Paul O. Dillon, Attorney at Law

Why Gen Z Needs to Pay Attention to Estate Planning

Gen Zers may still be young, ages 17–27. However, this doesn’t mean some don’t have ownership and assets to protect with estate planning. Medical emergencies and car accidents happen to people of all ages. An estate plan protects the person as much as their property. The sooner you have a plan in place, says a recent article from yahoo! finance, “Why Gen Z Should Be Thinking About Estate Planning,” the better.

For many young adults, estate planning is like buying rental insurance. You don’t expect to deal with a fire or have your home broken into. However, having insurance means if such events happen, your possessions will be insured, and you’ll be made whole.

Gen Zers who are signed up for employee benefits like 401(k)s or retirement plans already have assets to be passed to another person if they should die young. These accounts typically feature beneficiary designations, so they should be sure to have those completed properly. Many Gen Zers name their parents or siblings as their beneficiaries at this point in their lives. The future may bring new relationships, marriage and children, so they must update these beneficiaries throughout life.

While practically everyone using a cell phone or computer has digital assets, Gen Zers are likely to have more digital currency and crypto in digital wallets. They may have intellectual property on platforms, including TikTok or YouTube. These assets need to be protected in a digital estate plan. The information required to access these accounts should not be in a last will and testament. However, they should be documented so the assets are not lost.

Other digital assets don’t have any value. Users don’t have the right to transfer the assets, like social media accounts or music files. Having a conversation with a digitally savvy person about these assets and providing them with login and account information is an integral part of an estate plan.

Gen Zers do need a will. Without a will, the estate will get tangled up in probate, a court process where the laws of your state determine who inherits any possessions. This takes time and court fees can add up quickly.

Having a will created with an experienced estate planning attorney encourages a review of assets, providing a perspective of finances that one might not otherwise have early in their career.

Estate planning also includes planning who will make medical and financial decisions in case of incapacity. These documents, including a Power of Attorney, Healthcare Proxy, Living Will and other documents, are state-specific. Once someone becomes a legal adult, neither parents nor siblings can be involved with medical care or handle finances, unless these documents are created and executed. Trusted friends can also take on these roles.

A young adult should make an appointment with a local estate planning attorney. They’ll provide guidance through the process. Regardless of age and stage, having a plan creates peace of mind for young adults and their family members.

Reference: yahoo! finance (Sept. 17, 2024) “Why Gen Z Should Be Thinking About Estate Planning”

Does Your Retirement Plan Include Moving to a Lower Tax State?

People have long moved from high-tax to low-tax states. However, this movement increased during the pandemic and continues today. The response from high-tax states has become aggressive, especially in cases where people maintain a home in two states and try to pay taxes only in the less costly state. A recent Forbes article issues a clear warning: “Beware The Tax Traps Spring On Those Who Move In Retirement.”

These states levy a tax on income, estate and sales taxes based on where people make their legal domicile. However, determining where you live isn’t quite as cut-and-dried as people think. Tax departments in high-tax states have amped up their residency audits. When the system sees someone who once filed an income tax return as a full-time resident begins filing as a part-time resident or doesn’t file, the state wants to ensure that it’s not missing out on any revenue.

A residency audit is conducted. It may consist of a questionnaire asking about where the person lives, asking them to provide information about their lifestyle and providing details about the property they own in both states.

An aggressive state will search property records and other public records for evidence of ongoing connections to the state. Social media has become part of this information gathering, no matter how private people may set their profiles.

If you’ve moved for retirement or enjoy the benefits of living in two or more states, you’ll need to choose a state and prove your legally established residence in that state. Ideally, you’ll do this long before the residency audit arrives.

Did you already receive a letter from a state tax authority asking questions? Chances are the state has already begun investigating your status. The letter might include a questionnaire, an interview request, or both.

If you haven’t yet moved, consider how you’ll respond to these questions:

• Where do you vote?
• Where are your cars, boats, or other vehicles registered?
• Do you belong to a house of worship, and if so, where is it located?
• Do you have an estate plan, and what address does it show?
• Where do you own property, and how much time do you spend at each location?
• Do you belong to any social clubs – country clubs, bowling leagues, gyms, or community groups?
• If you own a business or are an employee, where is your business or employer located?

You’ll need to demonstrate where you live and whether you’ve truly cut ties with your prior state of residence. A final word of advice: don’t go into a residency audit unprepared or unrepresented. The possibility of paying taxes in two states should motivate you to make any necessary changes.

Another detail to consider when moving to retirement is that an estate plan made in one state may not be valid in another state. A local estate planning attorney in your new domicile should be consulted to review your will, power of attorney, healthcare directives and other state-specific documents to ensure they will be effective in your retirement home.

Reference: Forbes (April 23, 2024) “Beware The Tax Traps Spring On Those Who Move In Retirement”

How are Retirement Plans Handled in an Estate Plan?

If you have recently completed your estate plan, Kudos! But if you haven’t updated an estate plan, or worse, don’t have one at all, and haven’t reviewed retirement assets in years, your heirs may be in for some unpleasant surprises. The recent article from Whittier Daily News, “Are your retirement and estate plans at odds? Tips to fix that,” provides essential details.

Whatever directions you provide will not affect the beneficiary designations on your retirement accounts. You may have wanted your spouse to receive all your assets after your death, but this won’t happen if the named beneficiary is someone else, such as a child or former spouse.

Pension and other retirement plans are subject to a host of federal regulations. Upon death, pension funds typically go to a surviving spouse. The surviving spouse is not allowed to designate anyone else as the beneficiary, even if a part of the surviving spouse’s retirement plan is deemed community property in your state.

IRAs and pension funds require careful planning to ensure distributions align with your wishes. Federal law governing qualified retirement plans requires a married spouse's consent to name anyone else as a beneficiary. Suppose the estate planning goal is to have the assets in the retirement account pass to biological children, not the spouse. In that case, an updated beneficiary designation form and the correct spousal release forms must be updated. A pre- or post-nuptial document will not suffice for this to be enforceable.

This is why all accounts or assets where beneficiaries can be named need to be reviewed whenever an estate plan is created or revised. This issue becomes particularly critical for blended families.

Suppose your trust contains language leaving retirement assets to your children. In that case, even if it contains great detail about the accounts and how you’d like the assets to be distributed, it won’t matter if the beneficiary designation names another person.

Trusts need careful construction to prevent children from being disinherited. Often, the answer is to have a single trust designed to “split” into two trusts upon the first spouse's death. These are known as “A/B” trusts. The surviving spouse’s share is held in Trust A, while the decedent’s share of the trust is held in Trust B and accessible to the surviving spouse. When the second spouse dies, whatever assets are held in Trust B are distributed to the stated beneficiaries. Other estate planning solutions are available when concerns about the surviving spouse arise within the trusts.

A final note: if you fail to complete beneficiary designation forms for retirement plans, the assets may need to go through probate. Distribution of the retirement plan assets will be governed by the retirement plan document, which includes language for a default beneficiary. Usually, the default beneficiary is your estate.

Consult with an estate planning attorney to ensure that your estate plan and retirement plan work together to achieve the desired results.

Reference: Whittier Daily News (April 7, 2024) “Are your retirement and estate plans at odds? Tips to fix that”

Beneficiary Mistakes to Avoid

Planning for one’s eventual death can be a somber task. However, consider what would occur if you failed to plan: loved ones trying to figure out your intentions, a long and expensive legal battle with unintended heirs and instead of grieving your loss, wondering why you didn’t take care of business while you were living. Planning suddenly becomes far more appealing, doesn’t it?

A recent article from yahoo! finance, “5 Retirement Plan Beneficiary Mistakes to Avoid,” explains how to avoid some of the issues regarding beneficiaries.

You haven’t named a beneficiary for your retirement accounts. This is a common estate planning mistake, even though it seems so obvious. A beneficiary can be a person, a charity, a trust, or your estate. Your estate planning attorney will be able to help you identify likely beneficiaries and ensure they are eligible.

You forgot to review your beneficiary designations for many years. Most people have changes in relationships as they move through the stages of life. The same person who was your best friend in your twenties might not even be in your life in your sixties. However, if you don’t check on beneficiary designations on a regular basis, you may be leaving your retirement accounts to people who haven’t heard from you in decades and disinheriting loved ones. Every time you update your estate plan, which should be every three to five years, check your beneficiary designations.

You didn’t name your spouse as a primary beneficiary for a retirement account. When Congress passed the 2019 SECURE Act, the bill removed a provision allowing non-spousal beneficiaries to stretch out disbursements from IRAs over their lifetimes, also known as the “Stretch IRA.” A non-spouse beneficiary must empty any inherited IRA within ten years from the death of the account holder. If a minor child is the beneficiary, once they reach the age of legal majority, they are required to follow the rules of a Required Minimum Distribution. Having a spouse named as beneficiary allows them to move the inherited IRA funds into their own IRA and take out assets as they wish.

You named an estate as a beneficiary. You can name your estate as a beneficiary. However, it creates a significant tangle for the family who has to set things right. For instance, if you have any debt, your estate could be attached by creditors. Your estate may also go through probate court, a court-supervised process to validate your will, have your final assets identified and have debts paid before any remaining assets are distributed to heirs.

You didn’t create a retirement plan until late in your career. Retirement seems very far away during your twenties, thirties and even forties. However, the years pass and suddenly you’re looking at retirement without enough money set aside. Creating an estate plan early in your working life shifts your focus, so you understand how important it is to have a retirement plan.

An experienced estate planning attorney can help square away your beneficiary designations as part of your overall estate plan. The best time to start? How about today?

Reference: yahoo! finance (Dec. 19, 2022) “5 Retirement Plan Beneficiary Mistakes to Avoid”

It Is Important to Update Your Estate Plan

Individuals who have a will, a power of attorney for health care, a financial power of attorney and a living will might believe they are done with estate planning. They’re only half right. There are many reasons an estate plan needs to be revised or updated, as explained in the recent article “10 reasons to update your estate plan” from American Legion.

New children, grandchildren, or a change in heirs. Most estate plans make provisions for children and heirs who are living when you die. If you have a specific transfer in your estate plan, a new child or one who has not been included in your will may receive a smaller inheritance, or no inheritance at all.

Here’s an example: Jane Doe has a $1 million estate and left a home valued at $400,000 to her first-born son Jason. She divided the rest of her estate, with 1/6 of the balance going to Jason and 5/6 to Justin. If a third child is born, depending on the laws of her state, the third child might receive nothing. Family strife or litigation could easily be the legacy she leaves. Thus, the arrival of a new heir is a reason to update your estate plan.

If you are married and move to a different state, there may be laws impacting ownership and inheritance. Some states are “common law” property states, others are “community property” states. If you move, clarify the ownership of your property as either separate or jointly owned.

Some states still have state inheritance or estate taxes. Many have taxes applied at lower levels than the federal exemption per person. Depending on who your heirs are and the state, you may be giving heirs a large tax liability, in addition to an inheritance.

Power of Attorney laws also vary from state to state, as do living wills or advance directives. You’ll want to be sure your medical planning documents reflect your state’s laws.

Selling or buying a major asset can change your plan and its results. If you transfer a property which has appreciated in value and a large estate tax is to be paid from your estate, beneficiaries could receive less than you intended.

Most estates contain cash, cash equivalents, stocks, real estate and retirement accounts. If your retirement accounts, including 401(k)s, IRAs, pensions, or other accounts, have become the largest portion of your estate, you should review the accounts and their tax impacts on heirs.

Families with unmarried brothers and sisters often receive an inheritance and remember their surviving siblings with an inheritance. However, if there are two or three unmarried siblings, one will inevitably become the survivor and hold most of the assets. If you have included a sibling in your estate plan, there is also the chance they will die before you.

Single people have different estate plans than married couples. A single person who transfers assets to a former spouse will not qualify for the unlimited marital deduction. If there is a divorce and beneficiary designations on retirement plans and insurance policies are not updated, the named person will receive the assets.

When a will is created, it names an executor and a successor executor. If the primary executor predeceases the person making the will, a new executor will need to be added. It’s always better to have two candidates for a position than one.

Estate plans are impacted by changes in asset value, changes in the family and changes in federal and estate law. Every three to five years, meet with your estate planning attorney to review your plan and be sure it still accomplishes what you want.

Reference: American Legion (Nov. 28, 2022) “10 reasons to update your estate plan”

RMD Formula Changes for First Time in 20 Years

For the first time in two decades, the IRS has updated actuarial tables used to determine Required Minimum Distributions, the amount taxpayers are required from their retirement accounts starting at age 72, reports Yahoo! Money in the article “Good News for Retirees: RMD Formula Changes for First Time in Decades.”

The new tables rely on longer lifespans to calculate RMDs from tax deferred accounts, including traditional IRAs, 401(k)s and other similar retirement accounts every year.

One of the key benefits of retirement accounts are the tax advantages they offer. Traditional IRAs and 401(k)s allow savers to defer taxes until funds are withdrawn, letting their investments grow over an extended period of time. However, as with all good things, there are limits. To encourage people to take funds from the accounts (which generate tax revenues), the IRS requires a certain amount of money be taken out after a certain age.

The age requirements have changed over the years. Before the SECURE Act of 2019, withdrawals were required starting at age 70.5. After the SECURE Act, if you reached age 70.5 in 2019, the prior rules applied, and you had to take the first RMD by April 1, 2020. However, if you reached 70.5 in 2020 or later, the first RMD needs to be taken by April 1 in the year after you reach age 72.

Here are the accounts subject to RMDs:

• Traditional IRAs
• SEP IRAs
• SIMPLE IRAs
• 401(k), retirement plan from private sector employers
• 403(b), retirement plan for public employees and nonprofits
• 457(b), retirement plan for some state and local government employees

Profit sharing plans and other defined contribution plans are also included in this category. Roth IRAs are not subject to RMDs.

With the IRS raising the average life expectancy from 82.4 to 84.6, retirees will also need to make their retirement savings account last longer. Therefore, the RMDs starting in 2022 will be less than those from the prior calculation, which has been the same since 2002. Smaller RMDs will also lower tax liabilities and might even put some people into a lower tax bracket.

You can still withdraw as much as you like from an IRA or the accounts listed above. However, be mindful of the resulting tax bill.

Reference: Yahoo! Money (June 15, 2022) “Good News for Retirees: RMD Formula Changes for First Time in Decades”

Prepare for Changes in Tax Laws and Possible Retroactivity

The proposed tax increase on capital gains may be applied to taxpayers with annualized realized gains over $1 million, with those high net families paying a higher tax rate of 39.6%, nearly double the current 20% rate for individuals, explains the article “Capital Gains Strategies to Keep Clients on Track for Retirement” from Wealth Management.com. Unlike previous tax proposals, there is now talk of making these changes retroactive to April 28, 2021.

Congress has historically never affected tax bills on a retroactive basis, but these are uncertain times and Congress is very divided. While fundamental tax and estate planning should continue as the final tax legislation is far from being decided, there are some steps to consider.

First is an accelerating gain realization to a period before the effective date of any legislation. If legislation is made retroactive but the start date is January 1, 2022, this won’t be needed, but could still be helpful.

The second planning strategy is charitable giving with appreciated securities. For families who are philanthropic, making donations with appreciated securities have several benefits. The taxpayer receives an income tax charitable deduction for the value of the security and the capital gain is not realized when the security is transferred to a charity. This strategy also benefits the family in a high tax situation.

Finally, investors may find it best to hold on to investments for extended periods to avoid realizing capital gains.

Retirement planning is being impacted by the discussions happening on Capital Hill as well. The negotiations and research on limiting a step-up in cost basis of an inherited asset after a person’s death is being watched carefully by estate planning attorneys and accountants. The step-up in cost basis often dramatically reduces the capital gains owed by the recipient. If this does happen, estate planning attorneys may need to become more aggressive with planning for gain realization.

If this change does come to pass, increasing fixed income investments in taxable accounts may become more valuable.

What can you do while waiting to see what action Congress takes? Reevaluate your risk profile and consider your retirement budget and cash flow needs. Equally important, check in with your estate planning attorney. While there’s no way to know exactly what the final form of these legislative changes will be, they will have an impact on your estate plan. Make sure you are as prepared as possible, so your estate plan changes can be made in a timely manner.

Reference: Wealth Management.com (Sep. 3, 2021) “Capital Gains Strategies to Keep Clients on Track for Retirement”

Estate Planning Meets Tax Planning

Not keeping a close eye on tax implications, often costs families tens of thousands of dollars or more, according to a recent article from Forbes, “Who Gets What—A Guide To Tax-Savvy Charitable Bequests.” The smartest solution for donations or inheritances is to consider your wishes, then use a laser-focus on the tax implications to each future recipient.

After the SECURE Act destroyed the stretch IRA strategy, heirs now have to pay income taxes on the IRA they receive within ten years of your passing. An inherited Roth IRA has an advantage in that it can continue to grow for ten more years after your death, and then be withdrawn tax free. After-tax dollars and life insurance proceeds are generally not subject to income taxes. However, all of these different inheritances will have tax consequences for your beneficiary.

What if your beneficiary is a tax-exempt charity?

Charities recognized by the IRS as being tax exempt don’t care what form your donation takes. They don’t have to pay taxes on any donations. Bequests of traditional IRAs, Roth IRAs, after-tax dollars, or life insurance are all equally welcome.

However, your heirs will face different tax implications, depending upon the type of assets they receive.

Let’s say you want to leave $100,000 to charity after you and your spouse die. You both have traditional IRAs and some after-tax dollars. For this example, let’s say your child is in the 24% tax bracket. Most estate plans instruct charitable bequests be made from after-tax funds, which are usually in the will or given through a revocable trust. Remember, your will cannot control the disposition of the IRAs or retirement plans, unless it is the designated beneficiary.

By naming a charity as a beneficiary in a will or trust, the money will be after-tax. The charity gets $100,000.

If you leave $100,000 to the charity through a traditional IRA and/or your retirement plan beneficiary designation, the charity still gets $100,000.

If your heirs received that amount, they’d have to pay taxes on it—in this example, $24,000. If they live in a state that taxes inherited IRAs or if they are in a higher tax bracket, their share of the $100,000 is even less. However, you have options.

Here’s one way to accomplish this. Let’s say you leave $100,000 to charity through your IRA beneficiary designations and $100,000 to your heirs through a will or revocable trust. The charity receives $100,000 and pays no tax. Your heirs also receive $100,000 and pay no federal tax.

A simple switch of who gets what saves your heirs $24,000 in taxes. That’s a welcome savings for your heirs, while the charity receives the same amount you wanted.

When considering who gets what in your estate plan, consider how the bequests are being given and what the tax implications will be. Talk with your estate planning attorney about structuring your estate plan with an eye to tax planning.

Reference: Forbes (Jan. 26, 2021) “Who Gets What—A Guide To Tax-Savvy Charitable Bequests”

Despite Pandemic, Many Still Don’t Have an Estate Plan

It’s true—many people still believe that they don’t have enough assets so they don’t need a will, or that their money will automatically go to a next of kin. Both of these beliefs are wrong. While the title of this CNBC article is “More people are creating wills amid the pandemic,” the story’s focus is on the fact that most Americans don’t have a will. If you belong to this group, here’s what happens when you die.

The state you live in has laws about who will receive your assets if you die without a will, known as intestacy. Let’s say you live in New York. Your surviving spouse and children will receive your assets. However, in Texas, your assets will be entered into the state’s intestacy probate process, and your relatives will divide up your assets. Want to be in charge of who inherits your property? Have a will created with an experienced estate attorney.

Young adults think they don’t need a will, but Covid-19 has taken the lives of many healthy, young people. Every adult over age 18 needs a will. If you don’t have one, your loved ones—even if it’s your parents—will inherit a legal mess that will take time and money to fix.

If you have children and no will, there’s no way to be sure who will raise your children. The court will decide. Choose your guardians, name them in your will and be sure to name additional choices just in case the first guardian can’t or won’t serve. You should also appoint someone to be in charge of your children’s money.

What if you had a will created 10 or twenty years ago? That’s another big mistake. Your life changes, the law changes, and so do relationships. Life insurance policies, retirement plans, and transfer-on-death instruments are all legally binding contracts. The last will you made will be used, and if you haven’t updated your will or other documents, then the old decisions will stand. Remember that contracts supersede wills, so no matter how much you don’t want your ex to receive your life insurance proceeds, failing to change that designation won’t help your second spouse. You should review and update all documents.

Doing it yourself is risky. You won’t know if your will is valid and enforceable, if you do it from an online template. Your heirs will have to fix things, which can be expensive. The cost of an estate plan depends on the complexity of your situation. You may only need a will, power of attorney and advance directive. You may also need trusts to pass property along with minimal taxes. An estate planning attorney will be able to give you an idea of how much your estate plan will cost.

Talking about death and planning for it is a difficult topic for everyone, but a well-planned estate plan is one of the most thoughtful gifts you can give to your loved ones.

Reference: CNBC (Oct. 5, 2020) “More people are creating wills amid the pandemic”

How to Make Beneficiary Designations Better

Beneficiary designations supersede all other estate planning documents, so getting them right makes an important difference in achieving your estate plan goals. Mistakes with beneficiary designations can undo even the best plan, says a recent article “5 Retirement Plan Beneficiary Mistakes to Avoid” from The Street. Periodically reviewing beneficiary forms, including confirming the names in writing with plan providers for workplace plans and IRA custodians, is important.

Post-death changes, if they can be made (which is rare), are expensive and generally involve litigation or private letter rulings from the IRS. Avoiding these five commonly made mistakes is a better way to go.

1—Neglecting to name a beneficiary. If no beneficiary is named for a retirement plan, the estate typically becomes the beneficiary. In the case of IRAs, language in the custodial agreement will determine who gets the assets. The distribution of the retirement plan is accelerated, which means that the assets may need to be completely withdrawn in as little as five years, if death occurs before the decedent’s required beginning date for taking required minimum distributions (RMDs).

With no beneficiary named, retirement plans become probate accounts and transferring assets to heirs becomes subject to delays and probate fees. Assets might also be distributed to people you didn’t want to be recipients.

2—Naming the estate as the beneficiary. The same issues occur here, as when no beneficiary is named. The asset’s distributions will be accelerated, and the plan will become a probate account. As a general rule, estates should never be named as a beneficiary.

3—Not naming a spouse as a primary beneficiary. The ability to stretch out the distribution of retirement plans ended when the SECURE Act was passed. It still allows for lifetime distributions, but this only applies to certain people, categorized as “Eligible Designated Beneficiaries” or “EDBs.” This includes surviving spouses, minor children, disabled or special needs individuals, chronically ill people and individuals who are not more than ten years younger than the retirement plan’s owner. If your heirs do not fall into this category, they are subject to a ten-year rule. They have only ten years to withdraw all assets from the account(s).

If your goal is to maximize the distribution period and you are married, the best beneficiary is your spouse. This is also required by law for company plans subject to ERISA, a federal law that governs employee benefits. If you want to select another beneficiary for a workplace plan, your spouse will need to sign a written spousal consent agreement. IRAs are not subject to ERISA and there is no requirement to name your spouse as a beneficiary.

4—Not naming contingent beneficiaries. Without contingency, or “backup beneficiaries,” you risk having assets being payable to your estate, if the primary beneficiaries predecease you. Those assets will become part of your probate estate and your wishes about who receives the asset may not be fulfilled.

5—Failure to revise beneficiaries when life changes occur. Beneficiary designations should be checked whenever there is a review of the estate plan and as life changes take place. This is especially true in the case of a divorce or separation.

Any account that permits a beneficiary to be named should have paperwork completed, reviewed periodically and revised. This includes life insurance and annuity beneficiary forms, trust documents and pre-or post-nuptial agreements.

Reference: The Street (Aug. 11, 2020) “5 Retirement Plan Beneficiary Mistakes to Avoid”