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?

WHO'S THE B-O-S-S?

WHAT DOES B-O-S-S STAND FOR?

BOSS is an acronym that we use to refer to the four key people everyone must consider with respect to retirement planning, i.e., developing an income exit strategy and ensuring all IRAs, 401(k)s and other retirement plans are set up properly. To ensure retirement assets will be distributed in a manner consistent with an overall retirement plan, all paperwork must be filled out accurately and clearly reflect the owner’s wishes. To assist in this, we recommend what we call a BOSS review. This is a retirement plan review that should be conducted at least once per year and must be conducted anytime there is a life changing event such as birth, death, marriage or divorce.

Even though an IRA is frequently the largest asset people have, except perhaps their home, many IRA owners surprisingly fail to conduct a BOSS review on an annual basis to ensure that their money will flow the way they want it to. Many people are unaware that unless their IRAs and other retirement plans are set up correctly, they will be leaving their heirs a tax bill and not a legacy. Nobody is immune to IRA mistakes. Plenty of well educated, intelligent, wealthy individuals die without proper planning because they just didn’t know they had a serious problem…a problem that, sadly, could have been easily corrected.

It’s important to understand what happens to your IRA when you pass away. Many people think that their IRA passes through their will, it does not. The IRA beneficiary designation form determines what happens to IRA assets. IRAs are not inherently probate assets, meaning, they do not need to go through the probate system which requires that a probate court declare how and to whom the assets shall be distributed. IRA assets COULD, however, end up going through the probate court system if there is no valid designated beneficiary and, as a default, the IRA ends up going into the deceased’s estate.

You may ask yourself, why does it matter if my IRA or 401(k) goes to my estate, my children are the beneficiaries of my estate anyway, so what’s the big deal?

The big deal is that if the estate is the beneficiary of an IRA, the opportunity for heirs to stretch the IRA RMDs over their individual life expectancies is effectively destroyed. The opportunity for heirs to enjoy continued tax deferred growth on those IRA funds will be destroyed. The opportunity for heirs to maximize the benefit of the IRA by turning the tax infested IRA into a tax efficient legacy from you is destroyed!

Simple Mistakes Can Cost Beneficiaries Everything

Beneficiary designation forms are an often overlooked area of estate planning that can have dire consequences if not taken care of. For example, divorce is already an unpleasant event but imagine that your ex-spouse gets the proceeds of your life insurance policy and/or retirement accounts because you forgot to update your beneficiary designation forms. In Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, Kari Kennedy was the administrator of her father’s estate and tried to recover $402,000 that was paid to her father’s ex-spouse. As part of the divorce agreement, the soon to be ex-wife had given up her rights to Mr. Kennedy’s pension and other work-related benefits.

However, Mr. Kennedy failed to remove his ex-wife as the beneficiary of his investment plan assets and replace it with Kari’s name. Following his death, the funds went to his ex-spouse, not Kari as he had intended.

The case made it all the way to the Supreme Court but, unfortunately, Kari was not deemed the beneficiary because, under ERISA, the beneficiary designation form trumps a divorce decree. The Court made it clear that a former spouse can give up the right to retirement benefits as part of a divorce decree but the specific terms of an ERISA governed plan ultimately control what happens to the plan assets.

This is an extreme case but it illustrates the dire consequence of failing to review and update beneficiary designation forms whenever a life changing event occurs such as death, divorce, marriage or birth. A beneficiary review is an important part of your financial review process that your advisor can help guide you through.

Tips to Avoid IRA Errors

Know the Contribution Limits

There is a maximum amount you may contribute each year to your IRAs. The aggregate limit for 2016 is $5,500 ($6,500 if age 50 or older). This limit includes all contributions to all of your traditional IRAs and

Roth IRAs.

Avoid Excess Contributions

If you exceed the annual contribution limit, you will be penalized unless you withdraw the excess amount in a timely fashion. The penalty is currently 6% and this penalty applies each year the excess amount remains in your IRA(s).

Take RMDs on Time

Whether you are an IRA owner who is over age 70½ or you have inherited an IRA from someone, there is a 50% penalty for every missed required minimum distribution! Yes, a 50% penalty on the undistributed amount so mark your calendars with the annual December 31st deadline and avoid this common error.

Keep Beneficiary Forms Updated

If you fail to name a designated IRA beneficiary, it could have unintended consequences. What is a  “designated” beneficiary? Aren’t all beneficiaries “designated”? No, they are not the same! A designated beneficiary is a living, breathing, human with a remaining life expectancy. Charities cannot be designated. Estates cannot be designated. Trusts cannot be designated. Your beloved dog cannot be designated. Failure to name a designated beneficiary essentially diminishes the opportunity for individual beneficiaries to maximize the benefits of tax deferred distributions on an inherited IRA.

Life changing events such as marriage, death, divorce, birth and adoption occur regularly and could impact your beneficiary designation decisions. Every IRA owner should conduct a beneficiary form review at least once a year to ensure that IRA assets will pass to the intended beneficiaries.

Don’t Guess, Know the Rules

Do you have questions or need help with your personal situation? Your retirement distribution expert can assist you! Call today to schedule a free consultation, ask questions or discuss important IRA planning issues such as: conducting a beneficiary review, correcting IRA mistakes, making sure you’re with the right IRA custodian

Attention Accountants!

As trusted advisors, clients often look to their accountants for guidance and advice on a wide range of tax related and financial issues. But not all firms can offer a full solution to their clients, thus missing out on important business opportunities and a competitive edge. During a recent survey conducted by Accounting Today, they spoke to tax professionals who offer financial services to their clients as well as those who don’t. On Thursday, June 9th at 12:30 PM, America’s Tax Solutions™ will present a webinar that discusses the real and perceived benefits and challenges of offering a more robust financial services solution. Attend this one-hour educational web-based seminar to hear more about the research findings. You will also learn:

• How to produce higher client satisfaction/better client relationships
• How tax professionals are using financial services to drive revenue and profitability
• How America’s Tax Solutions™ can overcome concerns about time and staffing through partnership and planning
• Why the expertise and skills needed to offer financial services are well within a tax professionals grasp

Please join the President and Founder of America’s Tax Solutions™ as he sheds light on the real and perceived experiences and concerns of tax professionals with and without financial services offerings.

Thursday, June 9, 2016

12:30 pm - 1:30 pm PST

REGISTER NOW AT: https://attendee.gotowebinar.com/register/7032282132603949316

What is an HSA?

In short, certain individuals with high deductible health plans may establish and contribute to a tax-advantaged health savings account (“HSA”). Distributions from an HSA are used to cover qualified health and medical expenses. Contributions to an HSA may come from the individual, the individual’s employer, a family member or any other person. Some of the potential advantages are: HSA contributions are tax-deductible, HSA distributions for qualifying health/medical expenses are not taxable and the interest is not

taxable. To be eligible for an HSA, you must meet the following requirements:

• You must be covered under a high deductible health plan
• You have no other health coverage except what is permitted under IRS rules
• You are not enrolled in Medicare
• You cannot be claimed as a dependent on someone else's tax return
• According to the IRS, “Under the last-month rule, you are considered to be an eligible individual for the entire year if you are an eligible individual on the first day of the last month of your tax year (December 1 for most taxpayers)."

For more detailed information on HSAs, see IRS Publication 969. You may access IRS Publication 969 through the IRS website at www.irs.gov.

Leveraging Your Competitive Advantage

Why do your tax clients keep asking you for financial advice? Because you have a deep understanding of

their overall financial situation, and they already trust you to guide them in the right direction. So, the real question is: why haven’t you added financial services alongside your tax practice?

You’ve built a successful tax practice, but how are you leveraging your deep knowledge of your clients’ financial situation to support their growing need for the level of objective and holistic advice you can provide? While you use the 1040 to provide clients with tax advice, it can also be leveraged to identify broad range of financial needs. That makes offering financial services a natural extension of your tax practice.

America’s Tax Solutions™ is looking for CPAs, EAs, and Tax Professionals to join our growing organization designed for accountants interested in building a wealth preservation component to their existing tax practice. We are America’s leader working with accountants to serve their clients best interest and grow their revenue exponentially.

Let’s be honest, most investment planners are unaware of the tax implications associated with certain investment decisions. You see it every year. Nor do they have a full view of a client’s financial statement. That’s why your tax knowledge makes you an ideal solution for offering financial services. Considering the tax equation when working on a financial plan gives you a unique advantage and, more importantly, helps your clients better manage their financial future. At America’s Tax Solutions™ were committed to helping you leverage this knowledge to your advantage and our model proves it.

Top 5 Reasons to Add Financial Services to Your Tax Practice

• Increase value to clients
• Increase income to your practice
• Provide a single source of expertise for clients and remain competitive
• Increase client retention and referrals
• Establish recurring and diversified revenue streams

America’s Tax Solutions™ offers an exclusive model customized to your needs as a tax professional. We understand the unique needs of tax professionals. That’s a leading reason why we’ve successfully helped scores of tax professionals realize their potential through adding financial services to their tax practices. Best of all, we provide a road map and all the support you need to get started today, including:

A skilled Wealth Preservation Consultant to help you establish these strategies inside your practice.

• Training focused on effectively integrating your tax and financial practices
• Professional development opportunities outside of tax season
• Full acceptance of your tax practice

We recognize taxes are your priority. As a result, we’ve built our support model around your unique needs:

• We offer extended hours during tax season
• All training is scheduled outside of tax season
• Our consultants understand taxes – you don’t have to educate us
• We have unique and proprietary tools designed specifically to help you leverage the tax return

Interested in learning more? We are conducting an informative 30 minute webinar Monday June 6th at 12:00 PM Pacific/3PM EASTERN. Please join us by registering using the following link.

https://attendee.gotowebinar.com/register/3063108928001615364

CPA Direct Announcement

Are your concerns about offering financial services to tax clients limiting your competitive edge?

As trusted advisors, clients often look to their accountants for guidance and advice on a wide range of tax related and financial issues. But not all firms can offer a full solution to their clients, thus missing out on important business opportunities and a competitive edge. During a recent survey conducted by Accounting Today, they spoke to tax professionals who offer financial services to their clients as well as those who don’t. On Thursday, June 9th at 12:30 PM, America’s Tax Solutions™ will present a webinar that discusses the real and perceived benefits and challenges of offering a more robust financial services solution. Attend this one-hour educational web-based seminar to hear more about the research findings. You will also learn:

• How to produce higher client satisfaction/better client relationships.
• How tax professionals are using financial services to drive revenue and profitability.
• How America’s Tax Solutions™ can overcome concerns about time and staffing through partnership and planning.
• Why the expertise and skills needed to offer financial services are well within a tax professionals grasp.

Please join the President and Founder of America’s Tax Solutions™ as he sheds light on the real and perceived experiences and concerns of tax professionals with and without financial services offerings.

REGISTER HERE

The Battle Over Retirement Accounts: Spousal Waivers and IRAs

You are married and have an IRA. You know you need to name a beneficiary for those funds. But what if you do not want to name your spouse as the beneficiary? Are you required to name him or her? Under federal law, and IRAs are governed mostly by federal law, you are not required to name your spouse as your IRA beneficiary. You can name anyone you want as the beneficiary. They don’t even have to be a relative.

State law will have some impact here, though. If you live in a community property state, you will most likely need to have your spouse sign a waiver before you can name a non-spouse beneficiary for your IRA funds. In some states, you can “disinherit” your spouse by naming someone else on the beneficiary form, but the spouse could have the last laugh. Some states allow a disinherited spouse to make a right of election against the estate and the spouse would then end up with some of your assets. He or she could then laugh all the way to the bank.

In most employer plans, if you are married and want to name someone other than your spouse as the beneficiary of your plan benefits, you must have your spouse sign a waiver.

 Be careful who signs the waiver. It must be a spouse. Documents signed by a fiancé, such as a pre-nuptial agreement, do not count. Once a spouse signs a waiver, update the beneficiary form. You should do both steps to ensure that your assets go to the beneficiaries that you select.

 Divorce decrees also don’t count. A spouse can waive rights to retirement benefits in a divorce decree, but as long as a beneficiary form naming the spouse remains in place, that spouse – now the ex-spouse – will, in most cases, end up with the retirement benefits. Always update beneficiary forms after a divorce.

 Beneficiary form reviews should be a key component of your financial plan, whether you are your own planner or you have a professional doing this for you. You can see how something that seems so simple can quickly become complicated.

My Plan Custodian Will Only Issue a Check, Now What?

Checks Issued Could Still Qualify as a Trustee-to-Trustee Transfer…

If you want to do a direct transfer (trustee‐to‐trustee transfer) but your current IRA custodian or plan administrator will only issue a check, all hope is not lost. If a check is made payable to you, that transaction will trigger the 60‐day rollover rules. In addition, if the check is not from your IRA but is issued by a qualified employer plan such as your 401(k) for example, the issuance of the check usually triggers a mandatory 20% withholding.

How Can You Fix This Problem?

If the plan will not do a trustee-to-trustee transfer (sometimes called a direct rollover) to an IRA or eligible retirement plan and you are told they must issue you a check, there is a work around. The check may still qualify as a trustee‐to‐trustee transfer if the check is made out directly to the receiving IRA instead of you, the IRA owner. Regulation Section 1.401(a)(31)‐1, Q& A‐4 tells you exactly how to make the check out so that the transaction qualifies as a direct rollover.

Source: www.irs.gov

Reviewing Estate Plans

Articles in popular publications routinely warn readers about the very thing we have been telling our clients for years: review your estate planning documents at least once per year!

BASIC ESTATE PLANNING DOCUMENTS INCLUDE:

• Wills
  
• Trusts
• Beneficiary Forms
• (Insurance, Retirement Plans, Accounts)
• Powers of Attorney
• (Durable, Health Care Directives)
• Letters of Instruction
• (For Your Trustee, Executor and/or Heirs)
• Anything Else You Have to Provide For and Protect Your Loved Ones!

Failure to review estate planning documents can spell disaster for your beneficiaries yet this failure is surprisingly common. One example is a client who recently discovered that the trust her husband set up contains provisions that conflict with their most recent financial plan and distribution goals.

Unfortunately, he passed away and she is now stuck with the flawed trust terms. The trust was drafted about 25 years ago but they never reviewed the trust terms despite the fact that several life changing events occurred and their planning strategies changed. Sadly, this oversight resulted in irreparable and unintended results for their beneficiaries.

Even though you cannot predict what will happen and when it will happen, you can adjust your estate plan as needed. Make sure you consult with your personal Wealth Preservation Consultant, accountant, attorney or other professional advisor when any life changing event occurs or new legislation affects your tax and estate planning. Always ensure your assets flow the way you want them to and in the most tax efficient manner.

RMD Basics for IRA Owners

If you own or are the beneficiary of an IRA, 401(k) or other retirement plan, make sure you don’t make an RMD (required minimum distribution) error. Failure to take at least the RMD amount each year results in a 50% penalty imposed by the IRS! Keep in mind that beneficiaries who inherit IRAs have different rules so you will need to contact your retirement distribution expert for more information about rules specific to IRA beneficiaries.

• IRA owners must take their very first RMD no later than April 1st of the year following the year they turn 70½. So if you turn 70½ in 2016, your required beginning date is April 1, 2017. However, if you choose to delay your very first RMD until 2017, you will need to take two RMDs in 2017 – your first RMD and your regular RMD for 2017.
• You reach age 70½ on the date that is 6 calendar months after the date of your 70th birthday.
• Except for your very first RMD discussed above, all subsequent RMDs must be taken no later than December 31st each year.
• RMDs are generally calculated by dividing the adjusted market value of your IRAs as of December 31st of the preceding year by the distribution period that corresponds with your age in the Uniform Lifetime Table (IRS Publication 590-B).
• You must calculate the RMD amount for each of your IRAs separately. However, if you have more than one IRA (must be the same type), you don’t have to take a separate RMD for each…you can aggregate and withdraw the entire amount from just one IRA of the same type or withdraw a portion from each IRA to satisfy your RMD.
• Failure to take a timely RMD results in a 50% penalty on the undistributed amount. This rule applies to both IRA owners and IRA beneficiaries.
• IRA owners can always withdraw more than the minimum distribution amount… just be prepared to pay the income taxes.

Special Needs Trusts: 10 Common Mistakes

Conversations about tax and estate planning often lead to conversations about trusts. Special Needs Trusts in particular can be very complex and difficult to understand.

The Following are 10 Common Special Needs Trust Mistakes:

1. Confusing Public Benefit Programs
2. Failure to Keep Current with Trust Administration Laws
3. Confusing First Party and Third Party Special Needs Trusts
4. Misunderstanding the “Sole Benefit” Rule
5. There is No System for Requesting Distributions
6. Trustee Refuses to Make Distributions
7. Failure to Distribute for Food or Shelter
8. Distributing Cash Directly to the Beneficiary or Reimbursing the Beneficiary
9. Failure to Maintain Excellent Records
10. Trust Termination and Disbursement Priority

Eligibility for public benefits may be adversely impacted if a Special Needs Trust isn’t handled properly. Trustees must be sure to follow strict rules when administering a Special Needs Trust to ensure that the beneficiary’s need-based public benefits are not compromised.

Do you have a Special Needs Trust set up for a loved one or do you plan to create this type of trust in the near future? If so, it is imperative that you consult a qualified attorney who specializes in estate and tax planning to ensure that your trust doesn’t inadvertently cause a problem for the Special Needs Trust beneficiary.

Spousal Beneficiary Options for IRAs

Why is it important to distinguish between a spouse beneficiary and a non-spouse beneficiary of an IRA? It’s important because non-spouse beneficiaries do not have the same distribution options as spousal beneficiaries. A few key differences are discussed below.

Take RMDs as a Beneficiary

Spousal IRA beneficiaries are not required to treat IRAs they inherit from a deceased spouse as their own. They may be significantly younger and need to withdraw IRA assets to live on but they also want to avoid an IRS early distribution penalty. Assume Mary passes away at age 58 and her husband Ben is the beneficiary of her IRA. The IRA contains significant assets but Ben is only 35 years old and he needs the IRA money to live on. If he elects to treat the inherited IRA as his own, he will not only owe income taxes on any distributions, he will also owe a 10% early distribution penalty because he is under 59½ and no other exception applies. In this case, Ben is likely better off taking required minimum distributions (RMDs) as a regular beneficiary. Should his situation improve a few years down the road, Ben can later elect to treat the IRA as his own and roll it into his own IRA, basically “turning off” the RMD requirement until he reaches age 70½. However, a spousal rollover is a one-time irreversible election so Ben needs to consult with his distribution expert and make an informed decision.

Retitling – Treat As Your Own

A spouse beneficiary may elect to treat the deceased spouse’s IRA as his or her own by simply having the IRA retitled with the surviving spouse’s name. Only spousal beneficiaries have this option available to them.

Rollovers

A spousal rollover permits the surviving spouse to rollover the inherited IRA into his or her own existing IRA. To illustrate, assume Mary is the beneficiary of her husband Ben’s IRA. Ben passes away and Mary elects to rollover Ben’s IRA into her own because she is only 62 years old and she wants to delay her required minimum distributions from Ben’s IRA until she reaches age70½. Mary may now name her young grandchildren as the beneficiaries, creating the opportunity for a multi-generational IRA strategy that allows them to enjoy tax-deferred distributions over their individual life expectancies. No other type of IRA beneficiary has this option. *IMPORTANT: a spousal rollover is a one-time, irreversible election.

60-Day Rule

A spousal IRA beneficiary has the advantage of the 60-day rollover rule. Using Ben and Mary as an example, assume Mary passed away and Ben withdrew the IRA assets. Ben has 60-days to complete a rollover and deposit the funds into his own IRA. In this case, to avoid rollover errors, Ben may simply choose to retitle Mary’s IRA as his own rather than engage in a rollover transaction.

A 60-day rollover option is never available to non-spouse IRA beneficiaries. Once a distribution is made to the non-spouse, it is irrevocable and fully taxable.

401(k) Withdrawals During Retirement

QUESTION: WHAT ARE YOUR OPTIONS WITH RESPECT TO YOUR EMPLOYER SPONSORED 401(K) PLAN WHEN YOU RETIRE?

Answer: It varies depending upon the options that are made available to you in your plan document - your 401(k) plan sponsor makes the rules!

TRUSTEE-TO-TRUSTEE TRANSFER

If you don’t want to leave your assets with the current plan sponsor, you may want to consider a trustee-to trustee transfer (direct rollover) to an IRA. This is a non-taxable transaction.

LUMP-SUM WITHDRAWAL

You will owe ordinary income taxes if you elect to take a lump-sum distribution. If you later decide to rollover this distribution, you are required to redeposit the funds into another qualified retirement account, such as an IRA, within 60 days of the distribution.*

AUTOMATIC PERIODIC WITHDRAWALS

Some plans will allow you to request regular monthly, quarterly or annual withdrawals. Automatic withdrawals come in handy for RMDs – it eliminates the risk of missing the RMD deadline each year.

WITHDRAWALS ANYTIME

Your plan may allow you to make as many withdrawals as you wish. Be careful with this type of option – besides any ordinary income taxes you may owe on distributions, you could be charged a high fee every time you take a withdrawal.

Be careful when it comes to fees and your 401(k). If you decide to leave your 401(k) assets with the plan sponsor, look into the fee schedule. How much will you be charged for each transaction? What about 401(k) management fees, do you believe they are too high?

Before deciding to leave your 401(k) assets where they are or choosing to transfer the assets to an IRA when you retire, it is critical to fully assess the pros and cons. Your local America’s Tax Solutions professional is a retirement distribution specialist and can help you evaluate your situation including information about safe, alternative options.

*A 20% mandatory withholding applies to lump-sum distributions from a 401(K). If you later decide to rollover that distribution within 60 days, you will not get the withholding back until tax time so you will have to add funds from other sources equal to the amount withheld.

What is Net Unrealized Appreciation?

QUESTION: CAN I AVOID TAXATION ON THE APPRECIATION OF MY COMPANY STOCK?

NET UNREALIZED APPRECIATION (NUA)

Money you make on the appreciation of an asset over time is called capital gains. Those gains are measured by the price the stock is sold for, minus the original purchase price of the stock when acquired. If your 401(k) plan holds stock from your employer and that stock appreciates over time, its fair market value will be considerably higher than its cost basis when you retire. The difference in the value of the stock from the time of purchase to the time of withdrawal is called Net Unrealized Appreciation.

A SPECIAL TAX BREAK

Special tax rules regarding NUA allow you to withdraw company stock from your retirement plan, retain ownership of the stock, and pay ordinary income tax on the acquisition price rather than its fair market value at the time of distribution.

WHAT HAPPENS WHEN I SELL THOSE SHARES?

Should you choose to sell the shares, you pay the long-term capital gains tax rate in effect on the appreciation and the applicable capital gains rate on any additional appreciation since distribution.

OUR ATS EXPERTS CAN EXPLAIN OTHER STIPULATIONS IN THE CODE INVOLVING NUA:

• To qualify for the break, you must take the entire pension plan account balance in a lump-sum distribution over the course of one tax year.
• Dividends paid on the stock are not tax-deferred.
• For inherited stock in an IRA, beneficiaries are taxed at a different cost basis, called a step-up in basis. Your America’s Tax Solutions retirement distribution specialist can describe for you how this strategy works, and how it may affect you and your heirs.

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.”

Roth vs. Traditional IRA: Features and Distinctions

The primary difference between a Roth and Traditional IRA is that the funds in a traditional IRA grow tax-deferred, while the funds in a Roth IRA grow income tax-free. Contributions you make to a traditional IRA are taxed upon withdrawal. Roth IRA funds are taxable at the time of contribution, thereafter, Roth interest and capital gains are distributed income tax-free.

One popular rationale for maintaining a traditional IRA is that retired people may be in a lower tax bracket and would therefore pay less tax on withdrawals of IRA funds going out than they would tax on Roth contributions going in. Because of pension income, Social Security payments, and/or investment income, some Americans will find themselves in an equal or higher bracket after they leave their jobs. Also, present income tax rates are at an historical low—only the 1930s saw a lower individual tax rate than we’re experiencing today.

Traditional IRA account holders must take Required Minimum Distributions (RMDs) each year, beginning at age 70½. Roth IRA owners are not subject to RMDs. You can continue making contributions to a Roth IRA after age 70½ if you have taxable compensation and fall within the MAGI limits. Traditional IRA contributions are tax deductible and grow tax-deferred. Roth Contributions are not deductible but the earnings grow tax-free.

Is a Roth strategy right for you? Everyone’s situation is different and Roth rules are complicated so it is easy to make an error. That’s why it is very important that you discuss opening a Roth IRA or converting to a Roth IRA with your qualified tax professional and/or retirement distribution specialist.

IRA Summit: May 11-13, San Diego

Register HERE Today!

Rolling Over Your Retirement Plan

QUESTION: HOW CAN “TAX-INFESTED” MONEY BECOME “TAX-DEFERRED”?

You have some crucial decisions to make about how you take distributions from your hard-earned savings. Not understanding rollover regulations can lead to unintended tax consequences that chip away at your retirement funds.

The funds held in your retirement accounts are called “qualified savings,” since they qualify for special tax-deferred status by the Federal Government. If you decide to withdraw all of the money at once from those accounts, it is called a “lump-sum distribution.”

Your America’s Tax Solutions^TM retirement distribution specialist can explain the tax consequences of taking a lump-sum distribution and the benefits of rolling those funds into an IRA.

WATCH OUT

Plan administrators of your 401(k)s will not automatically assume you want to do a rollover. Also, the Tax Code provides for a 60-day window during which you can remove your qualified money from your pension plan or 401(k) and deposit into a traditional or Roth IRA. Be advised: The IRS does not trust that you will dutifully meet your 60-day obligation. If you request a lump-sum distribution, your employer is required to withhold 20% for federal income tax. Thus, on a $50,000 lump-sum distribution, you would pay $10,000 in withholding to the Federal Government.

FROM TAX-INFESTED TO TAX-FREE!

Your America’s Tax Solutions^TM retirement distribution specialist can explain how you may bypass the 20% withholding requirement by structuring the transaction as a trustee-to-trustee transfer. Your ATS specialist will also explain the legacy advantages of rolling your 401(k) into an IRA, including the ability to stretch the period of tax-deferred earnings within an IRA beyond the lifetime of the person who set up the account at a compounded, tax-deferred rate.

CAUTION: This Can Destroy Your Nest Egg…

There has been a huge spike in the life expectancy of Americans over the past several decades.  We have been conditioned to diligently save for our retirement.  We have been encouraged to have a retirement distribution strategy in place to help us maximize our retirement assets while mitigating and eliminating heavy, immediate and unnecessary taxation.  But what about that event that nobody likes to talk about that can destroy your nest egg?  This event is typically sudden, unanticipated and blindsides many Americans.   What is it?...

Today you may look and/or feel great.  Your spouse may be active and strong.  What happens if you or your spouse suddenly takes ill?  What if you or your spouse is suddenly faced with a debilitating injury or other health problem?  If you haven’t allocated some of your assets to handle a sudden illness or long-term care event, you have essentially allocated ALL of your assets to address this type of crisis. 

It may be hard to imagine yourself in a dire position now, but ignoring the fact that most Americans (or their spouse) will encounter a long-term care event at some point in their lives, will only serve to help erode the assets you have earmarked for retirement.  To give you an idea of what to expect, below are the average annual cost statistics in a few states from coast-to-coast for nursing home care.  The statistics are based on semi-private room accommodations:

If you are not sure how to handle and plan for a long-term care event, don’t keep putting it off.  All Americans should have a solid, well thought out plan to help protect themselves and their loved ones from financial and emotional devastation.  A long-term care planning assessment is a FREE service that retirement distribution specialists offer.  He or she can help you understand what options are available and what strategies make sense for you and are appropriate for your personal situation.

Does Your Current Policy Need a Make-Over?

We here at America’s Tax Solutions like to make sure our clients and their clients are always prepared.  Many Americans buy various types of insurance policies, put the paperwork in a drawer and never look at it again. Unfortunately, many of those people could be stuck with old policies they bought 10, 20 or even 30 years ago and they haven’t had them reviewed. Why is this important? Over the past several decades they may have experienced life changes and their planning needs have likely changed as well.

Did they consider things like tax diversification and tax-free retirement? Can these policies be used to help fund a college education for their kids or grandkids, protection against a long-term care disaster, and so on? If they were say 25 to 35 years old when they first selected their policies, probably not. There also may be better policies available today that didn’t exist back when they first met with their agent.

7 Points You Should Consider When Reviewing Old Policies:

1. You feel a higher rate of return may be realized with a new policy.

2. You feel that the current insurer may become insolvent and a more stable insurer can be obtained through a policy exchange or diversification of insurance carriers will increase safety and/or return.

3. You have exercised a loan provision against a policy, the interest paid on the policy is non-deductible, costs are increasing and you need to continue coverage.

4. You would like to change from an individual to a group product.

5. You can achieve a higher death benefit with a new product.

6. You would like to change an ordinary life policy into a single premium policy to eliminate the premium payment burden, obtain a higher rate of return on the underlying cash value and obtain a higher death benefit.

7. You have an ordinary life contract and you would like to exchange it for a universal, variable, or interest sensitive policy. Premium rates on the new policy are lower due to such factors as improved mortality tables, a non-smoking discount, a volume discount for several policies aggregated into one or other factors.

If you haven’t reviewed all of your active policies, it’s important to dust them off and take a look to make sure they still provide you with what you want. If you are unsure where to begin, don’t hesitate to reach out immediately to your retirement distribution expert, tax professional or agent. Remember, a basic policy review should always be a FREE service from your trusted advisors!