California Probate - Law Offices of Janet Brewer Blog

Inherited IRAs: How the SECURE Act Impacts the Taxes Your Recipient Will Pay

One of the most significant assets many individuals leave behind for their loved ones may be the balance in their IRA, or Individual Retirement Account. Before the Secure Act’s passage on January 1 of this year, legislation allowed for beneficiaries of IRA accounts to stretch out the required minimum distributions over their lifetime. This strategy minimized the tax burden on the withdrawals, and the resulting tax deferral could span decades.

What Does the SECURE Act Change?

The previous rules allowed a non-spousal beneficiary an option that would let them take minimum distributions over their life expectancy. Their life expectancy would be calculated by factors such as the beneficiary’s age, account balance, and anticipated life expectancy. The SECURE Act eliminated this option and now mandates that the account must be emptied and closed within ten years, regardless of the resulting tax implications.

The prior laws allowed what was commonly referred to as a stretch IRA, which meant that a younger beneficiary, such as someone in their twenties or thirties, could elect to stretch the distributions for 50-60+ years (depending upon the IRS life expectancy tables that govern this strategy). In this scenario, an individual would frequently be drawing an annual amount that is far lower than the investment gains that are still made by the remaining balance, which would allow the account to continue to grow.

The SECURE Act no longer permits this, and no matter what the tax ramifications are for the non-spousal beneficiary. However, there are Eligible Designated Beneficiaries, who may still be exempted from the provisions in the SECURE Act.

What Do the Changes Mean for Beneficiaries? 

If a beneficiary inherits an IRA with a relatively small balance, the potential tax benefits of a stretch IRA likely won’t be reaped, and the passage of the SECURE Act will have a minimal impact on them.

For non-spouse beneficiaries who inherit a substantial IRA, the tax burden will likely be much larger than it would be prior to the SECURE Act. But there is one bright spot in the changes. They are no longer required to take a minimum distribution each year but must simply withdraw the funds at some point in time within the ten-year window. With some planning, the tax burden can be minimized. For instance, the beneficiary could elect to withdraw less in high-income years and withdraw more during low-income years, which can mitigate some of the tax impacts.

What Are Eligible Designated Beneficiaries?

The SECURE Act did away with the stretch IRA but did create an exempted class of designated beneficiaries who do not have to adhere to the 10-year payout provision strictly. In addition to those who inherited prior to 2020, the following individuals enjoy greater flexibility and freedom to extend their distributions on an inherited IRA.

• Surviving spouses: Are exempt from the SECURE Act and may still stretch their minimum distributions or retitle the IRA into their own name.
• Minor children of the account holder: The ten-year rule goes into effect only when the child reaches the age of majority, or the age of 26 if still in school. Grandchildren are ineligible for this benefit.
• Chronically ill/disabled beneficiaries: Similar to spouses, these beneficiaries are exempt from the changes of the SECURE Act.
• Individuals who are not more than ten years younger than the IRA owner: These individuals may be a friend, sibling, or unmarried partner.

Is There Anything I Can Do to Minimize the Tax Impact for Other Beneficiaries?

While the SECURE Act represents major changes – and a tremendous difference in the tax burden – for many beneficiaries of IRAs, there are some ways to minimize the tax impact of these changes. For starters, you can convert a part of, or all of, your IRA into a Roth IRA. This strategy can be carried out over several years to ensure your income doesn’t push you into a higher bracket. While beneficiaries will still be subject to the ten-year rule, the portion in the Roth IRA will be tax-free.

Making qualified charitable distributions can also soften the tax impact for you and your beneficiaries, as these distributions are not included in income. Certain types of trusts, such as those that give the trustee discretion on whether to pay out or retain required minimum distributions, can be employed to also avoid the scenario of having a large distribution (and hefty tax burden). If you are unsure whether the SECURE Act will impact your IRA beneficiaries or you would like to learn more about how to minimize impacted IRAs, it is worth exploring your options with an experienced estate planner - this is the best way to ensure that your hard-earned assets can benefit your loved ones.   

Common Will Mistakes to Avoid

“The most obvious mistake is not to have a will at all. The news is replete with examples of celebrities who have died without a will, including Prince, Michael Jackson, James Brown and even Abraham Lincoln.”

Dying without a will (or “intestate”) means your estate assets will pass to your heirs, according to the intestacy laws of the state. Under the state’s intestacy provisions, if your spouse is alive, and you had no children (with any person), your assets will pass to your spouse. In many states, if you had children, your surviving spouse would get half of the assets of the estate, and the other half would be divided equally among your children. If you didn’t have surviving spouse, your children would share equally in the estate.

The Aiken (SC) Standard’s recent article entitled “Avoiding mistakes with your will” says that a critical point to remember is that only your spouse must survive in order to be an heir. Typically, if one of your children had died, their children would get their share.

Every state has specific requirements for what constitutes a legal will. For example, in South Carolina, a will has these requirements

• It must be in writing
• The maker of the will (the testator) must be of sound mind
• The maker of the will cannot be a minor
• The will must be witnessed by two witnesses who were present when the testator signed the will and who also witnessed each other sign the document and
• The will must be notarized.

The witnesses must not be beneficiaries of the will.

Because a will is so critical, you should employ the services of a qualified estate planning attorney. If you and your spouse already have a will prepared, it is important that these documents be reviewed periodically to make certain that your instructions are up to date and that your will recognizes any changes that have occurred in either federal or state law.

People frequently forget about including certain assets in their wills, like special collections of memorabilia or other treasures.

Be sure that you designate an executor to serve in this capacity who is well-organized, calm and willing. You should typically name a person who’s younger than you and also name an alternate executor, in case your primary choice is unable to serve.

If you have any minor children, you should name a guardian for those children. You can divide the duties of a guardian, by naming a different guardian to handle the children’s financial affairs and one who provides care for your children.

After your will is drafted, be certain you tell your family know where it’s kept, and be sure that your will is in synch with other documents, like your life insurance policies and other benefits that will pass directly to beneficiaries named in those documents.

If you have any questions about your current estate plan, please call or email us today.

Reference: Aiken (SC) Standard )(March 22, 2020) “Avoiding mistakes with your will”

Illinois’ Governor Simplifies Estate Planning During Pandemic

“Late on Thursday evening, Governor J.B. Pritzker signed his 14th COVID-19-related Executive Order. It makes it much easier for individuals to execute estate planning and healthcare planning documents."

By permitting remote witnessing and remote notarization, Illinois Governor J.B. Pritzker’s order allows people to make binding legal documents without having to congregate in groups and in doing so violate the current state and local rules and recommendations concerning social distancing.

This is a “game changer” for convenient and speedy implementation of essential healthcare documents and estate planning paperwork, says patch.com’s recent article entitled “Gov. Pritzker Executive Order to Simplify Estate Planning During.”

Instead of requiring four people to be together at the same time in the same room, Governor Pritzker’s executive order lets notaries and witnesses participate via "two-way audio-video communication technology" (i.e., video conference software like Zoom, Microsoft Teams or Google Hangouts).

The last several weeks have been challenging for estate planning attorneys and their clients, as uncertainty about how to handle the formalities of a signing ceremony conflicted with the responsibility to comply with policies designed to slow the spread of COVID-19. The order provides some much-needed clarity and simplicity.

It’s now very easy for Illinois residents to execute wills, living trusts, powers of attorney, and deeds—all of which are essential to proper estate planning. Likewise, on March 20, New York Governor Andrew Cuomo signed Executive Order No. 202.7 to allow notarization utilizing audiovisual technology. The New York order limits this process to persons physically located in New York. There is also a federal bill proposed in the Senate (S. 3533, referred to as the SECURE Notarization Act) that would authorize remote online notarization.

Most importantly in the current pandemic, it simplifies the process for executing healthcare directives which will give people peace of mind and the certainty that their healthcare and end-of-life wishes will be followed, if they become incapacitated. However, there are very specific requirements that need to be followed, so that a document can be properly notarized or witnessed remotely. The risks of an improperly executed will, power of attorney, or healthcare directive are substantial.

As with any of the procedural requirements for estate planning documents, speak with an experienced estate planning attorney about getting your plan in place or up to date. COVID-19 estate planning presents unprecedented challenges for our communities, so work with a qualified estate planning attorney to create a plan that addresses all of your family's needs.

Contact our office today to schedule your consultation.

Reference: patch.com (March 27, 2020) “Gov. Pritzker Executive Order to Simplify Estate Planning During”

What are the Main Estate Planning Blunders to Avoid?

“Maintaining a valid and current estate plan is vitally necessary in order to ensure the efficient and orderly dispersion of assets after a person dies. However, even a small mistake can create huge problems during the settlement process, and in many cases, these errors are impossible for anyone to correct.”

There are a few important mistakes that can make an estate plan defective—most of these can be easily avoided by reviewing your estate plan periodically and keeping it up to date.

Investopedia’s article from a few years ago entitled “5 Ways to Mess Up Estate Planning” lists these common blunders:

Not Updating Your Beneficiaries. Big events like a marriage, divorce, birth, adoption and death can all have an effect on who will receive your assets. Be certain that those you want to inherit your property are clearly detailed as such on the proper forms. Whenever you have a life change, update your estate plan, as well as all your financial, retirement accounts and insurance policies.

Forgetting Important Legal Documents. Your will may be just fine, but it won’t exempt your assets from the probate process in most states, if the dollar value of your estate exceeds a certain amount. Some assets are inherently exempt from probate by law, like life insurance, retirement plans and annuities and any financial account that has a transfer on death (TOD) beneficiary listed. You should also make sure that you nominate the guardians of minor children in your will, in the event that something should happen to you and/or your spouse or partner.

Lousy Recordkeeping. There are few things that your family will like less than having to spend a huge amount of time and effort finding, organizing and hunting down all of your assets and belongings without any directions from you on where to look. Create a detailed letter of instruction that tells your executor or executrix where everything is found, along with the names and contact information of everyone with whom they’ll have to work, like your banker, broker, insurance agent, financial planner, etc.. You should also list all of the financial websites you use with your login info, so that your accounts can be conveniently accessed.

Bad Communication. Telling your loved ones that you’ll do one thing with your money or possessions and then failing to make provisions in your plan for that to happen is a sure way to create hard feelings, broken relationships and perhaps litigation. It’s a good idea to compose a letter of explanation that sets out your intentions or tells them why you changed your mind about something. This could help in providing closure or peace of mind (despite the fact that it has no legal authority).

No Estate Plan. While this is about the most obvious mistake in the list, it’s also one of the most common. There are many tales of famous people who lost virtually all of their estates to court fees and legal costs, because they failed to plan.

These are just a few of the common estate planning errors that commonly happen. Make sure they don’t happen to you: talk to a qualified estate planning attorney.

Contact our office today to schedule your consultation.

Reference: Investopedia (Sep. 30, 2018) “5 Ways to Mess Up Estate Planning”

You Can Complete Your Estate Plan During the Coronavirus Quarantine

“If you are quarantined or under a lockdown and can't get to a notary, how can you get your will, trust and other documents executed? Don't give up. There are ways to get it done without leaving home.”

The coronavirus lockdown is happening in many states, following the lead of California, Illinois, Florida and New York. Kiplinger’s recent article entitled “How to Get Your Estate Plan Done While Under Coronavirus Quarantine” says that these isolation orders create unique issues with your ability to effectively establish or modify your estate plan.

The core documents for an estate plan are intended to oversee the management and distribution of your assets, after you pass or in the event you are incapacitated. Each document has requirements that must be met to be legally effective. Let’s look at some of these documents. Note that there’s proposed federal legislation that would permit remote online notarization, and Illinois and New York have passed orders to allow notarization utilizing audio visual technology.

Will. Every state has its own legal requirements for a will to be valid, and most require disinterested witnesses. Some states, like California, permit a will, otherwise requiring the signature of witnesses, to be valid with clear and convincing evidence of your intent for the will to be valid. An affidavit indicating that the will was signed as a result of the emergency conditions caused by the COVID-19 virus should satisfy this requirement.

Power of Attorney. This document designates an individual to make financial decisions regarding your assets and financial responsibilities, if you’re unable to do so. This can include issues regarding retirement benefits, life and medical insurance and the ability to continue payments to persons financially dependent on you. The durable general power of attorney is typically notarized.

Advance Health Care Directive. This document states whether you want your life extended by life support systems and if you want extraordinary measures to be taken. It may state that you wish to have a DNR (Do Not resuscitate) in place.

HIPAA Authorization. Some states have their own medical privacy laws with separate requirements, and most powers of attorney provide that the designated persons can act, if you’re unable to do so. Financial institutions typically require confirming letters from your doctor that you’re unable to act on your own behalf. To be certain that this agent can act on your behalf if needed, they should be given written access to see your medical information.

With the pandemic, these requirements can be fluid and may change quickly. Be sure to work with an experienced estate planning attorney.

Contact our office today to schedule your consultation.

Reference: Kiplinger (March 30, 2020) “How to Get Your Estate Plan Done While Under Coronavirus Quarantine”

Are You One of the Many Headed toward Financial Disaster?

“Managing your finances likely isn't the most exciting task on your to-do list, but it's crucial if you want to reach all your financial goals and set yourself up for long-term success.”

You may be saving for retirement, paying down debt or simply budgeting for your everyday expenses. Whatever your goal is, it's critical to have a plan in place. Some planning now can go a long way in making sure your finances are as healthy as possible. Without any type of plan, you're just blindly throwing your money around and hoping for the best.

Motley Fool’s recent article entitled “A Whopping Number of Older Adults May Be Headed Toward a Financial Disaster” says that millions of older adults are making a critical mistake as they plan for the future. If they don't make any changes soon, it could be extremely expensive.

More than one-third (34%) of baby boomers admit that they haven’t conducted any financial planning whatsoever in the last two years, according to the National Association of Personal Financial Advisors. Therefore, they haven't planned for retirement, managed a budget, set any goals, reviewed their investments, considered their insurance needs, or done any tax or estate planning. It's not just baby boomers who aren’t planning. Almost a quarter (24%) of Gen Xers also say they haven't done any financial planning over the past two years. The generations most likely to have thought about the future are the millennial generation and Gen Z -- only 16% and 15%, respectively, said that they haven't done any recent financial planning.

While all of us should be thinking about our future plans, it's even more essential for older Americans to focus on their finances. If you're close to retirement age and haven't reviewed your investments or thought about your retirement plan recently, you’ll have a hard time knowing if you're on track. The longer you wait to know if you're off track, the more difficult it’ll be to make changes and to catch up.

Baby boomers should have plans in place, in case the worst happens. Review your insurance and make an estate plan to be certain that your family is protected if something happens to you. Look at your plans regularly to make sure everything is up to date.

The first part of creating a financial plan is to set goals, like preparing for retirement, paying down your debt, or creating an emergency fund. Next, examine your money situation to find extra cash to put toward those goals. Begin monitoring your spending to get a good idea of just where your money is going every month. It's a lot harder to stay on a budget and save more if you don't know how much you're spending. Once you get into the habit of tracking your spending, it’ll be easier to discover parts of your budget to cut back. You can start reallocating that money toward your financial goals.

You should also remember that you'll need to review your plan regularly to make adjustments when needed. This is especially vital when saving for retirement because there are many factors to consider as you're saving. At least once a year, check that your retirement savings goal is still accurate, and decide whether your current savings are on track to reach that goal. Take a look at your investments to see if your asset allocation is still aligned with your risk tolerance.

Reference: Motley Fool (Feb. 8, 2020) “A Whopping Number of Older Adults May Be Headed Toward a Financial Disaster”

Do You Think Everything Is All Set with Your Estate Plan?

“You’ve considered how you want your estate to be distributed after you die. Hopefully, you’ve even written a will to make sure your wishes will be followed. So, your estate is planned…right?”

Many people would like to believe that estate planning is simple, and that once you sign everything you’re finished. Not so. There are other things to consider as part of the process, and topics that need to be revisited over time.

When you pass away, your executor will typically have many tasks to handle to settle your estate. Anything you can do in advance to add clarity and lessen the burden on her work is wise. MarketWatch’s recent article entitled “Why your estate plan is not as buttoned up as you think it is” gives us a list of seven items to review to be certain that your estate is as planned as you think:

Check to make sure your will is up to date. That’s assuming you’ve written your will (and if you haven’t, get on it!). How long has it been since you drafted it? Think about any major changes in your life that have happened since that time. If things have changed, be sure to update it.

Check to make sure that your will is sufficiently detailed. Most people think about the big stuff in their estate, like the house, car and jewelry. However, you also need to provide directions for items with sentimental value. This will help to avoid family fighting over these items. Leave directions about who gets what, even if these items of sentimental value don’t have a high dollar value.

Check to make sure that your will spells out your wishes in a way that’s legally binding. Every state has its own laws, when it comes to the requirements for a valid will. Work with a seasoned estate planning attorney to make certain that your will is valid. You can also let them do it, so you don’t make a mistake that could lead to problems for your executor after you’re gone.

Check to make sure that your will has your funeral plans sufficiently detailed. Don’t force your grieving family to plan your funeral and try to guess your wishes at the same time. Preplan your funeral. Funeral directors are happy to talk to you to preplan. Leave instructions regarding your wishes, including whether you want to be cremated or buried in a casket; the services you’d like and if you’d like charitable donations to be made in lieu of people sending flowers.

Be sure that your financial affairs are organized. Your executor will need to know about your typical monthly bills. Make a list of your account numbers and passwords to simplify your executor’s job. Be sure to include automatic deductions or charges on your credit card for things like internet-based subscriptions, club memberships, recurring charitable donations and automatic utility payments.

Make arrangements for the care of your family members who survive you. If you’re a caregiver to a parent, spouse, child, or another family member, create a detailed plan concerning who will take over their care, if they outlive you. Don’t forget your pets, since the laws on the care for animals contained in a will are different in each state. It’s a good idea to make your loved ones aware of your wishes for your furry family members.

Thorough estate planning will help ensure that you family has less to deal with in their grief. Anything you can do to help them get through that difficult time by managing your affairs today is a great gift to them.

Reference: MarketWatch (March 4, 2020) “Why your estate plan is not as buttoned up as you think it is”

How Do I Do the Most with My Inheritance?

“You may have a friend, or two, who has blown a large inheritance. Some of you may have also seen a news story about a lottery winner who went bankrupt (or worse) just a few years after receiving a life-altering sum of money. If you don’t want this to be you, keep reading as we share five tips to make the most of an inheritance or windfall.”

Studies have shown that when people unexpectedly come into money, they’ll treat it differently than the money they’ve earned.

Forbes’ recent article entitled “5 Important Steps To Maximize An Inheritance” says that even the most financially astute consumers can get inundated with their newfound wealth. People can feel pressure to use the cash to purchase new vehicles, bigger homes, or even take their families on dream vacations. Others may feel that they can safely quit their jobs and live the life of luxury.

Many people regret jumping into major purchases after getting an inheritance. Others will give away much of the money or even make bad investments that are completely wrong for their goals and financial needs. If you don’t get expert financial guidance to develop a plan for your inheritance, or take the time to do it yourself, you may find yourself worse off than you were before you became wealthier via an inheritance.

Here are some financial planning tips for anyone who is receiving an inheritance or another windfall.

Do Something Fun. Set aside an amount to splurge on something fun. However, figure out how much you want to spend and on what. Without that, you may find that one small splurge turns into many, and next thing, a big chunk of your inheritance could be spent.

Taxes on Your Inheritance. It’s uncommon for someone to get an inheritance big enough to trigger the federal estate tax. However, estate taxes will vary at the state level, so check with your estate planning attorney. Depending on the type of assets you inherit and how they’re held, you may owe taxes on some of your newfound riches.

Quitting Your Job. This sounds tempting, but before you take this big step, make sure you’ve thought it through and that you have a plan to replace your income. It’s not hard to underestimate how much money you’ll actually need to provide a nice standard of living for the rest of your life.

Take Care of Yourself. When you come into money, you’ll hear from relatives you never knew you had. They’ll all be asking for money. Make sure your own finances are in order, before you commit to take care of others beyond your immediate family.

Consult Experts. An inheritance can be stressful and overwhelming, so talk to an experienced estate planning attorney. He can help with tax filing deadlines and provide strategies to protect that wealth.

Reference: Forbes (Feb. 26, 2020) “5 Important Steps To Maximize An Inheritance”

Coronavirus Got You Thinking About a Will? That Might Not Be Enough.

Amid the climate of uncertainty surrounding the coronavirus pandemic that is sweeping the nation, people are grappling with the difficult subject of estate planning … and not taking any chances.

As the coronavirus pandemic continues to spread across the country, it seems like everyone is thinking they should probably get a will done, just in case.

While this renewed attention to estate planning is great, experts at Bankrate.com warn that a will may not be enough.

What is a Will?

A will is a legal document that directs who should receive your property at your death – specifically any property that is in your name only and without a beneficiary designation. Without a will, your property may be distributed by the courts according to your state’s laws of intestacy … regardless of what your wishes might have been.

Some Shortcomings of a Will

• Contrary to popular belief, a will does not avoid probate – a court process that can be expensive and can take years to resolve. With courts backed up now due to coronavirus, the process of settling a will could take much longer.
• A will can face challenges in probate court, leading to long, messy and expensive litigation.
• A will does not control the distribution of any assets held jointly with others, or that will pass according to beneficiary designations.
• Your will goes into effect only after you die. It cannot help with medical or financial decisions that must be made in the event of your incapacity or serious illness.

What’s Right for You?

When it comes to estate planning, there is no one-size-fits-all solution. In some situations, a will – even with all its shortcomings – may still be a good option. Meeting with an estate planning attorney is the best way to get the planning that’s right for you. In most instances, you won’t have to leave your home and can meet by phone or online in a video chat.

Contact our office today to schedule your consultation.

Resource: ABC News, Coronavirus leads to surge in wills: 'Everyone is thinking about their mortality', April 2, 2020; Bankrate.com, Revocable trust vs will: A guide to estate planning in the age of coronavirus, April 17, 2020

Overcoming Barriers to Creating an Estate Plan

When you think about the future, you may need to overcome various types of barriers to creating an estate plan. Barriers can prevent people from seeing a lawyer, paying for services, or even wanting to estate plan at all.

What Kinds of Barriers to Creating an Estate Plan Do People Face?

The many kinds of barriers to creating an estate plan that people face could keep them from any future planning at all. These barriers include:

• Cultural norms against discussing death or dying
• Low income or no savings
• Lack of time
• Focusing on the present
• Little knowledge about the necessity of estate planning
• Never having needed a lawyer before

These barriers should not keep people from making estate plans, but they do. Overcoming various reasons for not making a plan can give you peace of mind and security for years to come.

Surpassing Obstacles to Make Your Plan

Just speaking to an estate planning lawyer in an initial meeting can help with your concerns. A lawyer can reassure you on the cost of making a plan, explain what you might need even if you have a low income, and tell you why an estate plan is absolutely necessary for many people. Often an estate plan is less expensive than you might think to create, and you can choose which documents you want to sign. It also takes less time than you might think, because a lawyer can do most of the work for you.

If your family does not discuss death and dying for cultural reasons, reading information about the consequences of not making a plan could spur you to action. For example, anyone with non-U.S. citizens in the family or connnections abroad may need a plan to potentially prevent expensive tax bills and hassle.

Even having a low income or little money saved is not a reason for failing to plan ahead. Otherwise, family members who need support in your absence might not have it, or your family (spouses and co-signers) could end up paying your debts later. A simple estate plan and some financial advice could help you turn things around.

Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.