Paul O. Dillon, Attorney at Law

How to Help Heirs Prepare for an Inheritance

If your family doesn’t talk about estate planning, including incapacity, death, or money, your heirs aren’t likely to know what to do if and when you become incapacitated, when you die or how to manage your assets when they become their inheritance. This is all too often the case, but it doesn’t have to be; according to a recent article from Madison Daily Leader, “Are your heirs ready to receive an inheritance?”

When an inheritance arrives, it’s accompanied by emotional, financial and legal issues. Having everyone prepared and informed can make the difference between a squandered inheritance, an inheritance consumed by taxes, or an inheritance wisely managed and benefiting one or more generations.

There are key issues to discuss, including matters to cover with an estate planning attorney.

Communicate with your family about your estate plan, which is more than a will. Incapacity planning includes a Power of Attorney and Healthcare Power of Attorney, two documents allowing you to name someone else to act on your behalf if you cannot express your wishes. A living will tells loved ones your wishes regarding end-of-life care. With it, your family will know if you want to be kept alive by artificial means. Without it, they’ll have to guess.

Sharing the contents of your will allows loved ones to know what to expect. They may not all be happy with your decisions. However, it won’t be a surprise and will be less likely to spark disputes after you have passed.

Do your heirs know how to manage money or other assets? If you’re leaving your heirs wealth in the form of stocks, real estate, IRAs, 401(k)s, cash, or cryptocurrency, they’ll need to be prepared to accept the assets. If your estate includes a vacation home, is there a plan for sharing it among heirs? These issues will be more manageable, if heirs understand what they are inheriting and what they’ll need to do.

An estate plan should address taxes for the people creating the plan and their heirs. While your family may not have to worry about federal estate taxes, some states still have inheritance and estate taxes. Withdrawals from certain types of inherited accounts may incur state and federal income taxes, which could take a bite out of their inheritance. If inherited assets are sold for more than they were worth at the time of inheritance, there may be capital gains taxes.

Every estate has some expenses to be considered, including funeral costs. If the decedent has a mortgage and the home is left to heirs, they may need to sell it quickly before expenses mount. The estate plan should include an inventory of all liabilities and assets, so the executor can address any outstanding debts.

There’s a lot to unpack when managing an estate. Start by having an estate plan created with an experienced estate planning attorney or update an existing plan to be sure that it still achieves your wishes. Talk with heirs so they understand your intentions. Leaving a legacy of caring takes many forms, and this is one of them.

Reference: Madison Daily Leader (Nov. 23, 2024) “Are your heirs ready to receive an inheritance?”

Do You Have a Large IRA You Don’t Need for Retirement?

John and Sally’s problem is a nice one to have. However, it is still a problem. They are rightfully concerned about the taxes generated by Required Minimum Distributions and any taxes heirs may face.

Their two adult children would currently be required to empty the IRA within ten years of their parent’s death. Depending on their ages, these taxable withdrawals could hit during their peak earnings years. The $1 million IRA could potentially lose 40% of its tax value. If John and Sally’s estate exceeds the federal or state tax exemption levels, their heirs could pay a combined estate and income tax burden of 60%-70%.

A recent article from Forbes, “Don’t Need That IRA For Retirement? Here’s What You Can Do With It Instead,” provides several options to consider.

IRA Disclaimer to Pass Assets to Grandchildren. Adult children could disclaim part or all of the IRA, passing all or a portion to grandchildren instead of the children. The grandchildren would still have to be content with the ten-year rule for withdrawals. They are in a far lower tax bracket than their parents. The original IRA owners would need to set up a special IRA trust to restrict how funds could be used. They might specify the funds to be used for education, a down payment on a first home, or medical care. An experienced estate planning attorney can help set up a trust to reduce the tax impact on the family and enhance the grandchildren’s lives.

Create a Testamentary Charitable Remainder Trust. The IRA could be left to the trust to create a lifelong income stream for the children. The benefits are twofold: steady income while protecting the principal and spreading tax liability over many years. Upon the death of the heirs, the balance in the trust is donated either to a charity of the parent’s choice or a Donor Advised Fund. If the couple wishes to replace the amount of money given to charity, they can buy a life insurance policy for their children to benefit the grandchildren.

Buy a Guaranteed Life Insurance Policy. Purchasing a life insurance policy with the RMDs would add an asset outside the probate estate. The income tax-free proceeds could be used to pay taxes on the remaining IRA or become an inheritance. The IRA could also be bequeathed to a charity, and life insurance proceeds would replace the IRA inheritance.

Qualified Charitable Distributions During Life. For philanthropically minded families, a QCD allows IRA owners to contribute funds directly to qualified nonprofits once they turn 70 ½. The QCD does not count as income, so John and Sally can keep taking the standard tax deduction.

Early Distributions Before Reaching Age 73. John and Sally could take their distributions before they reach the required minimum distribution age, spreading withdrawals over extended periods of time. The tax burden would be evened out over time.

These options should be reviewed with an experienced estate planning attorney to be sure they don’t undo other estate planning strategies created to pass wealth across generations and support their future.

Reference: Forbes (Nov. 25, 2024) “Don’t Need That IRA For Retirement? Here’s What You Can Do With It Instead”

How Professionals Use Estate Planning

Estate planning encompasses many aspects of an individual’s life, including asset management, wealth transfer and tax planning. With the help of an experienced estate planning attorney, a secure financial future and protection for loved ones can be accomplished. A recent article from mondaq, “Estate Planning for Professionals” provides useful details.

Estate planning includes protecting personal assets from creditors. The tools most often used include trusts, retirement accounts and insurance. Which type of trust is needed depends upon each person’s circumstances and should be tailored to meet your needs. Available trusts include gift trusts, revocable trusts, marital trusts, trusts to benefit children and special needs trusts, to name a few. Trusts also transfer business assets out of direct ownership while minimizing estate taxes.

Retirement accounts, including IRAs, are considered savings vehicles but serve other purposes. Certain retirement accounts include ERISA spendthrift protections, which also allow unlimited accumulation free from creditor claims while protecting someone from taking too much out of their account. ERISA, a federal law, does not protect IRAs, so any protection for the IRA is state-specific. In some states, assets in IRA and Roth IRAs are protected from creditors in case of bankruptcy.

Business owners are often advised to use LLCs and corporations to protect assets from creditors. However, the entity used depends upon the nature of the business and the owner’s circumstances. Keeping business and personal assets separate is a foundation of estate planning, which should also incorporate retirement and succession planning.

Succession planning should be done as soon as a business reaches a certain level of stability and success. If family members are part of the business, assigning key roles, clarifying responsibilities and planning for how ownership will transfer when the founding owners decide to retire or if they die while still operating the business needs to be in place. How the business will be transferred, which can occur in many different ways, must be clarified.

Divorce is an unpleasant fact of life for many families. Protecting assets must be weighed along with maintaining relationships, particularly where children are involved. A pre-nuptial agreement for the professional or business owner should be part of planning for marriage. Drafting the document when the relationship is good can clarify issues and hopefully preclude some acrimony if the marriage doesn’t go well.

An estate plan requires time to prepare, as documents including a last will and testament, power of attorney, healthcare power of attorney, advanced directives and trusts all require careful drafting. Any estate plan must be reviewed every few years to ensure its efficacy.

Reference: mondaq (Oct. 18, 2024) “Estate Planning for Professionals”

It’s Not Too Soon for Generation X to Start Estate Planning

Adults born between 1965 and 1980 are often called the “sandwich generation” as they sometimes support older children who are still figuring out who they want to be when they grow up and caring for aging parents. While retirement may feel far away, says a recent article from Kiplinger, “Come as You Are: Wealth Management for Gen X,” it’s on the horizon, and planning for the future should start now.

Some of the tools used for retirement planning include 401(k) plans, which are tax-deferred plans from an employer. If your employer offers matching funds, try to contribute enough to take advantage of the match. You can also use a personal IRA to make tax-free annual contributions.

With changes from the SECURE 2.0 Act, you can open and contribute to a 529 College Savings Account and then roll a portion of unused funds into a Roth IRA once the account has been opened for 15 years and the funds have been in the account for at least five years. There are rollover limits, but this might be a good fit for retirement savings. Commonly, 529 funds are used for various educational purposes, so even if your children are past college, your grandchildren might use them for private school, not just college.

The one constant in life is change, and estate planning documents created when your children were little need to be reviewed and possibly updated. If the last time you thought about your will was when your adult children were born, you should schedule a review with your estate planning attorney. Changes like marriage, divorce, death, financial ups and downs and changes in the tax law all call for updates to wills.

If you don’t have long-term care insurance, now is the time, while you’re still relatively young and healthy enough to be able to buy it. Insurance companies now offer hybrid policies combining life insurance with a long-term care insurance policy rider.

Digital assets are a relatively new asset class requiring estate planning. Speak with your estate planning attorney to be sure your estate plan documents reflect your digital life. If you are active on social media, investing in cryptocurrency, or own an online business, you have digital assets and need to protect them.

Be proactive about estate planning to protect yourself now and your loved ones after you’ve passed. Just as retirement is on the horizon, so are the inevitable events of aging. Make an appointment to see an estate planning attorney to learn your needs, now and in the future.

Reference: Kiplinger (Oct. 7, 2024) “Come as You Are: Wealth Management for Gen X”

How to Create an Estate Plan with a Blended Family?

Blended families are not as unusual as they used to be. However, the financial and legal challenges of combining two families haven’t changed. If your future includes a combined family with stepchildren and stepparenting, the recent article from Kiplinger, “How to Navigate Finances as a Blended Family,” has useful information to consider.

Prenuptial Agreement. A prenup is used to clarify expectations regarding assets and debts. How assets are to be divided between children from past marriages or any future grandchildren can be addressed in a prenup and your will. If you come to the marriage already owning a home or a business, a prenup should be used to clarify your future spouse’s ownership interest. If your spouse-to-be has debts, a prenup covers how premarital debt will be handled.

Shared Expenses. Hoping financial matters will work out themselves is not a plan for a blended family. Will you set up joint checking accounts? Who will be responsible for biological or adopted children’s expenses from prior marriages? What expenses will be split? Single parents of college-age children need to know that if they marry, both spouses' incomes are used on applications for financial aid.

Estate Planning Updates. Everything related to estate planning, from your will, trusts, insurance policies and health care directives, must be updated when you marry again.

Your will must be updated to reflect your wishes for assets to go to children from a prior marriage and your spouse. It’s easy for children to be disinherited in a blended family, requiring special attention. If there is no will, the state’s laws will be applied. This may not be what you wanted.

Beneficiary designations need to be updated. The person named as a beneficiary on accounts like IRAs, SEPs, pensions and life insurance policies receives assets directly, regardless of what the will may state.

You may want to establish a Revocable Trust to take assets from your “probate estate” and provide for children. Your new spouse may be the trustee, or you may choose an adult sibling to administer the trust. You may want to update the trustee or beneficiaries if you have trusts.

Medical directives must be updated so your new spouse can be involved in your healthcare. Privacy laws are strict, and a new spouse might be shut out from making healthcare decisions without new documents. These include a Health Care Proxy, also known as a Medical Power of Attorney, HIPAA Release Forms and Living Will. Your estate planning attorney will know what documents are used in your state.

Estate planning is not as romantic as planning a wedding. It is still a sure signal to your intended and your family to prepare for a future based on responsibility and caring.

Reference: Kiplinger (Oct. 18, 2024) “How to Navigate Finances as a Blended Family”

What are the Rules About Inherited IRAs?

It’s fun to imagine a tax-free, no-strings-attached inheritance. However, for most people, an inheritance comes with taxes and distribution rules, some of which are complicated. An Inherited IRA is one of those, says this article from Morningstar, “Inherited IRAs: What do Know About Taxes, RMDs, and More.”

With an Inherited IRA, your relationship with the original account owner impacts what you can and can’t do with your windfall. Provisions in the SECURE Act made Inherited IRAs a little less attractive, especially compared to Inherited Roth IRAs. For some, the rules are too much to navigate, and they take the entire amount of an IRA in cash and pay taxes out of their inheritance, giving up a third or even a half of an inheritance. It’s better to seek the guidance of an estate planning attorney and preserve as much of it as possible.

There are three different kinds of IRA beneficiaries:

Eligible Designated Beneficiary. This is the spouse of the IRA owner, a minor child or children of the IRA owner, a person who is disabled or chronically ill, or a person who is not more than ten years younger than the IRA owner.

Designated Beneficiary. This is not your spouse and doesn’t fit any of the above categories.

Non designated Beneficiary. This is a “nonperson entity,” i.e., a charitable organization or estate.

Which category you’re in determines what your inheritance options are. The best candidate for an inherited IRA is a spouse. They have the option to put the assets into a properly titled Beneficiary IRA, roll it into their employee plan, or transfer funds to their own IRA.

Changes to IRA distribution rules from the SECURE Act impacted designated beneficiaries the most, the most common person to inherit an IRA. The new rule mandates that all funds must be taken out of the account by the end of the tenth year the account was inherited.

You’ll want to speak with your estate planning attorney to learn how your IRA inheritance may impact your current estate plan, since it may change how assets are distributed to your own beneficiaries. You may also want to consider converting some of your own IRA funds into a Roth IRA. Taxes are paid when funds go into the Roth IRA. However, beneficiaries don’t pay taxes on withdrawals.

Inheriting an IRA can lead to changes in your life as well as your estate plan. Take the time to consider your short-term and long-term goals, then consult with an estate planning attorney to make sure you make the best choice for your situation.

Reference: Morningstar (Sept. 13, 2024) “Inherited IRAs: What do Know About Taxes, RMDs, and More”

Estate Planning Success Supported by Speaking with Heirs

Because we are reluctant to discuss wills, many families only learn what their loved ones want to happen with their property after funeral services, and grief has made everyone fragile. A recent article from Success, “Will Power: Why Transparency in Estate Planning Matters,” explains how family members can share their wishes with loved ones during difficult times.

People not used to dealing with large sums of money may not have plans for tax-efficient wealth transfer. This includes parents who have devoted their lives to saving for retirement and need a plan both to use their accumulated wealth and pass it on to the next generation. Without an estate plan, inheritances could be diminished or lost entirely to taxes.

For beneficiaries, knowing they may be receiving an inheritance should lead to advance planning. Inherited IRAs, for instance, need to be inherited and retitled correctly, or the entire amount could be subject to taxes. Anyone expecting to inherit assets should speak with an estate planning attorney to learn what steps they need to take beforehand.

Discussions about inheritances and last wishes are opportunities for families to connect on a deeper level than planning a Thanksgiving menu. Providing ample time to have these discussions can also allow families to work through any issues before it’s too late.

These are not easy conversations. They may not be possible for every family. Another option is to create a personal message via video or write a letter explaining your intentions. Whichever way you decide to communicate your wishes, it doesn’t need to be an overly long message. A simple explanation of what you’ve decided and why may be enough.

When you create an estate plan, start by inventorying all your assets, checking how they are titled and finding out which assets have beneficiary designations. Assets like life insurance policies, investment accounts and some bank accounts with beneficiary designations pass directly to beneficiaries and are not included in your probate estate. Check on beneficiary designations to make sure you’re not leaving a surprise present to a college pal you haven’t spoken to in three decades—unless you want them to receive a surprise.

Be especially careful if you decide not to give your heirs equal distributions. This can often lead to litigation against the estate, assets lost to legal fees and damaged family relationships. Your estate planning attorney will have strategies for how you might distribute your assets to be fair to all of your loved ones.

Surprises are good for birthday parties but bad for estate planning. Revealing a hidden secret in a will after you have passed will shadow your legacy.

If you haven’t updated your will in more than three or four years, now is a good time to tackle this task. Include your new, up to date will in a folder with other documents, including Power of Attorney, Living Will, Healthcare Proxy and other estate planning documents. Ensure that your executor knows where the folder is, so it can be accessed in case you become incapacitated or pass.

Having an estate plan created by an experienced estate planning attorney, who will be able to guide you through the process, is a gift to the family. You’ll enjoy the peace of mind of knowing you did the right thing.

Reference: Success (Sep. 12, 2024) “Will Power: Why Transparency in Estate Planning Matters”

Can an Irrevocable Trust Be Changed?

Most irrevocable trusts are created to serve for generations. However, life and tax laws change. The terms of the trust sometimes simply don’t work for the family any more. An article from Kiplinger, “Can You Change an Irrevocable Trust? Yes, But Be Careful,” explains how changes to irrevocable trusts can be made, with a few caveats.

Changes to an irrevocable trust shouldn’t be done without the guidance of an experienced estate planning attorney. Be very clear about why you want to make any changes. Make sure that you understand what your choices are for making changes. You may learn that you can’t do exactly what you have in mind. If this is the case, find out what changes you can make. Understand the tax consequences, which could be considerable.

Why would you want to make changes to an irrevocable trust? In most cases, a trust created twenty years ago no longer serves its purpose. Other reasons include fixing errors in drafting the trust, changes in family circumstances, needing to fund a Special Needs Trust, the death or incapacity of a trustee or successor trustee and permitting investment flexibility.

There are also tax-based reasons to change an irrevocable trust. You’ll want to make changes if you want to move the trust to a state with lower income taxes, include or exclude assets from a beneficiary’s estate, convert a grantor trust to a non-grantor trust, change provisions for IRA distributions, or qualify a trust to own stock in an S corporation.

How do you actually make the changes to the trust? Start by reviewing the trust with your estate planning attorney. The trust may already contain language permitting changes to be made. The trust terms may also block your usage of certain trust strategies.

Review the state’s governing laws. Laws about trusts may have changed since the trust was originally created. Some states, including New York, Delaware and California, have “decanting” statutes, meaning one can “pour” assets from one trust into another. Your estate planning attorney will be up to date on these laws.

Consider a trust modification. Depending upon the state’s laws, you might be able to make changes without court involvement simply by obtaining and documenting beneficiaries' consent. In some states, you’ll need to obtain approval from the court.

Be mindful of tax implications. If the trust assets will be included in a beneficiary’s estate, this could be a good thing—or a bad thing. Assets subject to estate tax receive a step-up in income tax basis. Therefore, having these assets in the beneficiary’s estate might be costly.

Changes to the terms of the trust may make sense as your life progresses and laws change. Just be certain to make changes with the guidance of an experienced estate planning attorney.

Reference: Kiplinger (Aug. 26, 2024) “Can You Change an Irrevocable Trust? Yes, But Be Careful”

Retirement Savings Account Changes and Financial Decision Making

Keeping track of all the changes concerning retirement savings accounts and estate planning laws is not an easy task. However, there are some things you’ll want to know as 2024 moves forward. According to a recent article from The Wall Street Journal, “Changes in Retirement Savings Rules to Know Before Year’s End,” not knowing could impact retirement finances. Some of these changes include:

The End of RMDs from Roth 401(k) Plans. You use after-tax dollars to add to a Roth 401(k) plan. This is how contributions have always worked for Roth IRAs. Required Minimum Distributions (RMDs) had to be taken from Roth 401(k) plans. However, in 2024, this is no longer the case. If you meet other qualifications, you can take as much or as little as you like from your Roth 401(k), just as you do with a Roth IRA.

401(k) Catch-Up Contributions for High Wage Earners Must Go into Roth Accounts. Starting in 2026, if you are participating in a 401(k) plan, are age 50 and older, and if your annual income exceeds $145,000, you’ll have to make your catch-up contributions on a Roth basis. The income benchmark is indexed to inflation; your spouse’s income does not impact this change. This provision also does not affect Roth IRAs.

More Potential Tax-Deferred Growth for Certain Spousal Beneficiaries. Starting this year, an older spouse beneficiary of an IRA owned by a younger spouse who dies is treated as if they were the same age as the decedent spouse. RMDs based on the beneficiary's age don’t have to be taken until the deceased spouse is 73. While the benefits will depend on the younger spouse's age, this gives the surviving spouse more years for the account to grow tax-free.

A related change: the beneficiary may use the IRS uniform lifetime table to determine the amount of the RMD, which is a change from the single-life expectancy table. This can result in smaller RMDs, allowing for more tax-deferred growth. The RMD will rise to 75 years old in 2033.

Penalties for Missed RMDs are Reduced. The penalty for missed RMDs was reduced from 50% to 25% in 2023. If it’s corrected in a timely manner, two years from the end of the year for which the RMD should have been taken – it can be cut even lower, possibly as low as 10%.

These and other changes to retirement accounts may indicate a need for adjustments to your estate plan. With high estate and gift tax exemptions from the Tax Cuts and Jobs Act of 2017 possibly ending, now is a good time to speak with your estate planning attorney and learn if your estate plan is ready for the changes ahead.

Reference: The Wall Street Journal (July 31, 2024) “Changes in Retirement Savings Rules to Know Before Year’s End”

Seniors Cannot Be Careful Enough About Internet Scammers

The biggest threat to retirement accounts today isn’t a market downturn. It’s thieves who have become highly sophisticated in technology and human nature.

A recent article from The New York Times, “How One Man Lost $740,000 to Scammers Targeting This Retirement Savings,” tells how a 76-year-old retired attorney was duped into thinking he was helping an active government investigation when he was actually being scammed out of almost all of his retirement savings accounts. This man was one of many who were drawn into complex plots so intricate they could be used for crime novels.

Scammers are especially adept at using human vulnerabilities against their victims. Romance scams are more common. However, so are impersonators who purport to be law enforcement officials or technical support team members. They use basic psychological tactics to get victims to act, isolate them from friends or family who might be suspicious and present an opportunity to do good for others by helping in the so-called “investigation” or preying on our basic desire to connect and be liked by others.

In 2023, cybercrime theft was more than $12.5 billion, an increase of 22% from 2022 and more than three times the levels in 2019. These are just the crimes known to the FBI—countless others go unreported.

Seniors over 60 are targeted because they are seen as having savings worth pursuing. In 2023, seniors lost more than $3.4 billion to cybercrime.

For the retired attorney, it started when he had trouble logging into a 401(k) account. When he got in a few days later, the screen changed abruptly, and he was instructed to call the fraud department. There was a phone number on the screen. He was connected with his first scammer. Lesson one: If you’re having trouble logging into an account, close the window and find a phone number in a paper document or statement.

The man said he was a fraud investigator, and his money was vulnerable. The scammer built credibility by knowing the victim’s name and where all of his accounts were. This scammer connected him to another man, who claimed to be from the bank. A third man alleged to be from the IRS was on the phone. He provided his badge number to establish further credibility. They told their victim he had an opportunity to be part of their investigation. He was told not to disclose the investigation to anyone, including his three adult children.

A lengthy series of machinations began, with the victim giving the so-called investigators access to his accounts and transferring assets as the thieves kept up friendly banter about how the investigation was going. They told him one of their targets had been caught by Interpol and another was being tracked in Singapore.

The thieves guided him through many transactions, including moving money from an IRA to another bank because the bank had declined to release a large amount of funds, being wary of fraud. The thieves responded by saying the advisor was on their watch list, making their victim suspect the one person who was trying to look out for him.

The man only learned he was a scam victim when a real detective found his name and address on a paper receipt for gold in a car. He was one of at least seven people pulled into a scheme based in India. Making matters worse, his withdrawals created a tax bill: $285,000 in federal and state income taxes, which he cannot pay.

Awareness and a healthy skepticism should be part of every senior’s survival skill set. If someone promises involvement in a scheme or requests money, contact a trusted adult child, your estate planning attorney, or even the local police department to be sure you are not being scammed.

Reference: The New York Times (July 29, 2024) “How One Man Lost $740,000 to Scammers Targeting This Retirement Savings”