Overland Park Attorney

If Death Occurs, What Becomes of the RMD on an Inherited IRA? What if you are in Overland Park, KS?

If the IRA owner died before their RBD, there is no year of death RMD that you need to take. However, if the IRA owner died after their RBD, there may be an RMD that you as their beneficiary have to take that year.

When a loved one is no longer with us, do all of their financial and legal affairs cease? For the most part – yes. But when the loved one is over the age of 70 ½, there could be an exception in the form of their final RMD on their IRA.

Many surviving designated beneficiaries of a decedent’s IRA do not realize that Required Minimum Distributions (RMDs) have to be taken annually and up to the end, even if the owner died earlier in that year. In fact, the year of death IRA distribution is a requirement that is easy to miss.

Recently, The Slott Report took up this matter in an article titled “Taking the Year of Death IRA Minimum Distribution.”

Essentially, the RMD is required because there is an attending tax burden involved. As you likely are aware, any individual over the age of 70 ½ must take RMD from their IRA. When it comes to the year of death for such an individual, their designated beneficiary of the IRA beneficiary must take the RMD even before inheriting the IRA itself.

OK; simple enough. The trouble is that it is difficult to track whether the decedent had already taken their full RMD in the year of their death. For example, were they on a monthly installment plan? Were they waiting until the last moment? Did they miscalculate?

So, what is the penalty for failing to take the full RMD? Would you believe a whopping 50% of the shortfall?!

If you are the IRA owner, then you can see how accurate and communicated recordkeeping can help your loved ones (i.e., your designated beneficiaries) avoid an unpleasant treasure hunt to determine the post-mortem status of your RMD.

Reference: The Slott Report (April 30, 2013) “Taking the Year of Death IRA Minimum Distribution”

For more information on IRA's and the associated Estate Planning issues - as they relate to Overland Park, KS, please visit my website.

Business Succession in the Form of an ESOP - in Overland Park, KS

Known as employee stock-ownership plans, or ESOPs, the move is being embraced by smaller firms, especially those struggling to find buyers during the weak economy.

Businesses are formed in many ways, and we have come to know those varying abbreviations (S-Corp, C-Corp, LLC, LLP, LP, LTD, and so on and so forth) that represent each varying business.  But when it comes to passing on your business, there is another acronym to consider: the ESOP.

So, what is an ESOP, what can it do, and is it right for your business?

ESOPs, or Employee Stock Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently highlighted by Congress and featured by The Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?” Planning to exit a business is all about doing one of two things; either restructuring the business or selling it outright. With an ESOP you accomplish both goals and build the company around the very employees that compose the company in the first place.

Rather than going out and hunting for a buyer, the employees become vested in the stock ownership of their own company. In turn, the ownership stake simultaneously becomes a retirement asset while the ownership of the founder is bought out.

Now, if you are already familiar with this approach, it may be worth reading the original article since there are certain limitations affecting the employees-turned-owners. The article gives examples of how an ESOP can work a win-win for all concerned under the right circumstances. These examples include Bob’s Red Mill, for example, or, from a different industry, Manson Construction Co.

ESOPS have been a powerful tool in an otherwise soft market for business transfers. Accordingly, ESOPS are worth a good look, and then even a second look, as a unique and proven business succession strategy.

Reference: The Wall Street Journal (April 17, 2013) “Founders Cash Out, but Do Workers Gain?”

An Estate Planning Tool Disguised in Retirement – The Roth IRA - in Overland Park, KS

Seniors who convert a regular IRA into a Roth account can reduce their estate taxes and eliminate the income tax their heirs would otherwise have to pay on withdrawals taken from an inherited regular IRA.

Even though a tool may not originally be designed for the job at hand, it doesn’t mean that the tool won’t get the job done. One such tool in the estate planning world is the Roth IRA.

As with an IRA of any stripe, the Roth IRA is a retirement account. Unlike its plain vanilla IRA cousin, however, the Roth IRA offers significant estate planning opportunities. When it comes to retirement and estate planning, wouldn’t it be nice to kill two birds with one stone?

A recent SmartMoney article titled “Estate Planning With a Roth IRA” tackles the salient differences between a plain vanilla IRA and a Roth IRA, noting that a fundamental distinction is when the income tax is paid. Is it upon deposit or at withdrawal? The article also explores other important distinctions.

You pay taxes only upon withdrawal from a plain vanilla IRA, not upfront upon contribution. Result: every cent can appreciate safely without taxation until the day that you (and the IRS) can start drawing from the account. In addition, shortly after you reach age 70 ½ annual withdrawals become mandatory. These are known as Required Minimum Distributions (RMDs).

On the other hand, a Roth IRA is a plain vanilla IRA in reverse. You pay income taxes upfront at deposit. Result: every cent post-contribution appreciates safely without taxation thereafter. Period. Obviously, this tax-free feature can come in handy for retirement, but consider its inheritance benefit too. What if you were to leave a Roth IRA to an heir by listing them as a beneficiary? First, there is no income taxation burden that accompanies the Roth IRA when withdrawn by your heir. Second, the heir can elect to receive it as a tax-free lump sum or, what is often more useful, take scheduled RMDs over their lifetime much like an annuity (but without any income taxes due).

Be sure to consult with qualified legal and financial counsel to evaluate how to leverage a Roth IRA for yourself and your loved ones.

Reference: SmartMoney (February 5, 2013) “Estate Planning With a Roth IRA”

For more information about various aspects of Retirement Planning, please visit my website.

Avoid These Five Retirement Planning Mistakes, in Overland Park, KS

Unfortunately, planning for retirement isn’t an exact science. There’s no one-size-fits-all when it comes to saving the right amount for your golden years--which is part of what makes retirement planning so nerve-wracking for a lot of us.

Although there is no exact equation for retirement planning, there are some common blunders to avoid in the process. A recent NBC News article breaks down these mistakes:

1. 1.      Don’t be overly optimistic

While optimism is usually a welcomed attribute, when it comes to retirement, a more pessimistic view may be more appropriate. According to Tami Simpson, CFP and president of Wealth Financial Group West, a retirement management services and financial consulting firm in Southern California, “too much positive thinking isn’t the best recipe for saving…a healthy dose of pessimism is actually a good thing for your retirement planning.” Simpson says that some people put off saving money because they “hope” things will simply fall into place down the road. People imagine the best case scenarios and don’t account for unexpected events that could occur. 

1. 2.      Don’t underestimate your spending

Many people underestimate how much they’ll be spending once they hit retirement. Wells Fargo financial adviser Fay Sheppard reminds her clients that “retirees often take more vacations, make more home improvements, and dine out more frequently than they did before they left the workforce.”

When planning for retirement, people need to be realistic and look at income, inflation, long-term care needs and emergencies.

1. 3.      Don’t focus only on investments

According to Jeff Yeager, author of How To Retire The Cheapskate Way: The Ultimate Cheapskate’s Guide to a Better, Earlier, Happier Retirement, “paying off all of your debt before you retire is as central to a good long-term plan as the size of your retirement fund.” He believes that the greatest retirement asset is something you don’t have: debt.

1. 4.      Don’t worry about being “selfish”

When it comes to preparing for retirement, experts says we must concentrate on our own financial well-being. This means that we stop paying for our children or helping friends or relatives. “It’s important to leave your retirement funds intact for yourself, no matter how hard it may seem to turn somebody down if they ask for money.”

1. 5.      Don’t put off your financial physical

Similar to our yearly health physical, Jack Keeter, CFS, and president of Jack Keeter and Associates, advises that a periodic “financial physical” is the key to a healthy retirement. He insists that everyone meet with a financial professional before there’s a problem and review your financial health.

References: NBC News (December 6, 2012) “5 retirement-planning mistakes to avoid”

For more information on retirement planning, please visit my website.

“Facing Retirement” Gets a Whole New Perspective in Overland Park, KS

Executives of Bank of America’s Merrill Edge program have taken a page from The Christmas Carol to prompt investors to change their financial behavior: They’re offering them a glimpse of their future selves.  Through a new online tool that ages a consumer’s photo, investors can see what they’ll look like many years down the road.

It can be hard for us to really believe we are facing retirement.  Sometimes, we just don’t want to admit that the time is fast approaching. We’ve all been told that we need to save for retirement long before the time arrives, but it’s hard to think ahead of how things will change for us.  If only we could ‘picture” it …

As reported in a recent Financial Planning article, executives of Bank of America’s Merrill Edge program have altered the face of retirement planning, literally. A new online tool, Face Retirement, ages a consumer’s photo so investors can see what they’ll look like several years down the road.

The new tool is supposed to motivate Americans to save more for their retirement and to engage in conversations about their financial future. The tool was prompted, in part, by a Stanford University experiment finding that those who exposed “themselves” to their “older selves” were more likely to begin thinking about retirement and planning for it than those who were not exposed to the images.

The tool performs other functions as well. It can show a potential investor what prices will look like with inflation in the future. And most importantly, the tool can predict the amount of savings a person will need at the age of retirement.

If you need some extra motivation to start saving more for retirement, check out the new tool mentioned above – hopefully, you’ll have a better “picture” of your future.

 References: Financial Planning (December 6, 2012) “New Tool Helps Investors Face Retirement, Literally”

 Stanford University (2011) “Increasing Saving Behavior Through Age-Progressed Renderings of the Future Self”

 Merrill Edge (2012) “Face Retirement”

For more information on Retirement Planning in Overland Park, KS, please visit my website.

SMALL BUSINESS / RETIREMENT PLANS

There are quite a few different retirement options out there and many specifically designed for small businesses

If you are a small business owner, you may be seeing a slight uptick in your business – and your confidence. In fact, many small business owners are starting to think about hiring a few more people, and perhaps even offering a few employee benefits again … such as a retirement savings plan. Stuart Robertson of Forbes  wrote a brief, concise overview of the top three retirement plans available for small businesses (those with 25 or fewer employees).

Before you start researching options, Forbes suggests you ask yourself these five questions:

1. Can I afford a match for my employees?
2. Do I want to allow employees to contribute to the plan?
3. If so, will some want to save more than $11,500 a year?
4. Do I need flexibility to access the funds prior to retirement for emergencies?
5. How important are managing future taxes (a Roth option) versus my tax needs today?

Your answers to these questions will help you choose between what Forbes considers the top three options: the 401(k), the SEP IRA, and the SIMPLE IRA.

The 401(k), which is probably the most well known, is also the most versatile in that you can choose to match employee contributions or not and provide a vesting schedule. It’s also versatile for employees in that you can enable penalty-free access to the funds (by way of loans) and offer “catch-up” contribution opportunities to employees over age 50. Finally, you could also elect for Roth 401(k)s that switch taxation to contribution rather than distribution, if you or your employees fear higher taxes in the future.

The SEP IRA, or “Simplified Employee Pensions” is exactly that, the modern equivalent of a pension. It means that only the employer contributes to the fund, and must do so for all employees, rather than the employee contributing and the employer matching or not. The penalties are generally smaller, and it’s fairly easy to start, but this is because it is fairly stripped down in comparison to the 401(k) as there is no Roth, no catch-up contributing, no profit-sharing, and no loan option.

The SIMPLE IRA or the Savings Incentive Match PLan for Employees, offers the third option and lies somewhere in between the previous two. It is affordable, like the SEP IRA, but it operates by employer matching of employee contributions and offers catch-up options. Nonetheless, it is not quite as expansive as the 401(k), offering fewer options and having smaller contributions allowances.

These of course, are just outlines to get the ball rolling, and although more information can be found in the original article (which has a helpful chart) you will also want to consult your professional advisor.

Please visit my website to learn more about Retirement Plans and the interaction they play with Small Business endeavors.

Time Is Running Out on Tax Planning Options - Overland Park, KS

Much of what is being written on the prospect of the expiration of the Bush-Era tax cuts focuses on its income tax implications. Yet, I believe that there is a greater likelihood that the estate and gift taxation aspects of this looming expiration are both less likely to be continued in prospective new legislation, and have a far more significant dollar impact for many. Accordingly, consistent with my past postings, there are more definitive gifting actions that should be considered prior to year-end – that is, NOW!

Trick-or-treaters have come and gone, the turkey is on its way, and before you know it the holidays and the year itself will be over. What then? For many Americans the new year may find us in the grip of a potentially disastrous tax predicament, either the fiscal cliff itself or something else entirely.

When it comes to estate and gift taxes there are some actions you may want to take while it is still 2012. This matter was taken up in a recent Forbes article appropriately titled “Year-End Estate Tax Considerations -- TIME IS RUNNING OUT.”

Yes, time is running out on your ability to take advantage of more than a few powerful tax tips and tricks. In fact, this countdown clock has been ticking toward this very precipice since the final days of 2010. If you haven’t been carefully planning all along, then now’s the time to jump to it! What can be done is another question and, while it depends on your unique goals, the original article offers a few examples of your options before the buzzer sounds.

Another Forbes article titled “Major Estate Tax Change Looming - Don't Be A Last Minute Louie” points out rather directly how 2012 has been a year of waiting – of waiting for Congressional action, of waiting for an election to come and go, and of waiting for a settled law to base your planning around.

Instead of waiting, however, the best advice would seem to be to take action as best we can.

Remember: this is an excellent time to schedule a consultation with your legal, financial and tax advisors. Don’t go it alone, as too much is at stake.

References: Forbes (October 23, 2012) “Year-End Estate Tax Considerations -- TIME IS RUNNING OUT”

Forbes (October 26, 2012) “Major Estate Tax Change Looming - Don't Be A Last Minute Louie”

For moe information on Estate Planning/residual tax aspects, please visit my website.

ELDER LAW / QUALIFIED RETIREMENT PLANS IN OVERLAND PARK, KS

“For the longest time, it seemed like almost a no-brainer that people, when they were in their income-earning stage, would be in a higher tax bracket … That may or may not be true in the future.” -- Marcia Wagner, principal of Boston-based Wagner Law Group, a law firm specializing in employee benefits

 If you’ve been a diligent saver and keeping an eye on your 401(k) for all these years, it’s important to remember that the tax-man also has been looking on with interest and waiting for his cut. It’s simply too easy to forget, but a traditional IRA is tax-deferred until withdrawal, so that balance is deceiving. What is more, it means that the tax you will owe has yet to be decided. A recent MarketWatch article points out the strong possibility of higher tax rates for 401(k) savers once they reach retirement.

The value of delaying a tax hit into retirement, one of the principal benefits of a traditional IRA, has always been to avoid heftier taxes and secure what are expected to be lower tax rates whilst in retirement. Unfortunately, those expectations may not pan out for diligent savers with large IRAs. If your account is robust enough to keep you at or near your present income, then it’s also enough to keep you at or near your current tax bracket. If you are far from retirement then this may not be too distressing. After all, while you may be paying similar taxes upon withdrawal, your retirement investments are working for you with tax-free appreciation in the meantime.

Given the tax-rate outlook, savers should assess ways to diversify their tax situation in retirement. That means at least considering putting a portion of the amount you save for retirement into a Roth IRA – or a Roth 401(k) if one is offered by your employer.

“If you think taxes are going up, it makes sense to pay your taxes when rates are low, put the after tax amount into the Roth and take out your money tax-free when tax rates are high,” said Alicia Munnell, director of Boston college’s Center for Retirement Research and a professor at the school’s Carroll School of Management.

As summed up by Marcia Wagner of Wagner Law Group, “For the longest time, it seemed like almost a no-brainer that people, when they were in their income-earning stage, would be in a higher tax bracket … That may or may not be true in the future.”

For more information on Elder Law and Qualified Retirement Plans in Overland Park, KS, please visit my website.