Ask Liz Weston

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Q&A: Can investment gains outweigh inherited IRA penalties?

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Dear Liz: You recently answered a question from a person who inherited their father’s IRA in 2010 and learned they faced significant penalties for failing to withdraw the money over the subsequent 10 years.

But given how well the market has done over the last 16 years, is it possible they will end up with even more money despite the penalties than if they had withdrawn the funds as required?

Answer: No. The penalties are hefty enough that even a bull market shouldn’t tempt someone into ignoring them.

By the way, the original letter writer wasn’t required to drain the inherited IRA within 10 years.

That requirement for most nonspouse beneficiaries has only been in place since the SECURE Act of 2019. Before then, inheritors were typically allowed to stretch withdrawals over their own lifetimes — but they were still required to make annual withdrawals or face 50% penalties.

The SECURE Act reduced those penalties to a 25% excise tax on the amount that hadn’t been withdrawn. The penalty can be reduced to 10% if corrected within two years.

Q&A: What to do when a living trust document is lost

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Dear Liz: My parents created a living trust in 1999 and deeded their residence into the trust. Later, they sold that home, moved to another state and put their new residence into the same trust.

In 2014, my father was diagnosed with dementia. He died in 2020. During his illness, he destroyed most of the critical information related to the trust document, such as the attorney’s name and the trust document itself.

My mother relied on my father for all things financial. She is now 89 (bedridden but mentally sharp) and in need of funds to fix her house up for sale and to provide for her caregiving.

We went to the county recorder, but they could provide no advice and will not complete a property tax deferral without a copy of the trust document.

My credit union also will not fund a home equity line of credit without the trust document. Any recommendations in addition to seeking out an estate attorney?

Answer: Return to the county recorder’s office, retrieve the deed and check to see who requested the document be recorded, suggests Jennifer Sawday, an estate planning attorney in Long Beach.

Many attorneys put either their own name or the firm’s name in that field, she says. If you can identify the attorney and they’re still in business, you can contact them to see if they might have a copy of the trust.

Keep in mind that lawyers generally aren’t required to keep such copies. The attorney’s job is to properly prepare and deliver estate planning documents, Sawday says.

Once those originals are delivered, it’s the client’s responsibility to keep and safeguard them.

If a copy can’t be found, your mother’s legal options will be heavily dependent on the state law where she now lives, Sawday says. For example, in California, people can petition the court to establish the terms of a trust.

Attorneys sometimes use this process when a trust is discovered after someone has passed away, but the original document can’t be found, Sawday says.

An estate attorney can advise your mother about her options.

Estate planning should be an ongoing process. Any major life event, including a move to a new state or a diagnosis of dementia, should prompt a review of the documents.

Even without major changes, estate plans should be checked every three to five years and beneficiary designations reviewed annually. Many people resist paying for such reviews, but the cost of correcting a mistake can be considerably more.

Is the Disney Inspire Visa worth it? What I saved at Disney World

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Cinderella Castle at Walt Disney World’s Magic Kingdom

Disclaimer: This post contains an affiliate/referral link to the Disney Inspire Visa. If you apply through my link and are approved, I may receive a reward from Chase at no extra cost to you. Thanks for supporting my blog!

In February, I pounced on a “buy four, get two free” deal at Walt Disney World. This unusual promotion gave our family two free hotel nights and two free theme park days when we purchased a four-night, four-day vacation package.

Not long afterward, Chase announced three new Disney-affiliated credit cards: the Disney Inspire Visa with a $149 annual fee, the Disney Premier Visa with a $49 annual fee and the no-annual-fee Disney Visa. I opted for the Disney Inspire Visa, which came with a collection of benefits that seemed tailor-made for our trip, such as:

  • A $300 Disney gift card upon approval
  • A $300 statement credit after spending $1,000 (since reduced to $200 for new applicants)
  • 200 Disney Rewards Dollars after spending $2,000 on eligible U.S. Disney resort stays and Disney Cruise Line bookings
  • 10% off at many Disney resort restaurants and merchandise locations
  • 3% in rewards on Disney purchases and gas
  • 2% on groceries and 1% on other purchases

The card also offers a $100 statement credit after spending $200 on U.S. Disney theme park tickets and annual passes, plus a $10 monthly streaming credit for eligible purchases at DisneyPlus.com, Hulu.com or Stream.ESPN.com.

I got the card primarily for the sign-up bonuses and the 200 rewards dollars we could earn on our resort stay. But the 10% discount on dining and merchandise turned out to be an unexpectedly nice perk. It knocked about $30 off our souvenir purchases and $76.52 off our sit-down meals. (Bonus tip for meat eaters: Do not miss the phenomenal filet mignon at the Brown Derby in Hollywood Studios.)

The 3% rewards rate on Disney purchases also added up faster than I expected. So far, those rewards have generated statement credits worth over $200. If you add it all up, that’s more than $1,000 in savings.

I suspect the card will continue to earn its place in my wallet even if we don’t spring for another Disney resort or cruise vacation anytime soon. We’re annual passholders at Disneyland, so the $100 statement credit for eligible ticket and annual-pass purchases, the 10% discounts on many restaurant and merchandise purchases and the 3% rewards rate on Disney spending should more than offset the $149 annual fee.

If you’re planning a Disney vacation, have good credit and pay off your cards in full every month, the Disney Inspire could be worth considering. Of course, no credit card can make a Walt Disney World vacation cheap.

Six-night packages for a family of four typically start around $3,600 at Disney’s budget hotels and $6,300 at premium resorts such as Animal Kingdom Lodge, where we stayed. The “buy four, get two free” promotion, which is no longer offered, reduced our package cost to $4,859 for our family of three. The trade-off was traveling in late August, when we had to contend with considerable heat, humidity and afternoon thunderstorms that occasionally disrupted our plans.

I used frequent-flier miles for our plane tickets and a free-night award from a Hyatt credit card for an overnight stay at the Orlando airport. Disney’s extensive bus system helped keep our transportation costs down, but we still spent about $250 on rideshares, which was cheaper for us than renting a car and paying for parking. We spent about $2,000 on meals and snacks, more than $300 on souvenirs and about $620 on Lightning Lane passes that dramatically reduced our waits for rides and attractions.

So even with the deals, miles and other savings, this was a pricey trip. That made every discount, reward and sign-up bonus from the Disney Inspire card that much more welcome.

 

Q&A: Can Roth conversions help reduce the widow’s penalty?

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Dear Liz: The letter writer who asked about Roth conversions should also consider that they or their spouse will eventually be a widow(er) and will be subject to the income tax “widow’s penalty.”

Roth conversions now protect the survivor against some of that tax bite.

Answer: The widow’s penalty refers to the higher financial burden many survivors face after losing a spouse as they change from “married filing jointly” status to “single” status.

While their incomes may drop, their taxes and other costs may rise.

Having at least some money in a tax-free account can help with this as well as a number of other situations in retirement, which is why it’s important to fund a Roth account during your working years if you can.

The main downside to Roth contributions is that you don’t get an upfront tax break for making them.

Conversions, though, are more complicated.

They trigger a tax bill and can have ripple effects, such as reducing eligibility for tax credits, financial aid or health insurance subsidies.

Late-in-life conversions can increase Medicare premiums and cause more of your Social Security checks to be taxable. That’s why conversions should only be considered after careful consultation with tax pros.

Q&A: What to do when you missed years of inherited IRA distributions

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Dear Liz: I inherited my father’s IRA through a trust in 2010. Unbeknownst to me at the time, I’ve now found out I should have taken that money out over the following years, but I didn’t.

I turned 73 in May of this year, and I’d like advice on what I should do with that account.

Answer: Get thee to a tax pro. You’ve got some distributions to make, taxes to pay and penalties to mitigate.

Today’s rules for inherited IRAs require most non-spouse beneficiaries to empty the accounts within 10 years, thanks to the SECURE Act of 2019.

Before that, most beneficiaries could spread required minimum distributions over their own lifetimes.

Depending on the type of trust, you might have been required to take RMDs at the same pace your father was taking them. But either way, distributions were supposed to be made.

You (or better yet, your tax pro) will need to reconstruct the distributions that should have been taken since 2010, says Mark Luscombe, principal analyst for Wolters Kluwer Tax & Accounting.

Those distributions should be made as soon as possible, and then you (or better yet, your tax pro) can ask for relief from the possible 25% excise tax penalty that would otherwise be owed on the distributions you missed.

Your tax pro will need a copy of the trust, your dad’s date of death and the IRA’s Dec. 31 balances for every year since then.

Q&A: Can you revoke a revocable trust?

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Dear Liz: Is it possible to revoke an irrevocable trust?

Answer: Surprisingly, yes, in some cases it’s possible to revoke an irrevocable trust, depending on state law, the terms of the trust and the circumstances. For example, a trust could be dissolved or changed if all the beneficiaries agree and a court approves. In other cases, assets can be “decanted” from the old trust and put in a new, less restrictive trust. An experienced estate planning attorney can review the trust and offer advice.