See-Through Trusts

What is a “see-through” trust?  Sometimes referred to as a “look-through” trust, it is essentially a trust drafted in a way that permits an IRA custodian to distribute RMDs from an inherited IRA based on the oldest trust beneficiary’s life expectancy.  This type of trust is important to understand if you plan to name a trust as the beneficiary of your IRA or other qualified plan.  

Under IRS rules, a trust is not a person and, therefore, cannot be a designated beneficiary. Why is this an important rule to understand? It’s important because many people (including some estate planning attorneys) do not understand that naming a trust as the beneficiary of your IRA eliminates the opportunity for individual trust beneficiaries to use a Multi-Generational IRA strategy.

A trust will qualify as “see-through” if all of the following elements are met:

1)   The trust is valid under state law.

2)   The trust is irrevocable or becomes irrevocable upon the death of the owner.

3)   The trust beneficiaries are individuals who are identifiable.

4)   All trust documents have been provided to the IRA custodian by October 31st of the year following the year of the owner’s death including:
a)   A list of all beneficiaries including contingent and remaindermen.
b)   Trust certification and certification that the beneficiary list is correct.
c)    If the trust is amended, corrected certifications that change any information
       previously certified.
d)    An agreement to provide the custodian a copy of the trust instrument upon demand.

Even if your trust qualifies as see-through under IRS rules, the trust beneficiaries may be treated as designated for IRA distribution purposes. But, at best, the trust beneficiaries cannot use their individual life expectancies to receive required minimum distributions and they are stuck using the life expectancy of the oldest trust beneficiary. IRS Publication 590 clearly states that “The separate account rules cannot be used by beneficiaries of a trust.”

Retirement Plans and Divorce

Divorce has become relatively common in today’s world. Whether you expect your divorce to be quick and easy or long and complicated, it is critical for those with retirement plans to know how those assets may be transferred or divided upon divorce without triggering unexpected tax consequences and penalties.

IRAS
Transfers incident to divorce are tax-free…if done correctly. IRAs are governed by state law. Thus, an official divorce decree, court order or legal separation instrument is needed before IRAs may be split between a divorcing couple so the split is not deemed a taxable transaction. The divorce judgment or divorce settlement agreement should contain specific language that addresses the splitting of the IRA(s). Absent an official divorce decree, court order or legal separation instrument, a split would be considered a taxable distribution for the IRA owner.


401(K)S, CERTAIN PENSIONS AND OTHER ERISA GOVERNED RETIREMENT PLANS
Qualified Domestic Relations Orders (QDROs) are not required to accomplish a tax-free split of an IRA. However, QDROs are generally required for splitting federally governed retirement plans such as 401(k)s and certain pension plans. They are basically orders that determine a former spouse’s interest in the retirement plan. All QDROs must comply with ERISA specificity requirements.

Every situation is different and state and federal laws vary. It is very important to discuss the division of your retirement plan assets with your personal family law attorney or other qualified professional if you have a retirement plan(s) and are facing or contemplating divorce.

IMPORTANT REMINDER: After you are divorced, don’t forget to immediately update the beneficiary designation forms for your retirement plans. Assuming your ex-spouse is no longer an intended beneficiary, you will need to fill out new beneficiary forms to remove your ex-spouse.

Estate Planning: Letters of Instruction

You may have spent significant time and money getting your estate plan in order and set up the way you want, but what happens next?

A letter of instruction is an important estate planning tool that essentially accomplishes two things: 1) it gives you the opportunity to explain your wishes to your executor and/or beneficiaries to let them know how you want your affairs handled post death; and 2) it tells your executor and/or beneficiaries where to find all of your important documents, accounts, etc.

Important:  a letter of instruction is not a substitute for a will or a trust! It is simply a way for you to clearly let your loved ones know what is important to you and where to find everything they need.  Copies of your letter should be attached to your will, given to your executor and a copy should be kept in a file, drawer or safe in your home (or other place you normally keep important papers in your home).

The topics that are usually included in a letter of instruction are:

• First Steps: this is a handy overview for your family that can include things such as contacting your family members, contact your employer about your death, make funeral arrangements, get death certificate copies, contact the Social Security Administration, process life insurance claims, notify your bank, credit card companies, and other financial institutions.
• Asset List: this should list things like your various insurance policies, pensions, bank accounts and where to find the policies/documents and the names of the custodians/insurance companies.
• Location of Important Papers: indicate where you keep documents such as your will, trust, birth certificate, military records, deeds, insurance policies, pension statements, tax records, investment account statements, checking and savings account information.
• Tax Returns: this should include the name and contact information for your CPA.
• Life Insurance Policies:  a copy of your death certificate must be submitted to all applicable insurance carriers so the more detail you can provide the better.
• Other Insurance: this includes things like accident policies, medical policies, car insurance, homeowners insurance and mortgage insurance.
• Cars, Boats, RVs, Etc.: be sure to indicate where you keep the titles, insurance information, purchase price and brief description of each item.
• Funeral Arrangements: indicate the name and location of the funeral home or type of funeral preferred as well as any cemetery/plot information.
• Family Contact Information: list the names and contact information for family members that you would like to be contacted.
• Physician Information: list the names and contact information for your doctors and other health care providers.
• Financial Matters: indicate the location of any safe deposit boxes, bank accounts, brokerage accounts, documentation for other investments, real property documentation, loan documentation, credit cards, etc. so the respective institutions may be notified and provided with a copy of your death certificate, when applicable.

Just like any other planning strategies, you should review your letter of instruction at least once per year to ensure everything is still accurate.

Who's the BOSS: Part 4, Survivors

If you die without a surviving spouse, who will be the beneficiary of your IRA? Most people assume it’s their children but if your retirement plan beneficiary forms are not up to date, your estate could be the default and render the treasuries of the United States and your home state as your beneficiaries! The estate is the most common default beneficiary designation, not surviving heirs.

What if your primary beneficiary/ beneficiaries pre-decease you? Have you considered that possibility and named contingent beneficiaries? A lot of people stop at naming one primary beneficiary, which is usually their spouse. What if your spouse has predeceased you and you did not get around to updating your beneficiary forms before you passed away? What if your primary beneficiary decides to disclaim the IRA assets? These are very real situations that negatively impact inherited IRA assets every day. Every IRA owner must anticipate such scenarios and plan accordingly.

Financial Legacy or Tax Bill?
Approximately 87% of all IRAs are cashed out upon the death of the IRA owner. Many people who inherit IRAs think their only option is to cash it out. Because of this common misconception, they take a lump sum distribution and lose out on the opportunity for tax deferred growth and a much higher payout over their lifetime.

Do you have a bad exit strategy, or worse, no strategy at all? Do you have a good exit strategy that allows you and your heirs to enjoy exponential growth and increased wealth that may be passed on for generations? These questions cannot be answered without going through a BOSS review.

You may be sitting on what you think is a “good” exit strategy only to find that the beneficiary forms are not up to date or they have not been filled out properly.

Custodians are not infallible either. Do you have confirmation that the respective custodians received and accepted the most current beneficiary designation form? Does the custodian’s form permit a multi-generational strategy? If not, are customized beneficiary forms accepted by the custodian? We all have the choice to leave a financial legacy or a tax bill to our heirs.

Communicate With Heirs
It is very important to do a BOSS review. It is very important to make sure all retirement plans are structured the way you want. It is equally important to communicate your intent and IRA distribution plan with your heirs. You may have engaged in careful planning to ensure your beneficiaries can maximize the benefit of your IRA but if they are unaware of how the MGIRA strategy works, they could unknowingly make a fatal, irreversible error! Although it may be an uncomfortable topic, it is crucial to have that uncomfortable conversation so your heirs will know what you have set up for them, what their options are, and how to execute your carefully crafted plan when the time comes.


Avoid Another Common Error
A common beneficiary error occurs with respect to CDs. No, this is not a reference to your music collection, but what about your certificates of deposit, are they in order? When conducting a BOSS review, don’t forget about your CDs. Did you renew any of them? Does your institution automatically renew your CDs? If so, did you submit anew beneficiary designation form? Be careful with this, once a CD matures and has been renewed, a lot of institutions will treat it as a new account. This means that a NEW beneficiary form must be submitted and accepted by the custodian. When conducting your annual BOSS review, remember to check those POD (“payable on death”) designations on your CDs and pay special attention to any renewed CDs.

Who’s The BOSS: Part 3

Spouse

Is your spouse the sole primary beneficiary of your IRA or other retirement plan? If not, for those married IRA owners living in a community property state, a valid spousal waiver must be on file with the custodian. A spousal waiver is required if the owner is legally married but has named someone other than his or her spouse or someone in addition to his or her spouse as a primary beneficiary. Also, are you aware of the special options afforded spousal beneficiaries? Will your surviving spouse elect to treat your IRA as his or her own? Will your surviving spouse choose to re-title it to an inherited IRA? This and many more factors are often overlooked and need to be considered during a BOSS review as they are integral components of a comprehensive retirement strategy.

The Real Cost of Aging

We protect ourselves from costs associated with car accidents, flood and fire damage to our homes, and we have individual healthcare coverage to help prevent serious illness. Many of us have life insurance to plan for the future and to provide tax-free benefits to our families when we are gone. However, sometimes traditional coverage is just not enough. As we evolve as a society, so do our financial, retirement and health planning tools.

There has been a tremendous spike in life expectancy in America over the last 50 years, so what is the real cost of aging? How much can you expect to pay on average for nursing home care today? Many Americans look to solutions such as reverse mortgage planning or the federal Medicaid program but is that enough?

Below is a chart showing median annual costs for nursing home care in select states. The amount for each state is approximate and is based on a 365 day stay with a semi-private room accommodation:

Not all long-term care solutions will be appropriate for every individual so it is important that you meet with your own professional advisor(s) for an assessment to ensure you have the proper strategies in place for your situation.

Who’s The Boss? Part 2

Beneficiary

Do you have a designated beneficiary named on all of your IRAs, 401(k)s or other retirement plans? If you cannot answer this question with 100% certainty, you need to conduct a BOSS review immediately! To be “designated,” a beneficiary must be a living, breathing, human being with a birth date and a remaining life expectancy. Having a designated beneficiary or beneficiaries identified in your retirement plan paperwork is especially crucial in order to preserve the opportunity to make those plans multi-generational. If an IRA is deemed as having no designated beneficiary when an IRA owner dies, the heirs cannot correct this mistake so the opportunity to stretch RMDs over their individual life expectancies is permanently eliminated.

Owner

Will you have enough money to live on during retirement? Are your current IRAs and 401(k)s a good fit with your retirement plan and can they achieve your goals? It is important to determine the answers to these questions today through a BOSS review while there is still time to make any necessary adjustments or corrections. There are IRAs specifically designed to allow you an opportunity to help create a lifetime stream of income that cannot be outlived! If outliving your nest egg is not a concern, the next question is, what happens to your money when you are gone?