Retirement Plans

Thursday, January 27, 2011

NEET Tips

NEET Tips answers questions posed online to the NEET website

Why do retirement plans usually have a standalone trust separate from my revocable living trust?

It is not essential, but most estate planning attorneys recommend having a separate trust for retirement plan assets. There are several reasons. First, there are strict requirements for a retirement plan trust that are inapplicable to revocable living trusts (RLT), and trying to merge the two makes the RLT less flexible than it otherwise can be. Second, advanced IRA trusts can function as accumulation trusts, meaning that they receive annual Required Minimum Distributions (RMD) but do not distribute them to the beneficiary. This could become important if the beneficiary is receiving government benefits and the IRA proceeds would offset those benefits. Third, standalone IRA trusts very clearly state that they meet the requirements of being an IRA trust up front, so the IRA custodian, who must receive a copy of the trust, can quickly determine that the trust is a valid IRA trust. This also prevents the IRA custodian from having a copy of your complete RLT. Fourth, a standalone IRA trust alerts beneficiaries to the fact that IRA assets must be handled differently from most other assets, and thus the beneficiary is less likely to withdraw the account assets and waste the tax-advantaged benefits of the keeping the IRA intact as long as possible.

Wednesday, January 26, 2011

NEET Tips

NEET Tips answers questions posed online to the NEET website

How do I plan for a large IRA?

Options for handling IRAs and other retirement plan assets have expanded in recent years. It is now possible for your spouse and your children to inherit an IRA and use their own life expectancy to establish the required minimum distribution (RMD) schedule. A child’s ability to use their own life expectancy is critically important, because that allows the child to “stretch out” the RMDs as long as possible, while obtaining the favorable tax treatment for the account.

Planning for a spouse or child to inherit an IRA is relatively easy. You simply update the beneficiary designations on the account and check them every few years to ensure they remain current with your wishes.

There are potential downsides to allowing a young adult to inherit an IRA. Although no hard evidence exist, it is believed that approximately 70 percent of young adults who receive an inherited IRA cash it out within 18 months. What could be a perfect retirement plan for the son or daughter if they removed only the RMDs annually is instead “found money” and wasted, as is the tax-advantaged compounding of plan assets.

A better option for many IRA owners, typically those with accounts above $200,000 in value, is to set up a trust that IRA distributions must pass through. By having a Trustee in place, the beneficiary is unable to withdraw more than the RMD unless the Trustee agrees. If the beneficiary is young, the account usually grows faster than the RMDs exhaust it, so your son or daughter could have a sizable account when they retire.

For more information on planning for retirement assets, see the NEET article:

Making the Most of Your Retirement Accounts

Friday, November 20, 2009

Press Coverage of Estate Planning This Week (November 20, 2009)

Robert Powell of Dow Jones Newswires puts forth rules for properly handling inherited IRAs. Keep a bottle of aspirin available, says Powell, because you are now subject to a set of retirement rules you never knew existed. See The 10 Vital Rules for Inherited IRAs (Nov. 12, 2009).

Kristen McNamara of Dow Jones Newswires writes about the importance of planning ahead regarding online financial accounts, email accounts and the like. Without usernames and passwords, it could take months to access online accounts even if you have a death certificate or a power of attorney. See Don’t Overlook Digital Assets in Plans (Nov. 13, 2009).

Friday, August 14, 2009

Press Coverage of Estate Planning This Week (August 14, 2009)

Martin Vaughan of the Wall Street Journal reports that the U.S. House of Representatives will likely propose a temporary one-year extension of the current federal estate tax to carry through 2010 and prevent repeal of the estate tax next year.  This extension would be in lieu of a more long-term adjustment of the estate tax, which is scheduled to expire in 2010 but return in 2011 at a level that would impact far more taxpayers.  See Bid to Block Estate-Tax Repeal (Aug. 13, 2009).

Susan B. Garland of Kiplinger's Retirement Report points out that even if the federal estate tax threshold remains $3.5 million per person, state estate tax levels often differ.  Many states, including Vermont, have an estate tax threshold below the federal level, which can create unexpected estate tax liabilities and may require updating your estate plan.  See Protect Heirs From State Estate Taxes (Aug. 6, 2009).

Amy Feldman of BusinessWeek notes that new Roth IRA conversion rules taking effect in 2010 create opportunities for certain conventional IRA owners.  One big incentive is using a conversion for money to be left to children or grandchildren, because taxes paid now to complete the conversion are no longer part of your taxable estate, and the inheritors will never owe income tax on the distributions later.  See Is a Roth IRA Right for You? (Aug. 13, 2009).

Friday, June 05, 2009

Press Coverage of Estate Planning This Week (June 5, 2009)

Tyra Pacheco of the Cape Cod Times (Hyannis, Mass.) finds that many people spend more time planning for a vacation than they do planning their estate.  Although the reasons are numerous, she lists why drafting at least a will makes sense.  See Why You Need a Will (May 31, 2009).

Stacey L. Bradford adapted a portion of her recent book "The Wall Street Journal Financial Guidebook for New Parents" to address whether you should consider setting up a trust for your children.  In a Q&A format, she addresses many of the most important questions facing parents.  See Deciding if Your Kid is Trust-Worthy (June 3, 2009).

Janet Morrissey of Fortune Magazine covers some basics in reducing the size of your estate to avoid estate taxes.  See How to Avoid the "Death Tax" (June 4, 2009).

William Edy, Esq. writes in the News-Press.com about how to leave an IRA to children to achieve tax deferred savings and protect children from taking the money out too soon for imprudent purchases.  See Elder Law: IRA Can Be Stretched to Pay Out Over Lifetime (May 31, 2009).

Friday, April 10, 2009

Press Coverage of Estate Planning This Week (April 10, 2009)

Mike Spector and Anne Tergesen of the Wall Street Journal discuss the pros and cons of Intentionally Defective Grantor Trusts, which move money out of your taxable estate so that future appreciation is transferred to your heirs tax free.  Lowered asset values and low interest rates make this strategy more likely to succeed, but risks remain.  See Unusual Trusts Gain Appeal in Unusual Time (Apr. 7, 2009).

Jane Bennett Clark of Kiplinger's Personal Finance writes about the best ways to give money to children and grandchildren without violating the gift tax rules.  See Charity Begins at Home (April 2009).

Kelly Greene of the Wall Street Journal points out a law change that will allow children and others who inherit a 401(k) or other qualified plan to stretch out plan distributions based on the recipient's life expectancy.  Beginning in 2010, children will be able to roll over an inherited 401(k) into their IRA; previously only spouses could do so.  See New Tax Law Will Treat All 401(k) Heirs Equally (Apr. 4, 2009).

Tuesday, March 03, 2009

IRS Advice on Taking Early Distributions from Retirement Plans

The IRS issued guidance and useful links to publications on the tax implications of taking early distributions from retirement plans, such as an IRA.  Payments received from a retirement plan before the owner reaches age 59 1/2 are generally considered early or premature distributions. These distributions must be reported on your tax return and may be subject to an additional 10 percent tax because of the early withdrawal. However, there are several exceptions to the 10 percent additional tax, including purchase of a first home, certain medical and educational expenses, or if you become disabled. See Top Ten Facts About Taking Early Distributions from Retirement Plans, IRS Tax Tip 2009-36.