Spooky IRA Deadlines

You can't fight time. Don't try. 
We've talked before about the tax ramifications of halloween candy, but today I want to let you know if something much spookier: the October 31 deadline of notifying your inherited IRA custodian if a trust is a beneficiary. 

Don't lock the doors just yet, there is still time.

Per IRS publication 590:

Trust as beneficiary.   A trust cannot be a designated beneficiary even if it is a named beneficiary. However, the beneficiaries of a trust will be treated as having been designated beneficiaries for purposes of determining required minimum distributions after the owner’s death (or after the death of the owner’s surviving spouse described in Death of surviving spouse prior to date distributions begin , earlier) if all of the following are true:
  1. The trust is a valid trust under state law, or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or became, by its terms, irrevocable upon the owner's death.
  3. The beneficiaries of the trust who are beneficiaries with respect to the trust's interest in the owner's benefit are identifiable from the trust instrument.
  4. The trustee of the trust provides the IRA custodian or trustee with the documentation required by that custodian or trustee. The trustee of the trust should contact the IRA custodian or trustee for details on the documentation required for a specific plan.
  The deadline for the trustee to provide the beneficiary documentation to the IRA custodian or trustee is October 31 of the year following the year of the owner's death.



This can be a big deal if you miss it, as the lifetime stretch out is lost and you are defaulted into the 5 year rule to take out all the IRA proceeds. Don't mess this one up, send in your paperwork and call your IRA custodian to make sure you are in compliance.

The basics on inherited IRA's are you usually want to defer any payments for as long as possible, to let the tax-favorable account grow. If you miss the deadlines, you get punished. Here are more dates to remember:
Here are key dates you should keep in mind to make sure you meet the IRS deadlines that apply to the options you choose.
  • December 31 of the original account owner's year of death. If the account owner died on or after his or her required beginning date,  the RMD for the year must be satisfied if it was not taken in full during the account owner's lifetime.
  • December 31 of the year following the original account owner's year of death. If you are taking RMD based on the life-expectancy method, distributions must begin by this date. If you are one of multiple beneficiaries, all beneficiaries must have established separate inherited IRA accounts by this date in order to calculate distributions based upon each beneficiary's own life expectancy.
  • September 30 of the year following the original account owner's year of death. Important for determining the beneficiary whose life expectancy may be used to calculate RMD (the designated beneficiary). If you're one of multiple beneficiaries of varying ages, all beneficiaries must use the life expectancy factor of the oldest beneficiary who has not taken a lump-sum distribution or disclaimed his or her entire interest prior to this date. However, if all of the beneficiaries have established separate IRA accounts by December 31 of the year following the account owner's death, then all beneficiaries may be able to use their own life expectancy factors to calculate their RMD. Check with your tax advisor to see if you are eligible for this benefit.
  • October 31 of the year following the account owner's year of death. Important if you are the trustee of a trust named as IRA beneficiary. The IRS mandates that trustees provide Vanguard with a copy of the trust document or a summary list of the trust's beneficiaries and conditions by this date. If this requirement is not met, or if the trust failed to meet certain other IRS requirements, it's not considered a qualifying trust eligible for more favorable RMD calculations, usually based on the life-expectancy of the oldest trust beneficiary.
    • (thanks vanguard for the good summary)

Remember, missing an important date can cost you or your clients big. Stay safe out there, and have a happy halloween.




How to prevent the messy estate: the fight over pots and pans

More and more, I have clients who come to me and simply ask for "help." The scenario usually is
something like this:

Scenario:

Older (parent/relative) passes away. You and another (sibling/family member) are the sole beneficiaries of their estate. You live two states away, and the other person lives close by. After the funeral, you go by the house to check on things. Its ransacked, anything of value is gone, and the other beneficiary won't answer their phone. What to do?

Thoughts:

This is a big problem in modest estates, where the bulk of the value is in tangible personal property. Is there any recourse? Sure, you can try and sue for the return of the diamond necklace, grandpa's cowboy boots, or the coin collection, but it will be very, very difficult for you to prove who took what, and even with a victory in court, good luck collecting.

The best course of action is to keep communication lines open. If you are someone who wants certain items to go to certain people, write that down. I commonly encourage estate planning clients to include with their wills and important papers a list or binder of certain tangible personal property they want to go to certain individuals. I don't put this list in the actual will because people change their mind too often, and items can be lost, sold, etc., which causes problems if it is in the will. If you suspect this might happen to you, your best bet is to try and maintain a close relationship with your family and develop trust.  Just because you are named as someones beneficiary, doesn't mean property is yours for the taking. This can be a difficult lesson to learn, if you are the person who feels entitled or the person who ends up with nothing after someone else cleaned out all your inheritance.

Conclusion: 

While the above referenced scenario is more common in modest estates, some of the fiercest estate fights I have seen have been in estates of great wealth, but heirs fight over sentimental items like china or a belt buckle. We want to remember our lost loved ones, but the best way to prevent these disputes in through planning. If you foresee your heirs having a dispute, give it away now, or put someone else in charge. If you foresee a dispute down the line with other beneficiaries, start talking now.

At the end of the day, remember its just stuff. Stuff can be replaced. Family and relationships are much more difficult to mend. 


Estate tax Repeal Musings

Relevant in 2011, but still funny
Every couple years when the election cycles roll around, someone brings up the estate tax again. It is usually when we are not at war, arguing about when a fetus is viable, if universal healthcare is a good idea, or if we ought to bail out the banks, so I guess this means times are relatively good.

That said, we have the highest estate tax exemption in history (minus the times of repeal). It only affects a fraction of the wealthy, and there are many things you can do to plan around it. Foundations, charities, various trusts and other vehicles allow you to minimize the tax, or just pay a little bit. Even so, there is a current bill that allegedly has majority support in the house sponsored by a proud Texan, Rep. Kevin Brady from a district north of Houston. My beloved, departing, congressman also co-signed the bill, but I can't be mad at him (full disclosure, he employed myself, my brother, and numerous friends whenever we needed internships or jobs).

H.R. 2429 would serve to repeal the estate/death tax, the generation skipping tax, but it interestingly enough keeps the gift tax intact. So, die with all the money you want but if you try to give away more than $5 million, we are going to punish you for it. Make sense? Will it pass? Likely the House, doubtful in the Senate. Let's examine the arguments for and against repeal of the tax.

Arguments Against Death Tax:

  1. Punishes Small Business without liquid assets to pay the tax, namely farms. 
  2. Double tax on income and assets that have already been taxed
  3. Doesn't produce that much income
  4. How can you be taxed for dying?
Here is a good propaganda video, decide for yourself if the information is accurate: 

Analysis:

The oldest argument against the estate tax is that it imposes an undue burden on the small farmer. They are land rich/cash poor, and upon death the family has to sell the farm/business just to pay the tax. Life insurance isn't that expensive, and a very reasonable policy can be set up to cover this. Ok, but that is still more money out of good working folks' pockets. So, let's see how many small farms/businesses this affects each year. The tax policy center tells us: 40, as of 2011, when the exemption was less than it is now. Less than one per state.

Rep. Brady is quoted as saying
 “A majority of the U.S. House stands for permanently repealing the terrible Death Tax,” Brady, who represents Walker County, said. “It continues to be the number one reason family-owned farms and businesses aren’t passed down to the next generation, and it’s time to bury it once and for all.”
While this may be an issue for the 40 families a year that bear this burden, I would argue that family wealth doesn't make it to the second or third generation because of laziness, entitlement, and apathy. Or good 'old affluenza. Else, $10 billion in revenue isn't much compared to other taxes, but its something. Tax on dying? This is a tough one to explain, but read on.

Arguments For an Estate Tax:
  1. It raises dearly needed revenue
  2. Only affects a tiny percent of households
  3. Without it, much less incentive for charitable bequests
  4. Ideally prevents dynastic/aristocratic wealth 
Analysis:
So, why would I argue against a tax cut? The only reason I'm talking about this is I read another article the other day, aptly titled "The rise of the non-working rich" by Berkeley professor Robert Reich. His general point is that rich are getting richer and that America is heading toward an aristocracy only taxes can fix.

Do I want to pay a death tax? No. However, I hope to have enough money at some point to worry about it. I think most people are of this mindset, which is why its fun to rage against the tax, even though 99% of us will never have to pay it. Reich's points are that if we don't keep the estate tax, and ADD new taxes (a tax on "wealth" he limits to stocks and bonds, similar to the property tax) then we are headed for trouble. Where he really misses the mark is suggesting that we eliminate the adjusted cost basis at death, which I have talked about here. This plan would punish the families who inherit the farm or their parents house, and crush IRA's and other investment accounts: this is not the way to go.

When the estate tax was less than $1 million (last in 2001) it affected a lot of people, and was an issue for a lot of small businesses and farms. Now its over $5 million. If you have over $5 million, you have the resources to plan for the tax hit.

If you don't argee with any of this, the biggest argument for an estate tax is that the richest guys endorse it: Warren Buffet, Bill Gates, George Soros, and so on. They get it, that if there is no penalty on dying with your money, not as many folks will give it away. Charities dry up, and the world is a generally worse place. So who, really, is spending all this time, money, and other resources fighting for an estate tax repeal?

Conclusion:

The net worth of the average Congressman is now allegedly around $1 million, but the average is skewed higher to around $7.8 million (who knew Nancy Pelosi was so loaded?).  So, these guys are worried about the estate tax, because they are going to have to pay it. I can't blame them, you need to think about #1 and vote your pocketbook. However, that is not who I want in Congress, or what I want them to be focusing on.  I have heard arguments that the estate tax only benefits estate planning attorneys: I haven't prepared a really comprehensive estate tax plan for a client in years. A few clients have had almost enough, but not many folks have that much money.

The death tax sounds scary, so people don't like it. I understand that. So raise it to $10 million per decedent, indexed for inflation. That will cover MORE of the family farms, and make the average congressman happy.  If we do get rid of it, once and for all, I'm afraid the consequences to the rest of us will dwarf any marginal benefit that those wealthy enough to complain about it will experience.





All in the Family: Disputes between relatives


"Family quarrels are bitter things. They don't go according to any rules. They're not like aches or wounds, they're more like splits in the skin that won't heal because there's not enough material."
~F. Scott Fitzgerald
Background:
In Texas and the United States as a whole, we don't really have forced inheritance, birthright, or any of that nonsense. If you want to give someone something that is yours, we generally let you do it. If you die without a plan, we have a plan set up for you (see here) that makes sure it stays in the family and spreads it around equally. We also have rules so that if do accidentally forget to update your planning, your surviving spouse or minor children will be taken care of. It is not a bad system, for the most part. 
Issue:
The flip side of this is the old bitter pill that is the undue influencer. What this mean is one person uses their position of power, be it money, physical intimidation, coercive words, threats of any kind, whatever really, over another to influence that person into acting according to the other person's desires. 

Scenario: 
Said even more plainly: Dad died and Mom lives in a rest home outside of Lubbock, where Daughter, a single person, lives nearby. Son lives in Houston with his spouse and two children, and gets to see Mom on the holidays and a handful of other times of the year. All seem to have a good relationship. 
That is, until Mom passes away. After the funeral, Son asks Daughter what about Mom's estate: her retirement, the family farm, bank accounts, and Dad's silver coin collection. Daughter says that she had Mom's power of attorney, was POD or joint on all her financial accounts, and Mom wrote a will shortly before her death leaving everything to Daughter. Basically, Son gets nothing. 
Son is floored. Why would Mom do this? He needed the inheritance for his children. Mom was getting on in years, and starting to lose it a little. Did she have the mental ability to make these decisions? Did Daughter have something to do with it?
Daughter was the one who took care of Mom, took her to her doctor's appointments, took her to get her hair done, took her to the store. She was the one who got the call at 2 A.M. when Mom fell, and was the one who sat with Mom in the hospital for weeks on end last year. Son flew up to check on Mom, but had to get back for work soon after.  Didn't Daughter deserve to be paid for her affection? So what if she named herself on all those accounts using the power of attorney. So what if she convinced Mom to make a new will, and that she should leave Daughter everything. Daughter sacrificed everything for Mom, son moved far away and spent all his time at work and with his wife and kids. 
What is fair?
Aftermath: 
What now? Son can try to get the will set aside, but its not easy, or cheap.  What did Daughter do using the Power of Attorney? Good luck getting the financial records for the last 10 years to see where the money went. The coin collection? Can't find it, Mom must have sold it or given it away a while ago.  Son asks Daughter why this happened, asks her to split the estate like Mom had always said. Daughter says no, Mom changed her mind. How do you find the truth?
Regardless of the next steps, whether it's a lawsuit, some sort of mediation, or Son gives up, siblings and a family are now estranged for life. Daughter could have manipulated Mom to make these changes, or Mom could have made the changes in good faith, because she wanted to, without any urging from Daughter. Either way, it is now a family rift that will likely only widen. 

Take Aways: 
How do we fix and prevent this? Sadly, in estate disputes, the first one to raid Mom's house usually is going to get the prized belt buckle or coin collection. For bank accounts and financial instruments, Powers of Attorney holders can transfer these, and can write deeds to real property. These are all recorded though, so you usually have recourse if someone (or a family member) takes these type of actions. Here is a list of tips:

1. For Family Members with an Aging Parent
            Have "the Talk". Who is going to take care of the parent? Are they going to be paid? Are they the sole power of attorney holder? Where are the parent's assets, and who can make these decisions? This is tough for the fiercely independent parent, so be cautious here. Maybe start with your siblings, and put on a united front. Be wary of second marriage and step/parents/siblings, these are where battle lines are drawn.    

             Another option is to leave the power of attorney documents with a trusted friend or advisor, who can make the decision when it is necessary or appropriate to give a child all that power. 

2. For Attorneys and Advisers

             Get to know your client and their family situation. The one "no good" son in Houston that you are disinheriting in the will you are drafting may be the good kid after all. This can be extremely difficult to identify, so you will have to decipher the code from the questions you ask your client and the circumstances around why they are creating a will or other disposition. 

3. For the Disinherited Sibling

             You have options. If your sibling or family member acted under a power of attorney, they had a duty not to act in a way to benefit themselves. Transactions can be undone, assuming the money is not spent already. Wills can be overturned due to undue influence and a variety of other remedies. The best course, however, is to stay in the know and have a healthy understanding of the family state of affairs with all parties involved. If all else fails, maybe your sibling will have a conscious and make a deal to split things. 

Have a safe and happy Memorial Day, and thanks to all those who serve or have served. 




Intestate Distribution in Texas, Again

I've done this once before, but I almost like Judge Steve King's chart even better. Also, this is more aligned to how the probate judges want the respective shares of beneficiaries listed on an application.

So, if you die without a will in Texas, here is what happens (with references to the Texas Estates Code):

DIVISION OF PROPERTY UPON INTESTACY IN TEXAS

I. WITHOUT Surviving Spouse - Texas Estates Code §201.001 
           A. With Children or their descendants: Children & their descendants-------------- All
           B) Without Children or their descendants:
                1) Both Parents Survive: Father -------------------------------------------------------- 1/2
                                                                  Mother ------------------------------------------------------- 1/2
          or 2) One Parent Surviving: Surviving Parent ------------------------------------------- 1/2
                                                           Siblings and their descendants ------------------------------- 1/2
          or 3) One Parent Surviving alone ---------------------------------------------------------- All
          or 4) Siblings and their descendants alone ----------------------------------------------- All
          or 5) a) Paternal Kin: 1) Both Grandparents: Grandfather ----------------------------- 1/4
                                                                                                     Grandmother --------------------------- 1/4
                                            or 2) One Grandparent Surviving ------------------------------------- 1/4
                                                  & Descendants of deceased Grandparent ------------------------ 1/4
                                            or 3) One Grandparent Surviving alone ------------------------------ 1/2
                                            or 4) Descendants of deceased Grandparent alone ----------------- 1/2
                      & b) Maternal Kin: ------------------------------------------- other half in same order


II. WITH Surviving Spouse - Texas Estates Code §201.001 
            A. SEPARATE ESTATE (§ 201.002, Texas Estates Code)
                1) With Children or their descendants - §201.002(b)
                    a) Pers Prop: 1) Surviving spouse ------------------------------------------------------ 1/3
                                               2) Children and their descendants ------------------------------------- 2/3
                    b) Real Prop: 1) Surviving spouse has life interest in -------------------------------- 1/3
                                          (with remainder interest to children and their descendants)
                                              2) Children and their descendants have fee in ------------------------ 2/3
               2) Without Children or their descendants - §201.002(c):
                    a) Pers Prop: Surviving spouse --------------------------------------------------------- All
                    b) Real Prop: 1) Surviving spouse has fee in ----------------------------------------- 1/2
                                               2)  Both Parents Survive: Father -------------------------------------- 1/4
                                                                                                   Mother ------------------------------------- 1/4
                                         or 3) One Parent Surviving ------------------------------------------------ 1/4
                                              & Siblings and their descendants -------------------------------------- 1/4
                                         or 4) One Parent Surviving alone ----------------------------------------- 1/4
                                         or 5) Siblings and their descendants alone ------------------------------ 1/2
                                         or 6) Surviving spouse alone ---------------------------------------------- All

           B. COMMUNITY ESTATE (§ 201.003, Texas Estates Code)
              1) With Surviving Spouse and Children (or their descendants):
                 a) Surviving Spouse and Decedent were the parents of all the children
                             Surviving Spouse ------------------------------------------------------------------- All
                 b) Surviving Spouse and Decedent were not the parents of all the children:
                             Surviving Spouse (retains Surviving Spouse’s ½) ----------------------------- None
                             Children or their descendants (take Decedent’s ½) --------------------------- All
             2) With Surviving Spouse only ------------------------------------------------------------- All
             3) With Children or their descendants only ---------------------------------------------- All




All credit to Judge King and his excellent Ad Litem Manual, which can be found here.