The IRS recently issued proposed regulations regarding the treatment of tax-deferred retirement accounts after the SECURE Act of 2019.
Here are 2 highlights relevant to estate planning:The age of majority will be defined as age 21. This means that a minor child of the deceased account owner may elect stretch IRA treatment for pay-out of required minimum distributions until age 21 and then use the usual 10-year liquidation rule until age 31. The 10-year liquidation rule will require a beneficiary to take required minimum distributions based on the beneficiary's life expectancy during the 10-year liquidation period if the deceased account owner had reached his or her required beginning date (age 72). Previously, it was assumed that no distributions would be required until the end of year 10 in all cases. But now this prior assumption would only apply if the deceased account owner had not reached his or her required beginning date. It should be noted that a Roth IRA does not have a required beginning date, so this interpretation only applies to traditional IRAs. Another note: these are proposed regulations, not final. The final regulations may differ from the proposed regulations. Originally posted March 24, 2022
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Congress recently passed SECURE Act 2.0. The updated law includes countless items that affect financial planning and tax planning, however there isn’t much that affects estate planning. Only 2 items are worth noting here:
1. The age for required minimum distribution increased from age 72 to age 73. 2. There are no more mandatory lifetime distributions from Roth 401(k) accounts. Bouman Law Firm is a registered subscriber to the Arizona Healthcare Directives Registry (“AzHDR”), an online registry for secure storage and sharing of your health care power of attorney and living will declaration. The registry was established by the Arizona Department of Health Services and is currently administered by Contexture, a nonprofit organization that provides strategic, technical, and administrative support. Contexture includes the registry as an integrated component of the Arizona Health Information Exchange. This gives participating Arizona health care facilities instant access to your health care directives when they are needed most.
The registry is free to Arizona residents. Registrants are given access to a password-protected online portal so they can view and update their documents and edit their contact information. Registrants can also print a paper wallet card template with a QR code and a URL link that can be used by any health care providers who may not have direct access to the registry, such as an out-of-state hospital or your primary care physician’s office. We also recommend you share the QR code and URL link with your health care agent. While gifting an asset outright to a spouse or other relative would clearly be fraudulent if a claim is known or reasonably foreseeable, it may also be foolish when no claim is imminent. If you gift an asset to your spouse, and then your spouse later divorces you, your ex-spouse keeps the asset and you get nothing. Likewise, your other relative would have no obligation to gift an asset back to you, or use the asset for your benefit, when you might want it back in the future. Even the act of your spouse or relative gifting an asset back to you may serve as evidence the initial gift was made, in fact, to hinder or defraud a potential creditor.
A gifted asset is also exposed to creditor claims against the spouse or relative. For example, if your spouse is at fault in an auto accident, the asset you were trying to protect would be exposed to a potential new claim outside your control. Also consider the possibility that your relative might later get divorced and the relative’s ex-spouse becomes entitled to one-half of an asset that was originally yours. The better approach is to rely on liability insurance, LLCs, and irrevocable trusts to protect assets. For example, an irrevocable trust with spousal access provisions may be drafted to define your spouse as the person you are married to and not necessarily the person you were married to at the time the trust was established. Similarly, an irrevocable trust for your children may be drafted to protect trust assets from creditors and ex-spouses of the children. 1. What is a Revocable Living Trust?
A Revocable Living Trust is a popular alternative to the traditional Will as the main component of an estate plan. The Revocable Living Trust is best known as a probate avoidance tool. Assets titled in the name of a Revocable Living Trust bypass the court-supervised probate process upon the death of the owner. A fully-funded Revocable Living Trust has other potential benefits including (1) comprehensive incapacity planning; (2) simpler coordination of beneficiary designations for life insurance and retirement accounts; and (3) enhanced privacy from excluded heirs and the general public. There are many types of trusts. A revocable trust can be changed, or even cancelled, as opposed to an irrevocable trust that cannot. A living trust is established during the owner’s lifetime, as opposed to a testamentary trust established after the owner’s death. 2. How does a Revocable Living Trust work? A trust is established with at least one trustor, trustee, and beneficiary. The trustor is the person who establishes the trust. The trustee manages the assets of the trust for benefit of the beneficiary. Most Revocable Living Trusts will initially name the trustor as both trustee and beneficiary. A Revocable Living Trust is like a bowl of candy. If you establish a trust, you are choosing to hold your candy (assets) in a bowl, rather than in your hand. If you become incapacitated or resign as trustee, your bowl will be given to the successor trustee, who will distribute the candy to you as needed. After your death, the successor trustee will take enough candy from the bowl to pay debts and expenses, and then distribute the remaining candy to the persons or charities named as beneficiaries in the trust document. A Revocable Living Trust must be fully-funded to achieve its objectives. This means that you will need to re-title ownership of your personal assets (e.g., real estate, CDs, bonds, brokerage accounts) into the name of your trust. A Revocable Living Trust is tax neutral during the lifetime of the trustor. Any taxable income earned by assets of the trust is reported on the trustor’s personal income tax return. 3. Who should have a Revocable Living Trust? Many people mistakenly assume that the Revocable Living Trust is only for the very wealthy. However, in Arizona, a probate action is possible whenever a person dies with more than $100,000 of equity in real estate or more than $75,000 in personal property (and there is no surviving joint owner and no beneficiary designation is used). Anyone with assets titled in personal name valued higher than these amounts should consider the potential benefits of a Revocable Living Trust versus the costs and hassle of establishing one. The best candidates for a Revocable Living Trust are:
4. How is a Revocable Living Trust superior to a Financial Power of Attorney? If a trustor has an extended incapacity, a fully-funded Revocable Living Trust is more reliable than a Financial Power of Attorney. When incapacity strikes, the “disability trustee” can quickly take control of the trust assets without any court involvement. The same sense of confidence cannot be placed in a Financial Power of Attorney because financial institutions are often reluctant to rely on them. Financial institutions may assert that the Power of Attorney is “stale” or refuse to accept any document that does not conform to the financial institution's proprietary form. A well-drafted Revocable Living Trust document will provide clear provisions describing the triggering events after which a successor trustee can manage trust assets on behalf of the trustor. 5. How much does a Revocable Living Trust cost? A Revocable Living Trust is usually two or three times more expensive than a Will primarily because of the increased value and benefits it provides. Estate planning lawyers in Arizona typically charge $2,000 to $10,000 for a Revocable Living Trust-based estate plan. The exact amount will depend on many factors, including whether the estate plan incorporates estate tax savings and inheritance protection features, and the attorney's knowledge and experience. |
AuthorTom Bouman, Attorney Archives
April 2024
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