Blog Series: Five Easily Avoided Estate Planning Mistakes

Posted on March 29, 2013 by James Lange

Estate planning mistakes are made all the time and usually this is because the financial advisor/accountant/attorney has overlooked important issues. We have chosen to highlight five very common mistakes in this blog series. All of these mistakes are easy to avoid, as long as you and your trusted advisors know how to recognize them!

It is important to also consult with an attorney in your State in order to review whether or not these issues pertain to you. In any case, it is recommended to ask your estate planning attorney what the most common mistakes they encounter on a regular basis are, and bring up these issues with them for discussion.

Mistake 2 – Believing that having a will avoids probate.

Not true! Having a will does not mean you don’t have to go through probate! A will only directs your estate where you desire; in most cases probate is still required when the only estate planning tool is a will.

A big part of estate planning is deciding whether or not you should take steps to avoid probate. Probate is not necessarily a bad thing, and depends on many factors including the size and set up of your estate and the State in which you reside. In many cases, people choose to avoid probate as it is appropriate for their estate and there are usually legal fees and a significant amount of time required to go through the probate process.

The two most common ways to avoid probate are holding title as joint tenants and holding title in the name of a trust. It is also important to note that in most cases, beneficiaries of life insurance policies, retirement accounts, and annuities, are also not subject to probate.

This is only one common mistake. Again, please make sure that you consult a competent estate planning attorney to make sure everything in your estate is in order and fits perfectly with your individual situation!

Tackling the American Tax Payer Relief Act of 2012 in 5 Easy Steps!

Posted on March 15, 2013 by James Lange

Our friends over at Ed Slott’s website www.irahelp.com sent us a really great little one sheet last week and we wanted to share it with you! Ed Slott is one of our favorite radio guests and one of the top IRA experts in the country. We’ll break up the information for you over the next few days, and we hope you find it as useful as we did.

Step #4:Celebrate the return of Qualified Charitable Distributions (QCDs)!

QCDs are back retroactively through 2012 and extended through 2013. This will expire at the END of 2013. QCDs allow taxpayers required to take annual distributions from their IRAs to direct those withdrawals to charitable organizations and treat them as tax-free distributions. Special rules also apply in January 2013 to make 2012 QCDs.

Tackling the American Taxpayer Relief Act in 5 Easy Steps

Posted on March 14, 2013 by James Lange

Step #4: Utilize new provision for in-plan Roth conversions.

You no longer have to be eligible for a distribution from your employer plan to go through with a Roth conversion as long as the plan has a Roth option (i.e. 401(k) to Roth 401(k)). Key points to consider: 1) In-plan Roth conversions CANNOT be recharacterized; 2) You must make sure you have the money to pay tax on the conversion; 3) Roth employer plans HAVE required minimum distributions (RMDs); 4) You can utilize this provision for longer TAX-FREE growth in a Roth plan.

Tackling the American Taxpayer Relief Act of 2012 in 5 Easy Steps

Posted on March 13, 2013 by James Lange

Step 3: Be aware of these other KEY tax law changes.

The $5.25 million estate/gift/GST tax exemption and portability for the estate and gift tax exemptions are PERMANENT features of the law, and the top estate tax rate has climbed from 35% to 40%. Capital gains rates are the same EXCEPT for individuals in the highest income tax bracket, who will pay a 20% tax rate. A permanent AMT patch indexed for inflation was also instituted. The 2012 AMT exemption is $78,750 (married filing jointly) and $50,600 (single).

Tackling the American Taxpayer relief Act of 2012 in 5 Easy Steps

Posted on March 12, 2013 by James Lange

Step # 2 Plan with HIGHER taxes in mind.

The overall limitation on itemized deductions is back for those making $250,000 (single) and $300,000 (married filing jointly); personal exemptions will be reduced at the same limits; the payroll tax holiday expired with Social Security taxes going back to 6.2% from 4.2%; and the 3.8% healthcare surtax kicks in this year on net investment income of over $200,000 (single) and $250,000 (married filing jointly) along with a 0.9% surtax on wages at the same limits.

Tackling the American Taxpayer Relief Act of 2012 in 5 Easy Steps!

Posted on March 11, 2013 by James Lange

What is the American Taxpayer Relief Act of 2012?

This act addresses the expiration of certain tax provisions centered around what are called the Bush-era tax cuts. It tackles the tax revenue side of a Congressional deficit reduction plan, was passed by the United States Congress on January 1, 2013, and was signed into law by President Barack Obama on January 2, 2013.

Step #1: Understand the IMPACT of income tax law changes.

Roughly 98% of Americans will not be impacted by changes to the income tax brackets. However, individuals who file as single and make over $400,000/year or married filing jointly that make over $450,000/year will pay a 39.6% income tax rate.

Mistake 10: Not Reviewing the Costs Before Splitting the IRA into Inherited IRAs

Posted on March 3, 2013 by James Lange

We have seen many cases where the IRA is held in the form of an annuity product, with the insurance company as the custodian. I have read many contracts that impose costs or other expenses to split the account into Inherited IRAs for multiple beneficiaries. Please review your contract carefully to make sure there is no penalty before you make this election.

In the event you find out that there is a potential penalty, at least there is usually a solution:

Retitle the account as an Inherited IRA with multiple beneficiaries, but keep it as only one IRA.
Open up a self-directed IRA at a brokerage firm with the same title.
Transfer the Inherited IRA from the insurance company in kind via a trustee-to-trustee transfer over to the new self-directed Inherited IRA account.
Liquidate the annuity product that is held by the self-directed Inherited IRA account (there should be no penalty or income taxes because the annuitant passed away and it is being paid out all at once and into another IRA).
Once the proceeds come into this new self-directed Inherited IRA, then split it into the various Inherited IRAs for each of the beneficiaries.

Sounds like a lot of work? It is, and that is the reason why you need an advisor you can trust to guide you through the process and you will most likely want to review all of your IRAs at this time in order to avoid having all these problems in the future.

Mistake 9: Waiting until the last minute to make changes on the IRA.

Posted on March 2, 2013 by James Lange

Many advisors think that the IRA custodian will act promptly when dealing with these matters. However, many of these custodians are not familiar with all of these new rules and tax laws and will consider them an “exception.” They will often run these “special cases” through their legal department and it often takes a lot longer than you might think in order to finalize all of the paperwork. It often takes three months or longer for the IRA custodian to transfer the accounts and get everything retitled properly. This is especially true if you have multiple IRA accounts. Therefore, it is wise to make the decisions and final changes regarding the splitting of the IRA as soon as possible after the person passes away in order to give the IRA custodian enough time to process all this paperwork.

Mistake 8: Improper funding of the Exemption Trust, Martial Trust, Q-Tip Trusts, or and other Trusts.

Posted on March 1, 2013 by James Lange

While the following point is much less likely to occur due to the portability of exemption amounts between spouses it is still important to know the possibilty exists. It is also important to know just how easy this is to avoid by speaking with your advisor about your situation.

Let us assume that the beneficiary of the IRA was a revocable living trust (RLT) and that this trust states that upon the death of the first spouse, a new trust should be established and funded up to the current exemption equivalent. I have seen many cases where the attorney has “carved out” this exemption amount from the IRA in order to fund this exemption trust, and then suggested rolling over the difference into the surviving spouse’s IRA. Although this can be done, it has to be done properly!

I have seen countless examples where the exemption was in fact carved out and paid out directly into the exemption trust! One hundred percent of this money was subject to income taxation in one year, and if that isn’t bad enough, it was all taxed at the trust income tax rate brackets, which are usually much higher than individual income tax rates!

What should be done is to establish an Inherited IRA for the benefit of the exemption trust. Please remember that many attorneys and accountants have not heard of an Inherited IRA and believe that the exemption trust beneficiary would have to receive the money in order to have it funded. Please make sure that your financial advisor is aware of these complicated rules.

Again, this is an easy mistake to avoid based on new portabilty laws, but a situation involving funding of trusts for minors can come up. Remember that when people set up trusts for minors it is important the trust contains both the proper language to qualify for the stretch IRA and that the financial advisor properly titles the inherited IRA for the benefit of the trust established for the minor.

Information provided by MD Producer

Mistake 7: Not establishing the Inherited IRA properly.

Posted on February 28, 2013 by James Lange

There are a number of rules that must be met in order to properly establish an Inherited IRA:

Notification must be made to the custodian in writing.
The first minimum distribution must be taken no later than December 31st of the year following the year the person passes away. Note: if the decedent was receiving lifetime RMDs, the beneficiaries must ensure the RMD has been taken for the year of death.
The IRA must be retitled properly showing the following information (something that Jim has covered on the radio show more than once, due to the number of times mistakes are made on this key point):
1. The decedent’s name, with “deceased” or “decedent” after the name.
2. It must show that it is still an IRA.
Retitling must be done by December 31st after the year of death.

If these requirements are not met, then most beneficiaries will be faced with the following consequences:

If the orginal account owner was RMD age or older, the IRA must be distributed over the owner’s remaining life expectancy, based on the single life table.
If the orginal owner was under RMD age, the entire IRA account must be distributed no later than December 31st of the fifth year after the person passed away.
If the account title is not worded properly the entire account could also be subject to immediate taxation all in one year!

Make sure you discuss all the vaious laws and titling issues with your advisor when establishing an inherited IRA.

Information adapted from MD Producer material