Overland Park Attorney

Making Charitable Contributions Work

While you're alive and have philanthropic goals, give appreciated assets held in a taxable account to charity. For charitable bequests, designate your IRA or tax-deferred employer retirement plan. Why? Suppose a hypothetical Al Cole wants to give $10,000 to charity this year. Instead of cash, he donates $10,000 of ABC Corp. stock that he bought for $2,000. As long as Cole's holding period is more than one year, he'll get a full $10,000 charitable tax deduction. Yet those shares might be worth only $8,000 to Cole after paying tax if he sold them himself. The retirement planning and estate planning benefits are big. Say Cole has $1 million of securities: $500,000 in a taxable account and $500,000 in a traditional IRA. Cole wants to leave $500,000 to charity and $500,000 to his son Bob, who is in a high income tax bracket. If Cole leaves the taxable account to charity, Bob will inherit the IRA. Bob will have to take distributions, which will be highly taxed on top of his other income. Instead, Cole can leave his $500,000 IRA to charity. The charity or charities can cash in the IRA bequest and owe no tax, as they are tax-exempt. Now Bob will inherit the $500,000 taxable account. He won't owe any income tax on money he withdraws. He also won't owe any capital gain if he happens to sell securities in the account right away, before they gain more value. That's because he gets a cost basis step-up to market value on those assets.

Investor's Business Daily's recent article, "How You Can Squeeze Tax Breaks From Charitable Giving," says that this maneuver works very nicely if the taxable account holds appreciated securities. A Partial Payout strategy applies whether you want to bequest all or just some of your IRA. Experts suggest that it's better to use your IRA for donations in your estate plan. But you have to decide how you want to do it.

Consider the following scenario as an example: Ida Bass has a $500,000 traditional IRA, and she wants to leave $50,000 to charity from that IRA. The rest of the IRA is to be split evenly between her two children (Many IRA beneficiary forms require percentage allocations for multiple beneficiaries). Another way to do it would be for Ida to just leave 10% of her IRA to charity. The IRA form could designate that each of her kids will inherit 45% of the amount in the account at her death. This would leave the dollar size of her charitable bequest indefinite—potentially leaving more to the charity if the IRA grows or less if its value decreases.

Whether you implement the fixed amount or the percentage approach, problems can arise. Those who will inherit the balance of the IRA need to ensure that the charity is paid in full before September 30^th of the year after the death of the donor. If you do that, those getting the balance can stretch out required distributions of the IRA balance and extend their tax deferral. However, if you miss the September 30^th deadline, the taxable distributions will be accelerated. So individual beneficiaries should be aware of what they need to do if a charity also is on the form.

One other idea is to split the IRA. Bass could transfer $50,000 from her $500,000 IRA to a new IRA account, so that her favorite charity would be the beneficiary of the new IRA. That way her children won't have to worry about the charity if they want to claim the maximum tax deferral from the IRA they inherit.

Speak with an experienced estate planning attorney to learn more and to see if this strategy is right for you.

If you want to learn more about Estate Planing in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website.

Reference: Investor's Business Daily (October 02, 2015) "How You Can Squeeze Tax Breaks From Charitable Giving"

 

 

Come on, Kids! Start Estate Planning!

If you think estate planning is for only the elderly or wealthy individuals, think again. Everyone has collected some stuff, what professionals like to call assets, possessions, investments — and don’t forget the liabilities (debt), like student loans, car or credit card balances. Even if you do not think you have much, it’s important to have a plan for what you do have, and what you want to do with the stuff after you pass away. There are some basic documents everyone should consider having. If you do not complete the appropriate documents, the state you reside in has its own statutory regulations and procedures to dispose of your property. If you do not plan right, you not only surrender your control over your things, but your things may not go to the party you want — such as a partner, life partner, friend or charity. So what can you do?

The website credit.com addresses important tasks that everyone needs to address, in “Why Everyone Needs a Will (I'm Talking to You, Millennials).”

Designate Your Beneficiaries. You can list your beneficiaries on your retirement accounts (401(k), 403(b), IRA, etc.) when you complete the application. Likewise, you can designate your beneficiaries on bank and investment accounts by setting up a TOD (Transfer on Death) designation. It’s easy to do and costs nothing. Remember that beneficiary designations supersede any wish you make in a will.

Draft Your Will. A will is a legal document and is a written statement of your intentions, including where you want your possessions to go and how you want the orderly disposition to happen. See an attorney, as each state has different laws.

State Your Health Care Wishes. Use a Health Care Proxy to let someone you trust make health care decisions and carry out your health care wishes in the event that you are incapacitated.

Sign a Durable Power of Attorney. This form allows someone you trust to make financial decisions in the event you are unable to do so. There is a huge difference between a limited power and durable power of attorney. Talk to your estate planning attorney about these documents.

An experienced estate planning attorney can spend time with you and review your estate issues, complete a will, health care proxy, durable power of attorney, and check beneficiaries, as well as any tax issues. Use an attorney who specializes in this area to ensure your wishes are properly documented and you achieve what you are trying to accomplish, now and in the future.

If you want to learn more about Estate Planing in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website.

Reference:  credit.com (September 11, 2015) “Why Everyone Needs a Will (I'm Talking to You, Millennials)”

 

 

The Lowdown on IRAs

Self-employed people need to save for retirement, and a tax-advantaged retirement plan is the best way to accomplish this. Designed for the self-employed, the Simplified Employee Pension (SEP-IRA) and the Solo 401(k) are relatively easy to set up. Both plans offer tax-deductible contributions, enabling you to cut your taxes and get tax-deferred growth. Another plus: you can still reduce your 2014 federal income taxes because either plan allows you to contribute up until your tax-filing deadline, including the six-month extension. If you got an extension and haven’t filed your return yet, you have until Oct. 15 to make 2014 contributions to your plan. However, while a SEP-IRA can still be established up until Oct. 15, those who wish to make a profit-sharing contribution to a Solo 401(k) must have established the plan by Dec. 31, 2014.

Which plan is the one for you? The main features and the pros and cons of each are listed in Physician’s Money Digest, “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan.”

An SEP-IRAis similar to a traditional IRA in that the investment earnings grow taxed-deferred until they are withdrawn. However, a self-employed individual can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are calculated as the lesser of 20% of net business income or $52,000 for 2014, $53,000 for 2015.

A Solo 401(k) is for self-employed individuals with no employees. Your spouse is not included in the employee count and is permitted to contribute to the plan if he or she is employed by the business. This 401k can be structured as a traditional 401(k) or as a Solo Roth. The maximum 2015 contribution is $53,000 or $59,000 for those 50 and older. The contribution includes (i) an annual employee deferral up to 100% of compensation or earned income for a self-employed individual (to a maximum of $18,000 and $24,000 if 50 or older), which allows some to contribute more to a Solo 401(k) than to a SEP-IRA; and (ii) an employer discretionary contribution of up to 25% of compensation as defined by the plan or 20% of earned income for a self-employed individual.

One advantage a 401(k) offers over an IRA is that you can borrow from a 401(k). If you opt for Solo Roth 401(k), there’s no deduction, but withdrawals are tax-free if you wait until you’re 59½. The plan lets you save much more than a Roth IRA. Another advantage for the Solo Roth 401(k) is that contributions aren’t subject to income limits (unlike the Roth IRA).

Which is better… a Roth or traditional IRA?It depends on many factors. If you expect to be in a higher tax bracket in the future, the Roth version may make more sense, but if your current tax rate is low, it might be better to forgo a deduction now in order to withdraw money tax-free when you’re in a higher bracket in the future. What’s nice is that it doesn’t have to be an “either-or” proposition: you can have both traditional and Roth 401(k) plans and divide contributions between them.

For most self-employed individuals, the SEP-IRA may be a better choice than a traditional IRA because the contribution limits are much higher. Also, deductions for traditional IRA contributions are limited by income for participants who are covered or whose spouse is covered by a retirement plan at work.

Talk to a qualified estate planning attorney to see how these IRA options may fit into your strategy.

If you want to learn more about Estate Planing in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website.

Reference: Physician’s Money Digest (August 27, 2015) “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan”

 

 

Giving Up a Million Dollar Inheritance?

If you stand to inherit millions of dollars, the first thought to cross your mind is most likely not going to be that you should give it up. That will not cross most people's minds at all. However, in some cases, giving up the inheritance is the wisest course of action.

If you are the beneficiary of a wealthy person's IRA, you might be the heir to millions of dollars. Most people would be foolish to give up any claim to that IRA, legally known as "disclaiming" it.

But what if you are already wealthy?

If you are already in a high income tax bracket, when you inherit an IRA you will have to take a required minimum disbursement every year and pay income tax on it at your tax rate.

On the other hand, what if another family member, such as a child, could inherit the IRA instead and pay a lower tax rate? In that case, it would make financial sense for you to disclaim the IRA.

This consideration was explained by Kiplinger's Retirement Report in a recent article titled "Surprising Reasons You Might Want to Give Up a Multi-Million-Dollar Inheritance."

The article mentions a few other reasons you might consider disclaiming an IRA, such as for estate tax purposes or out of a sense of charity.  The key is to disclaim an inheritance correctly, if that is the decision you make.

For example, you will need to do so in writing within a small window of time. Also, you cannot take any benefit from the IRA, or any other inheritance you might want to disclaim, before you disclaim it.

As the article also mentions, you should talk to an estate planning attorney about disclaiming an inheritance. He or she can help ensure that you are doing the right thing in disclaiming and, if yes, that you are doing so properly.

If you want to learn more about Estate Planing in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website.

Reference: Kiplinger's Retirement Report (August, 2015) "Surprising Reasons You Might Want to Give Up a Multi-Million-Dollar Inheritance."

 

A New Supreme Court Decision Impacts Estate Planning

A ruling by the U.S. Supreme Court holding that assets contained in an inherited individual retirement account (IRA) don’t qualify as retirement funds for the purposes of bankruptcy exemption has turned the estate planning community on its head. The Supreme Court’s ruling is “sending seismic shock waves through the estate planning community,” said Gail Buckner, a retirement and financial planning specialist and instructor with Franklin Templeton Investment.

The ruling will make it easier for creditors and bankruptcy attorneys to lay claim on inherited retirement assets, experts say.

In Clark v. Rameker, the Supreme Court unanimously affirmed a lower court ruling in favor of bankruptcy trustee William J. Rameker. The Rameker decision impacts a sizeable segment of the nation's wealth. Quite clearly, inherited retirement assets are no longer as "bulletproof" from creditors as they were before the decision.

A recent InsuranceNewsNet article, titled "Court Decision Has Implications For Estate Planning," explained that the Supreme Court was asked if federal bankruptcy law exempted an inherited IRA from a debtor’s estate in bankruptcy. Justice Sonia Sotomayor wrote in her decision that an inherited IRA account did not qualify as a retirement fund, so it would not be exempt. Inherited IRAs do not fall under the definition of a retirement fund, the Justices held, because the heir to the fund, other than a spouse, is not permitted to put money into the account. The accountholder (or heir) must also withdraw all of the funds from the account or set up annual distributions. It does not matter how close this inherited IRA accountholder is to retirement, and he or she must pay taxes on those distributions. Permitting an inherited IRA to be exempt from creditor claims would ultimately undermine the purpose of the Bankruptcy Code, Sotomayor explained.

What does this mean for your IRA? How will you handle it in your estate planning strategy?

Speak with your estate planning attorney, get a thorough explanation, and put a sound plan in place.

For more information about Estate Planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website. 

Reference:  InsuranceNewsNet (July 24, 2014) "Court Decision Has Implications For Estate Planning"

 

 

Do You Know When You Can Withdraw From Your IRA? Are You Sure?

Now is the time of year when many investors rush to make contributions to individual retirement accounts. Although IRA investors have 15½ months to make contributions for a given tax year—from Jan. 1 through April 15 of the following year—the proportion of contributions made in that last half month is more than double that made in the first January, according to a recent analysis by Vanguard Group. But a subset of investors should be more concerned with taking money out of traditional IRAs right now: namely, those who turned age 70½ last year.

According to the tax law, from age 59½ to 70½ you are generally allowed to withdraw any amount you want from your traditional IRA without incurring a penalty or paying taxes on previously untaxed amounts. However, after you reach age 70½ you are required to withdraw a minimum amount every year or be subject to a hefty tax penalty. Ordinarily, the deadline for taking this required minimum distribution is Dec. 31st, but for your first distribution you are given until April 1st of the year following the year you turn 70½ to make the withdrawal.

Many investors make use of this three-month grace period. As of Dec. 31, 2013, some 40% of those required to take their first distribution had not yet taken the minimum amount, according to The Wall Street Journal in an article titled "Understanding Required IRA Distributions." That number of investors includes 14% who had not taken any distributions at all. If that is you, then the WSJ says you better get moving! If you miss the April 1st deadline, the IRS can penalize you up to 50% of the amount you were supposed to withdraw.

When do you take that initial required minimum distribution, and does that take care of all of that calendar year? It depends, the article says. If you turned 70½ last year and waited until this year to take all or part of your first required minimum distribution, you would still need to take your 2014 required minimum distribution by Dec. 31st of 2014. Likewise, withdrawals above and beyond the minimum in one year do not count toward required distributions in future years—you cannot apply it forward.

In which year is that first distribution taxable? The Wall Street Journal article says the basic answer is that the initial distribution is taxable in the year it is taken. So if you delayed taking it until 2014, the taxable portion of both your initial distribution and your 2014 distribution must be reported as income on your 2014 tax return. If those withdrawals are large enough, it could put you in a higher tax bracket this tax year. The financial institution that administers your IRA should be able to calculate your required minimum distribution and your IRA balance as of the previous year's end. Some IRA administrators will automatically calculate your required minimum distribution and then transfer it to an account of your choice, the WSJ says.

Can one have the financial institution that handles his IRA withhold the tax on his distribution, and, if so, whether the tax itself would still count toward his required minimum distribution amount? Yes to both parts of this question. In fact, unless you request otherwise, your IRA administrator must withhold federal (and, if applicable, state tax on your distribution), along with reporting withdrawals and any taxes withheld to you and the IRS on Form 1099-R.

Questions about IRA distributions, tax ramifications, and planning for retirement should be directed to an experienced estate planning attorney.  He or she will be able to help you put together the best strategy based on your needs and objectives.

For more information about Estate Planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website. 

Reference: Wall Street Journal (March 30, 2014) "Understanding Required IRA Distributions"

 

 

What Good is a Stretch IRA?

A “stretch IRA” is a popular estate planning strategy where the beneficiaries of an IRA (typically children or grandchildren) stretch out the required minimum distributions of an inherited IRA over their own lifetime. If your beneficiaries are young when they inherit, they could potentially enjoy decades of tax-deferred growth in the IRA.

A recent Forbes article discussed Stretch IRAs and their impact with two brothers, Wealth managers Tom and Robert Fross. In the article, titled "Should I Force My Beneficiaries to Stretch My IRA?," Tom thought it best to leave beneficiaries the full range of IRA distribution options. Why? Because trying to manage from beyond the grave does not allow for flexibility or changing family circumstances. Robert agreed but feels it is important to educate beneficiaries and ensure that they comprehend the benefits of stretching distributions across their own lifetime rather than withdrawing money all at once.

Indeed, “stretch IRAs” can be a worthwhile vehicle to allow children to get a head start on their own retirement savings. With proper planning, an inherited IRA can grow from a modest amount into a great sum of money, the Fross brothers agreed. However, they cautioned that it is critical to take some steps now to set your heirs up for success later. Robert explained that only the IRA's named beneficiaries are able to leverage stretch provisions, so you must name your children or grandchildren as direct beneficiaries of the account, rather than indirectly as heirs in your will or beneficiaries of a trust. They also suggest working with an estate planning attorney to guarantee that the current custodian (e.g., bank, investment company, or insurance company) will allow beneficiaries to take advantage of an inherited IRA.

Also, educate your beneficiaries about inherited IRAs and make sure they understand the tax and financial advantages involved.

For more information about Estate Planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website. 

Reference:  Forbes (March 12, 2014) "Should I Force My Beneficiaries to Stretch My IRA?"

 

 

Is Danger Lurking in Your Retirement?

Every well-built machine has at least some moving parts. When it comes to retirement investing, the dangerous moving part is — you. Early on, when you start saving, the problem of one’s own emotions often is subdued. You likely don’t have much money in your retirement accounts, and if you are in a workplace 401(k), not much say over how you’re invested anyway. In time, that changes. One day, 10 years down the road, you will take a look at a quarterly statement from your plan and realize “Wow, there’s some real money here!”

Many times this is the undoing of a retirement plan. According to a recent Forbes article titled "Avoid This Common And Dangerous Retirement Blunder," when the balance “odometer” rolls over a large, round figure like $100,000, people begin to think about borrowing against their 401(k) for a new car or a vacation. That is the first mistake many retirement savers make, the article points out. Taking money out of your tax-deferred accounts for spending means you will only have to pay it back. It is a loan to yourself and means that you lose any market gains in the intervening years, too.

That is not the biggest blunder, however. That comes when you have moved through two or three jobs. Workers in this situation should roll over their old 401(k) money into new workplace plans or roll them over into traditional IRAs.  However, Forbes says the problem—as well as the advantage—of an IRA is that you typically have to make your own investment choices.

The article suggests buying a target-date fund or a balanced fund to avoid the risks of a big mistake late in the game, but people often choose a different course. Many see their significant balances and figure, “Wow, if that’s what happened from my not paying attention, imagine what I could do by choosing my own investments!” And they do. This is sometimes called the “yard sale” portfolio with a little of this, a little of that—there is no logic to many of the investments, no rebalancing, no asset allocation — just a lot of investments in one account.

Locking in losses is the last blunder. As the portfolio balance falls older, independent investors see things getting worse and worse. When the stock market finally bottoms—and it cannot get any worse—the investor sells, locking in losses they cannot possible recover.

The Forbes article suggests owning a real portfolio that includes a variety of investments and hang on to them without emotion through all the ups and downs. Hedging against volatility as you age can help reduce the risk of an emotional blunder that will prove a costly mistake in your retirement planning.

For more information about Estate Planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website. 

Reference: Forbes (June 27, 2014) "Avoid This Common And Dangerous Retirement Blunder"

 

 

US Supreme Court Says IRAs Fair Game for Debts

The U.S. Supreme Court ruled that certain money inherited from individual retirement accounts can be taken by creditors to cover the debts of people in bankruptcy proceedings. In a unanimous ruling written by Justice Sonia Sotomayor, the court said inherited IRA money not received from a spouse isn't protected in bankruptcy proceedings.

"Nothing about the inherited IRA's legal characteristics would prevent (or even discourage) the individual from using the entire balance of the account on a vacation home or sports car immediately after her bankruptcy proceedings are complete," Justice Sotomayor wrote.

The Supreme Court ruling applies to inherited IRAs but not to other types of retirement accounts. It also clarified instructions in the Bankruptcy Code, as millions of baby boomers begin to leave behind unspent IRA money to families and loved ones.

The Wall Street Journal article, "Supreme Court Allows Creditors to Tap Into Inherited IRA Money," notes that courts have been divided on whether money that an individual inherits from an IRA should get special protection. Bankruptcy law protects certain property that creditors would want to seize to pay debts, which can include some equity in a person's primary residence, an inexpensive car or a few hundred dollars worth of household furniture. The reasoning behind this protection is that people need a base on which to rebuild their lives once they clear their debts. These same rules permit people to keep up to $1.3 million in retirement funds they have in an IRA.

This inheritance issue came up in the case of a couple who filed for bankruptcy in 2010. They inherited $293,000 of IRA money which the wife received when her mother died in 2001. Lawyers for the couple argued the money was protected from debts that stemmed from closing their pizza shop in 2009. The bankruptcy trustee sought those funds to cover, among other things, a $74,000 judgment in favor of the restaurant's landlord.

The Wall Street Journal article stated that last year more than 45 million U.S. households had some type of retirement account and the overall value of those accounts was more than $5.7 trillion in the second quarter of 2013, according to the Investment Company Institute, a Washington, D.C.-based trade association for U.S. investment firms. The WSJ said that it was not clear how many people file for bankruptcy with inherited IRA money in their possession.

For more information about Estate Planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website. 

Reference:  Wall Street Journal (June 12, 2014) "Supreme Court Allows Creditors to Tap Into Inherited IRA Money"

 

Take the Sting Out of Estate Planning

Recently rock legend Sting made headlines when he declared that his six children would be receiving little to none of his estimated $300 million fortune. He joked that he intended to spend all of his money before he died. But on a more serious note, he explained that he wanted his kids to develop a work ethic, and not let the wealth become “albatrosses around their necks.”

Sting's motive may be very admirable, and he can do as he pleases with his money; however, a recent article argues that there can be a big gap between over-indulgence and complete denial. Used the right way, your wealth can help you teach your child about using money wisely.

A recent Time article, titled "This is What Sting Should Have Done for His Kids, Instead of Disinheriting Them," lays out three ways you can use a small amount of your own money (during your lifetime) to motivate your children to be more productive and self-reliant without spoiling them rotten.

1. Save something for his college. You need not drop every dollar you have into a college savings account. Instead, set a little aside to show your commitment to your child’s education. It also ensures that he or she does not have to choose between assuming a huge student loan and not going to college at all.

2. Jumpstart retirement savings. When your child earns his or her first paycheck, you can again use a little money to teach a valuable lesson: open a Roth IRA on the child's behalf by April 15^th of the year after they get their first job. They will be able to deposit the lesser of their earnings, or $5,500. The article explains that a $5,000 deposit today into a 16 year-old’s Roth IRA earning 6% annually would be worth almost $100,000 by the time he turns 66, but if he deposits $5,000 into the Roth IRA every year for 50 years, the account could be worth roughly $1.5 million by the time he reaches 66.

3. Help with the house. The Time article quotes the National Association of Realtors, which says the median home price in the U.S. as of May of 2014 is $214,000. If your child’s (and/or their spouse’s) annual income is about $60,000, they should be able to qualify for a 30-year mortgage at about 4.0% to purchase a home in that price range. The monthly mortgage payment would be about $1,300. However, the biggest obstacle to the purchase of a first home may be the down payment of $42,000 (to make a 20% down payment). Consider helping your child meet that down payment requirement so they will not only enjoy the satisfaction of home ownership, but will also build equity in something with their own money.

It might also mean you have a place to stay if you emulate Sting and spend all of your money now.

For more information about Estate Planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), please visit my Estate Planning website. 

Reference: Time (June 25, 2014) "This is What Sting Should Have Done for His Kids, Instead of Disinheriting Them"