Estate planning Category
Dear Liz: My sister and I are in the middle of distributing our parents’ estate. The beneficiary of the estate is a trust. Part of the estate consists of a traditional IRA, which will be split between my sister and me. The problem is that because the IRA will be distributed from the trust and is considered a non-spouse distribution, I’m told that we’ll have to pay taxes on the entire distribution. It’s a good chunk of change. I’m almost 60. Is there any way that I can roll the IRA into my own and take minimum distributions? I’d rather not pay the tax all upfront.
Answer: That’s understandable, since it’s typically much better to stretch distributions out as long as possible so that the money can continue to grow (and you can replace one big tax bill with smaller ones as you take distributions).
Unfortunately, the way your parents structured their estate ties your hands, although perhaps not to the extent you’ve been told.
It appears from your question that the IRA either failed to name a beneficiary or named the estate as the beneficiary, said Mark Luscombe, principal federal tax analyst for tax research firm CCH.
“Assuming that is the case, since estates do not have life expectancies, the IRA cannot be distributed over a beneficiary life expectancy as it could have been had an individual been named the IRA beneficiary,” Luscombe said. “Instead, it must be distributed under the terms of the IRA document over a period that cannot exceed five years.”
The exception is if the IRA owner before dying had already reached the age of 701/2 and begun distributions, Luscombe said. In that case, distributions can continue to the estate over the IRA owner’s life expectancy. If the IRA owner was quite elderly when he or she died, this might not give you much time to stretch out the distributions, but it probably would be better than paying all the taxes at once.
Another exception, which doesn’t appear to apply in your case, is if the IRA named the trust as the beneficiary. If that were true, “it is possible that the distributions could be based on the life expectancy of the oldest trust beneficiary,” Luscombe noted.
As you can see, this is a complicated area of estate planning and taxation. Getting good advice about how to name beneficiaries for your accounts can save your heirs a lot of money.
Dear Liz: My mother will be 88 in August. She owns her own condo, which is worth about $95,000, and has $5,000 in life insurance. She is in good health and lives comfortably on a monthly pension. She wants to put her condo in the names of my brothers and myself. What is your advice?
Answer: This is probably a bad idea for a couple of reasons. You and your siblings wouldn’t get the “step up” in tax basis that would be available if you inherited the property. In other words, you might owe capital gains taxes when you sell that could have been avoided if you had inherited the property rather than received it as a gift.
A potentially bigger issue: Medicaid look-back rules. If your mom needs nursing home care, her eligibility for the government program that pays for such care could be compromised by such a transfer. Many elderly people transfer their homes to children hoping to “hide” the asset from Medicaid, but all such transfers typically do is delay the older person’s eligibility for help.
Before she does anything, take her to an elder-law attorney who can help her — and you — plan sensibly for her future. You can get referrals from the National Academy of Elder Law Attorneys at http://www.naela.org.
Dear Liz: I am 84, and my husband is 88. We have two daughters, the elder of whom is married to a very controlling man. In the past, we lent them money and were paid back. But starting in 2009 his small business began to do poorly. They borrowed nearly $100,000 from us. Then in 2010, he begged us to get a home equity loan on our home, which was paid for.
They now owe us $300,000. We make the home equity payments of $800 a month because they are not able to pay that amount. He said he planned to sell a parcel of land to pay us back. Now he wants to borrow from my individual retirement account. He is telling our daughter to go after us and what to do. So I told my daughter and her husband, no more!
We are so sad. We didn’t expect to have money problems at this age. We wanted our estate to be divided equally between our daughters. But we’re wondering if we should make a new living trust to reflect the debt owed to us. Should we consult a lawyer?
Answer: You absolutely need a lawyer. Not just to draw up a new trust but to stand between you and the financial predator you call a son-in-law.
Badgering people in their 80s for money could be considered a form of elder abuse, and the amount he’s squeezed out of you is horrific. If either of you died or became incapacitated, he could swoop in to clean you out completely.
An elder law attorney can help you protect your finances and figure out what to do about this debt. It certainly would be understandable if you wanted to deduct the money you’re owed from your elder daughter’s inheritance, but you can expect this bully to cause misery regardless of what you decide.
Not that you needed more to worry about, but what you’re calling a home equity loan may well be a home equity line of credit. Although home equity loans come with fixed rates, lines of credit do not — which means the payments that are difficult for you to make now will be more expensive when interest rates rise. In any case, you might want to ask the attorney about the feasibility of a reverse mortgage, which could allow you to pay off the loan without having to make further payments.
You can get referrals to the National Academy of Elder Law Attorneys at http://www.naela.org. If your other daughter is trustworthy, please enlist her help in looking for and speaking with an attorney. She needs to know what’s going on so she can help in your efforts to protect yourselves from this man.
Dear Liz: Your column from the person who wanted “heirlooms” from her stepfather is applicable to my situation. My husband’s daughter wants literally everything in my house, even though he and I commingled our assets 23 years ago and have been married more than 10 years. How do I access public records to see if her mother did have a will?
Answer: It’s interesting that your husband can’t clear up this mystery. Presumably he would know whether his late wife had a will and what it said.
You can check with probate court of the county where she died to determine if a will was filed. If she had a living trust, that would be private and probably not filed with the court, but your husband should know what it said.
If she had no will or living trust, then your husband was supposed to follow state law in dividing up her possessions. In community property states, without a will or trust he typically would inherit stuff acquired during their marriage, plus a share of any separately held assets — possessions she brought to the marriage, said Burton Mitchell, an estate planning attorney with Jeffer Mangels Butler & Mitchell in Los Angeles. In other states, your husband might inherit half of her assets, with the other half divided among her children, Burton said.
State laws vary widely and there are all kinds of exceptions to the general rules, so you may need a lawyer’s help in sorting out what belongs to whom.
In any case, you’d be smart to hire an estate-planning attorney at this point. Your stepdaughter may not be able to pursue a legal case after all this time, but she could cause trouble when you or your husband dies. Any time a relative creates a real fuss about an estate division, it’s good to get a qualified attorney’s advice as you craft your own wills or living trusts that spell out who gets what.
As you make your plans, try to be guided by kindness and compassion. Your stepdaughter may not have a legal right to lay claim to every item in your home, but letting her have items of strong sentimental value may be the right thing to do. Just think how you would feel if your father’s second wife gave your mother’s special jewelry or your grandmother’s treasured antiques to your step-siblings. Lifelong rifts and family feuds have started over less.
Then again, all parties need to remember that stuff is just stuff. What’s a precious heirloom to one generation may wind up in the next generation’s garage sale. Resolving to put relationships first, instead of possessions, can really help all sides avoid painful battles.
Dear Liz: My mother died two years ago, and I am trying to figure out how to get any of her things that are family heirlooms. Her husband refuses to part with anything, including her clothing, saying he isn’t ready yet and that only when he is ready will he give us anything. Well, he is already remarried. I see items such as my great grandmother’s 200-year-old wicker basket that came from Germany and through Ellis Island sitting in their living room being scratched by a cat and used as a piece of everyday furniture. I have it in writing that the basket should be mine, but he won’t let any of us have anything. My mother told me she was making a list. He states she never did it. Everyone else is afraid to go to an attorney. My mother’s sisters want me to not rock the boat, but I feel two years and a new wife who is younger than me means someone has moved on.
Answer: Perhaps he has moved on, but there may not be much you can do about it.
If your mother had a will, it typically would have been filed with the probate court in the county where she lived. It would be a public record, so you could see how she wanted her estate divided.
In the more likely case that your mother didn’t have a will, then the laws of the state where she died would determine how her estate is divided. Often, those laws dictate that her property would be divided between husband and her children.
If your stepfather isn’t following her will or your state’s laws, you could hire an attorney to try to pressure him. But you have to weigh that expense, and the enmity it will cause, against what you’re likely to gain. Are a few clothes and a cat-scratched basket really worth the fight?
You may find a change in attitude and approach is more effective. Instead of getting angry and making demands, acknowledge to yourself that your stepfather has suffered a loss as well, even if he seems to have bounced back from it. Apologize if you’ve given offense, and then let him know you’d appreciate having something by which to remember your mother.
Whether or not you’re given the basket, be sure to use this experience to prevent a similar situation from befalling your own family. If you care about who receives what, then make the appropriate arrangements. Have a will drawn up and pick an executor who will abide by your wishes. Or, better yet, give heirlooms and other possessions to the recipients while you’re still alive so you can enjoy their appreciation.
Dear Liz: My wife and I, ages 58 and 60 respectively, are both retired and collecting $3,500 a month in pensions. We have about $375,000 in two 401(k) accounts and owe about $75,000 on our home. Should we be thinking about estate planning? If so, who does this work and how much do they charge?
Answer: Unless your home is a mansion, you probably don’t have to worry about the federal estate tax, which currently affects only estates worth $5 million or more. After 2012, the limit is scheduled to drop to $1 million.
But you still need an estate plan. Most important, you need legal documents that can help others take over for you should you become incapacitated. Powers of attorney for healthcare and finances can allow someone you trust to pay your bills, make medical decisions and otherwise handle your affairs. Spouses typically name each other as their preferred agents, but you also need to name back-ups in case one of you dies or you’re both injured in the same accident, for example.
You also probably need a will to say who gets what when you die, and you may want to consider a living trust if the probate process in your state is particularly lengthy or expensive (as it tends to be in California). You can create all these documents yourself using software products such as Quicken WillMaker or Nolo’s Online Living Trust. If you want a little more guidance — and many people do — you should look for an attorney who specializes in estate planning. A simple will with powers of attorney will cost a few hundred dollars, while a living trust typically costs $2,000 or more.
Dear Liz: I’m 56, make $30,000 and have no credit card debt. I rent and I have no assets except for about $350,000 to $400,000 in cash, stocks, oil and gas leases and property that I will inherit from my mom’s living trust. She is 85 years old. Are there any specific suggestions you would give me to be preparing for my retirement years?
Answer: Let’s be clear: You have no assets. Your mother does, and she may plan to give those to you, but those plans could change. She may well need her money for living expenses and long-term care, which could easily eat up that nest egg.
So you need to start saving on your own for retirement. You may think you can’t live on less than you are now, but make no mistake: You’ll be living on significantly less if you don’t save. Your Social Security benefit, if you retire at 66, will be around $1,000 a month.
If you have a workplace retirement plan such as a 401(k), start contributing to that. If you don’t, put money aside in an individual retirement account. If your adjusted gross income is under $27,750, you may qualify for a tax credit that can help you, known as the Retirement Savings Contributions Credit or Savers Credit. (You’ll use Form 8880 to figure the credit; visit http://www.irs.gov for more information.)
Dear Liz: I wanted to thank you for urging people not to be cheap when doing their estate planning. I am an estate planning and elder-law attorney in Los Angeles, and every do-it-yourself trust or will I’ve seen makes it compulsory to leave income and assets to the spouse. This is a huge mistake in many cases. That’s because such a transfer will disqualify the spouse from receiving government aid from Medicaid (which is called Medi-Cal in California). The result could literally mean hundreds of thousands of dollars are lost. This area of law is extremely complicated and only a knowledgeable elder-law and estate planning attorney should be advising people about it.
Answer: Medicaid planning is a controversial topic, since the federal program is designed to help the indigent, not those trying to preserve assets. That’s why the programs have look-back periods (typically five years, although it’s 30 months in California) to discourage people from transferring assets just to qualify.
But your point is well taken that estate planning and elder-law issues are too complicated for do-it-yourself solutions.
Dear Liz: We were recently advised by a financial advisor to put $500,000 into a variable annuity. It is for my mother’s trust, and frankly, my mother is not expected to live past another year. The cost of the annuity is supposed to be 1% above our current fees, and there is a floor on our investment so that no matter what happens in the market, if my mother dies we would still get the $500,000 back. If the market rises, we get the higher fund balance upon her death. Articles that I read online say that variable annuities cost more, generate large fees for the seller and the survivor has to pay taxes on the distribution as ordinary income, not as capital gains. They say variable annuities are not really good, and brokers can get $30,000 to $50,000 in fees on a $500,000 annuity. What is your opinion of a variable annuity?
Answer: Run this investment past a fee-only financial planner — one who is paid only by fees from you, not commissions on insurance products. You’ll get an earful about why this investment is probably a bad idea.
Your research has turned up most of the disadvantages. One you didn’t mention was surrender charges. If the money needs to be accessed in a hurry, you are likely to pay stiff fees for doing so.
Variable annuities are designed to be long-term retirement savings vehicles, not short-term repositories for cash. If you’re concerned about the safety of your mother’s investments, talk to the fee-only planner about your options, such as moving some or all of the money to an FDIC-insured bank account.
“I know it’s boring, but the money will be there in case they need it for Mom,” said financial planner Delia Fernandez of Los Alamitos. “And it will be liquid and available at her death to help settle final costs.”
Dear Liz: My father died in June, and I inherited part of his stock portfolio. I understand in 2010 there is no estate tax but have heard different opinions (from my tax advisor and two financial advisors) as to what my tax basis will be when the stocks eventually are sold. The opinions are that 1) I will get no step-up in tax basis, so that I will pay tax on the difference between the sale price and what Dad paid for the stocks; 2) that I will get a 100% step-up, so that the stocks will get a new basis based on their value at Dad’s death, which would minimize capital gains taxes; or 3) some combination of the two — basically, a certain portion would have the step-up allowed and the balance would not be eligible for the step-up. Can you clarify?
Answer: You’ll need to talk to the executor of your dad’s estate.
Here’s why. When there is an estate tax in place, the assets in people’s estates get “stepped up” to their value at the time of the person’s death. This is a huge boon to the vast majority of estates. Most people’s estates don’t owe estate taxes, but they still get this favorable tax treatment so that no tax is paid on the gains that occurred during the person’s lifetime.
When the estate tax disappeared for 2010, the step-up rules changed as well. Each estate instead is allowed $1.3 million of step-up, which the executor can allocate any way he or she wants, said estate attorney Burton A. Mitchell of Jeffer Mangels Butler & Mitchell in Los Angeles, although no asset can receive a step-up that’s more than its fair market value.
If your father’s estate had less than $1.3 million of unrealized capital gains, then all of your inherited portfolio gets a step-up in tax basis. If the gains exceed that amount, however, some or none of the portfolio would get the step-up, depending on the executor’s decision.
The executor has to file a form with the IRS outlining how the step-up is allocated. This form is due with the decedent’s final income tax return, Mitchell said.