As we plan for our clients and for the ultimate distribution their estates, it may be beneficial for us to share some of the common issues that we encounter in an effort to help you identify issues that may need to be addressed:
Importance of titles on accounts
Several years ago, I had a client who had included her daughter’s name on her bank accounts with the local bank. The client also had two sons. In her Will, she wished for everything to be split equally between her three children. By placing only her daughter’s name on the bank accounts, all the money in those accounts at her death went to her daughter automatically by operation of law. She legally did not have to share this money with her brothers. Most people do not know that when you name a joint owner or put a “payable-on-death” designation on an account, those titles cause the account to pass outside of what is stated in your Will.
Review your beneficiary designation on accounts and insurance policies
Another common issue deals with beneficiary designations on retirement accounts. Unfortunately, divorces and deaths in a family can alter the landscape of who a client may wish to inherit his/her assets. It is a good practice to periodically review who you have listed as a beneficiary especially if the intent is to leave assets to a younger person. Young people tend to be more prone to making marital and financial mistakes which may result in the inheritance being tied up in a divorce or other court proceeding. If a client has concerns, we recommend a trust be set up to catch assets that otherwise might be spent unwisely. This usually needs to be done in the client’s Will.
The death of the “stretch” IRA
For decades, working Americans have been encouraged to contribute to tax-favored retirement plans and IRA’s with the goal of deferring current income not only for the current tax benefit but also for the prospect of retirement income that grows faster than the rate of inflation. Many of our clients have been successful at taking advantage of these vehicles and have secured tidy sums to spend in retirement. These accounts have become the foundation of lifetime incomes that not only span their retirements but also have stretched into legacies for their children and grandchildren. Under prior laws, an IRA would pass from the owner to a surviving spouse and ultimately to children, all the while allowing the asset to remain tax deferred — often for generations. Unfortunately, the fairy tale ending of tax-deferred growth may be coming to an end.
Under the SECURE act that became law at the end of 2019, spouse-to-spouse transfers are still allowed at the death of the first spouse with no tax consequences (as long as there is not a greater than 10 year age difference). However, at the death of the last spouse, a child or other beneficiary must have distributed all the assets out of the tax-favored account within 10 years. This rule applies to both Traditional and Roth IRAs. Congress and the IRS are getting more efficient at taxing tax-deferred arrangements in an effort to generate increased tax revenue to fund the budget.
All these areas are very technical and require individual guidance. We are happy to meet with you to discuss how these recent developments may affect your tax and estate plans.