually follows the same path as the rules used when making contributions or withdrawals to tax deferred retirement plans. When a person dies, their 401(k) becomes part of their taxable estate.

This means that any taxes due on earnings not paid during the person’s lifetime need to be paid.

Traditional 401(k) plans are funded with pre-tax dollars. This is great for the saver, who gets to defer paying taxes while they are working. When they retire, withdrawals are taxed at their ordinary income tax rate, which is typically lower than when they are working.

There is an exception with Roth 401(k)s, where contributions are made with after-tax dollars and qualified withdrawals are tax free.

How the IRS taxes an inherited 401(k) depends on three factors:

  • The relationship between the account owner and the heir
  • The age of the heir
  • How old the account owner was at the time of death.

Who Pays Taxes on an inherited 401(k)?

The beneficiary who inherits the 40(k) is responsible for paying the tax. They are taxed at the heir’s ordinary income tax rate. This could push the heir into a higher tax bracket.

What Should I Do with an Inherited 401(k)?

If your spouse was the original owner, you may leave the money in the plan and take regular distributions, paying income tax on the withdrawals. You may also roll it over into your own 401(k) or to an IRA. This allows the money to continue to grow tax free, until withdrawals are taken.

Can I Avoid Taxes on an Inherited 401(k)?

The only way to avoid taxes on inherited 401(k) would be to disclaim the inheritance, at which point the 401(k) would be passed to the contingent beneficiary. If you don’t need the money, don’t want the tax headaches, or would rather see it go to another family member, this is an option. Most people pay the taxes.

Planning For Taxes When Creating an Estate Plan

Talk with one of our experienced estate planning attorneys about your taxable assets and how to manage the tax liabilities to your heirs. There are numerous tools to address these and related issues. Your heirs will be grateful for your foresight and care.

Reference: The Madison Leader Gazette (July 29, 2022) “How Much 401(k) Inheritance Taxes Will Really Cost You”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Does Potential IRS Change Have an Impact on Estate Plan? – Annapolis and Towson Estate Planning

The new federal regulation would require many people who inherit money through traditional IRAs, as well as 401(k)s, 403(b)s, and eligible 457(b)s to withdraw funds from the accounts every year over a 10-year period, according to The Wall Street Journal.

Money Talks News’ recent article entitled “How an IRS Change Could Hurt Your Heirs” says that the change would apply to most beneficiaries other than spouses and would apply to those who inherited money after 2019.

Children 21 and older, grandchildren and most others who get money from an affected account would need to follow the new regulations or rules.

The proposed change would require beneficiaries to take minimum taxable withdrawals every year for 10 years from their inheritance in situations where the original account owner died on or after April 1 of the year of his or her 72nd birthday.

These withdrawals, technically known as required minimum distributions (RMDs), must deplete the account within the 10-year period.

Heirs would pay a penalty of 50% on any RMD amounts they did not withdraw according to the schedule defined by the new IRS rules.

The proposed change has the potential to leave your heirs less wealthy. The reason is because the money you bequeath to heirs would have less time to grow in tax-advantaged accounts before they would be forced to withdraw it.

Over time, this can make a big difference in how much money they accumulate from the initial amount you leave them.

The proposed rules are designed to clarify changes resulting from the federal Secure Act of 2019.

If the IRS moves forward with the changes, the new rules will add to the growing number of reasons why it makes sense for some people to consider putting money into a Roth IRA instead of a traditional IRA.

With a Roth IRA, the account owner pays taxes upfront. As a result, heirs will not owe any taxes on the money they inherit. Therefore, the new rules would not apply to Roth IRAs.

Reference: Money Talks News (May 13, 2022) “How an IRS Change Could Hurt Your Heirs”

 

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How Do IRAs and 401(k)s Fit into Estate Planning? – Annapolis and Towson Estate Planning

When investing for retirement, two common types of accounts are part of the planning: 401(k)s and IRAs. J.P. Morgan’s recent article entitled “What are IRAs and 401(k)s?” explains that a 401(k) is an employer-sponsored plan that lets you contribute some of your paycheck to save for retirement.

A potential benefit of a 401(k) is that your employer may match your contributions to your account up to a certain point. If this is available to you, then a good goal is to contribute at least enough to receive the maximum matching contribution your employer offers. An IRA is an account you usually open on your own. As far as these accounts are concerned, the key is knowing the various benefits and limitations of each type. Remember that you may be able to have more than one type of account.

IRAs and 401(k)s can come in two main types – traditional and Roth – with significant differences. However, both let you to delay paying taxes on any investment growth or income, while your money is in the account.

Your contributions to traditional or “pretax” 401(k)s are automatically excluded from your taxable income, while contributions to traditional IRAs may be tax-deductible. For an IRA, it means that you may be able to deduct your contributions from your income for tax purposes. This may decrease your taxes. Even if you are not eligible for a tax-deduction, you are still allowed to make a contribution to a traditional IRA, as long as you have earned income. When you withdraw money from traditional IRAs or 401(k)s, distributions are generally taxed as ordinary income.

With Roth IRAs and Roth 401(k)s, you contribute after-tax dollars, and the withdrawals you take are tax-free, provided that they are a return of contributions, or “qualified distributions” as defined by the IRS. For Roth IRAs, your income may limit the amount you can contribute, or whether you can contribute at all.

If a Roth 401(k) is offered by your employer, a big benefit is that your ability to contribute typically is not phased out when your income reaches a certain level. 401(k) plans have higher annual IRS contribution limits than traditional and Roth IRAs.

When investing for retirement, you may be able to use both a 401(k) and an IRA with both Roth and traditional account types. Note that there are some exceptions to the rule that withdrawals from IRAs and 401(k)s before age 59½ typically trigger an additional 10% early withdrawal tax.

Reference: J.P. Morgan (May 12, 2021) “What are IRAs and 401(k)s?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Happens Financially when a Spouse Dies? – Annapolis and Towson Estate Planning

Losing a beloved spouse is one of the most stressful events in life, so it is one we tend not to talk about. However, planning for life after the passing of a spouse needs to be done, as it is an eventuality. According to a recent article from AARP Magazine, “The Financial Penalty of Losing Your Spouse,” the best time to plan for this is before your spouse dies.

You will have the most options while your spouse is still living. Estate plans, wills, trusts, and beneficiary designations can still be updated, as long as your spouse has legal capacity. You can make sure you will still have access to savings, retirement, and investment accounts. Create a list of assets, including information needed to access digital accounts.

Make sure that your credit cards will be available. Many surviving spouses only learn after a death whether credit cards are in the spouse’s name or their own name.

Get help from professionals. Review your new status with your estate planning attorney, CPA and financial advisor. This includes which accounts need to be moved and which need to be renamed. Can you afford to maintain your home? An experienced professional who works regularly with widows or widowers can provide help, if you are open to asking.

A warning note: Be careful about new “friends.” Widows are key targets of scammers, and thieves are very good at scamming vulnerable people.

Be strategic about Social Security. If both partners were drawing benefits, the surviving spouse may elect the higher benefit going forward. If you have not claimed yet, you have options. You can take either a survivor’s benefit based on your spouse’s work history, or the retirement benefit based on your own work history. You will be able to switch to the higher benefit, if it ends up being higher, later on.

Be careful about your spouse’s 401(k) and IRA. If you are in your 50s, you are allowed to roll your spouse’s 401(k) or IRA into your own account. However, do not rush to move the 401(k). You can make a withdrawal from a late spouse’s 401(k) without penalty. However, it will be taxable as ordinary income. If you move the 401(k) to a rollover IRA, you will have to pay taxes plus a 10% penalty on any withdrawals taken from the IRA before you reach 59 ½. Your estate planning attorney can help with these accounts.

Use any advantages available to you. The IRS will still let you file jointly in the year of your spouse’s death. Tax rates are better for married filers than for singles. Any taxable withdrawals you’ll need to take from 401(k)s or IRAs may be taxed at a lower rate during this year. You may decide to use the money to create a rollover Roth IRA or to put some funds into a non-tax deferred account.

Do not rush to do anything you do not have to do. Selling your home, writing large checks to children, or moving are all things you should not do right now. Decisions made in the fog of grief are often regretted later on. Take your time to mourn, adjust to your admittedly unwanted new life and give yourself time for this major adjustment.

Reference: AARP Magazine (May 13, 2022) “The Financial Penalty of Losing Your Spouse”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Should I Know about Charitable Gifts? – Annapolis and Towson Estate Planning

Sometimes as individuals and families increase in wealth, they want to give more to charities.

Some charitable donations may be tax deductible or be able to reduce tax liabilities. Let’s look at some suggestions if you decide you want to make charitable donations, according to WMUR’s recent article entitled “Money Matters: Considerations when making charitable gifts.”

First, it might be the time to establish a giving plan. The first step is to decide how much your family wants to give. When researching a charity, look at how the contributions will be used. Charity Navigator, a charity assessment organization, has a site to help you get started at charitynavigator.org. Each charity has a rating with additional information.

Besides annual giving, charitable giving can play a role in estate planning. Your estate planning documents can state these wishes, and sometimes, giving can reduce estate taxes. The federal government taxes wealth transfers during life and at death. Currently, these types of taxes are imposed on lifetime transfers exceeding $12.06 million per spouse at a top rate of 40%. States may also impose these types of taxes. Ask an experienced estate planning attorney about it.

To give to charity, you could include a bequest in your will or trust. Another option is to name a charity as a beneficiary on life insurance policies. Retirement plans such as IRAs, 401(k)s, and 403(b)s may also have a charity listed as beneficiary. If these plans are tax-deferred, then an advantage to using them to make charitable gifts is that a charity can get money tax-free that would otherwise be taxed.

You might also ask an estate planning attorney about a charitable lead or a charitable remainder trust.

Another option for giving is to use donor-advised funds, which gives the donor the tax benefit for making the gift all in one year but the option to make the actual gift later on.

A donor-advised fund is particularly useful for taxpayers who itemize deductions. This is an agreement between the donor and a host organization, which then becomes the legal owner of the assets.

You can tell the fund how to invest the contribution and how the money is disbursed. The fund controls the assets but usually will honor the donor’s requests.

Finally, you could set up a private family foundation. These are more complex but give you and your family control over the investment and distribution of the money. They work best when a significant amount of money is involved.

Reference: WMUR (Dec. 30, 2021) “Money Matters: Considerations when making charitable gifts”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Is a Bypass Trust Necessary? – Annapolis and Towson Estate Planning

A bypass trust removes a designated portion of an IRA or 401(k) proceeds from the surviving spouse’s taxable estate, while also achieving several tax benefits, according to a recent article titled “New Purposes for ‘Bypass’ Trusts in Estate Planning” from Financial Advisor.

Portability became law in 2013, when Congress permanently passed the portability election for assets passing outright to the surviving spouse when the first spouse dies. This allows the survivor to benefit from the unused federal estate tax exemption of the deceased spouse, thereby claiming two estate tax exemptions. Why would a couple need a bypass trust in their estate plan?

  • The portability election does not remove appreciation in the value of the ported assets from the surviving spouse’s taxable estate. A bypass trust removes all appreciation.
  • The portability election does not apply if the surviving spouse remarries, and the new spouse predeceases the surviving spouse. Remarriage does not impact a bypass trust.
  • The portability election does not apply to federal generation skipping transfer taxes. The amount could be subject to a federal transfer tax in the heir’s estates, including any appreciation in value.
  • If the decedent had debts or liability issues, ported assets do not have the protection against claims and lawsuits offered by a bypass trust.
  • The first spouse to die loses the ability to determine where the ported assets go after the death of the surviving spouse. This is particularly important when there are children from multiple marriages and parents want to ensure their children receive an inheritance.

This strategy should be reviewed in light of the SECURE Act 10-year maximum payout rule, since the outright payment of IRA and 401(k) plan proceeds to a surviving spouse is entitled to spousal rollover treatment and generally a greater income tax deferral.

Bypass trusts are also subject to the highest federal income tax rate at levels of gross income of as low as $13,550, and they do not qualify for income tax basis step-up at the death of the surviving spouse.

However, the use of IRC Section 678 in creating the bypass trust can eliminate the high trust income tax rates and the minimum exemption, also under Section 678, so the trust is not taxed the way a surviving spouse would be. There is also the potential to include a conditional general testamentary power of appointment in the trust, which can sometimes result in income tax basis step-up for all or a portion of the appreciated assets in the trust upon the death of the surviving spouse.

Every estate planning situation is unique, and these decisions should only be made after consideration of the size of the IRA or 401(k) plan, the tax situation of the surviving spouse and the tax situation of the heirs. An experienced estate planning attorney is needed to review each situation to determine whether or not a bypass trust is the best option for the couple and the family.

Reference: Financial Advisor (Feb. 1, 2022) “New Purposes for ‘Bypass’ Trusts in Estate Planning”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Can Estate Planning Reduce Taxes? – Annapolis and Towson Estate Planning

With numerous bills still being considered by Congress, people are increasingly aware of the need to explore options for tax planning, charitable giving, estate planning and inheritances. Tax sensitive strategies for the near future are on everyone’s mind right now, according to the article “Inheritance, estate planning and charitable giving: 4 strategies to reduce taxes now” from Market Watch. These are the strategies to be aware of.

Offsetting capital gains. Capital gains are the profits made from selling an asset which has appreciated in value since it was first acquired. These gains are taxed, although the tax rates on capital gains are lower than ordinary income taxes if the asset is owned for more than a year. Losses on assets reduce tax liability. This is why investors “harvest” their tax losses, to offset gains. The goal is to sell the depreciated asset and at the same time, to sell an appreciated asset.

Consider Roth IRA conversions. People used to assume they would be in a lower tax bracket upon retirement, providing an advantage for taking money from a traditional IRA or other retirement accounts. Income taxes are due on the withdrawals for traditional IRAs. However, if you retire and receive Social Security, pension income, dividends and interest payments, you may find yourself in the enviable position of having a similar income to when you were working. Good for the income, bad for the tax bite.

Converting an IRA into a Roth IRA is increasingly popular for people in this situation. Taxes must be paid, but they are paid when the funds are moved into a Roth IRA. Once in the Roth IRA account, the converted funds grow tax free and there are no further taxes on withdrawals after the IRA has been open for five years. You must be at least 59½ to do the conversion, and you do not have to do it all at once. However, in many cases, this makes the most sense.

Charitable giving has always been a good tax strategy. In the past, people would simply write a check to the organization they wished to support. Today, there are many different ways to support nonprofits, allowing for better tax advantages.

One of the most popular ways to give today is a DAF—Donor Advised Fund. These are third-party funds created for supporting charity. They work in a few different ways. Let’s say you have sold a business or inherited money and have a significant tax bill coming. By contributing funds to a DAF, you will get a tax break when you put the funds into a DAF. The DAF can hold the funds—they do not have to be contributed to charity, but as long as they are in the DAF account, you receive the tax benefit.

Another way to give to charity is through your IRA’s Required Minimum Distribution (RMD) by giving the minimum amount you are required to take from your IRA every year to the charity. Otherwise, your RMD is taxable as income. If you make a charitable donation using the RMD, you get the tax deduction, and the nonprofit gets a donation.

Giving while living is growing in popularity, as parents and grandparents can have pleasure of watching loved ones benefit from the impact of a gift. A person can give up to $16,000 to any other person every year, with no taxes due on the gift. The money is then out of the estate and the recipient receives the full amount of the gift.

All of these strategies should be reviewed with your estate planning attorney with an eye to your overall estate plan, to ensure they work seamlessly to achieve your overall goals.

Reference: Market Watch (Feb. 18, 2022) “Inheritance, estate planning and charitable giving: 4 strategies to reduce taxes now”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys