Creating a Treasure Map: The Benefits of Preparing an Inventory before Death

If you have already done your estate planning, you have taken a significant step toward ensuring that your loved ones will know how to manage your affairs if you become incapacitated or die. However, simply having a will or a trust and related estate planning documents is often not enough. A detailed inventory of all of your accounts and property is crucial for helping your loved ones manage your legal and financial affairs effectively.

Most estate planning attorneys have received calls from distressed children who knew that a deceased parent had a will or a trust, but had no idea what accounts, insurance policies, or items of real and personal property the parent owned. If an inventory was never prepared and shared with the parent’s attorney, the child likely had to spend countless hours meticulously combing through the parent’s file cabinets, drawers, tax returns, mail, and online accounts to identify what the parent owned. 

Needless to say, this is not something that anyone wants to happen. Even if you do not have a will or a trust in place, you do not need to wait to prepare an inventory of your property until you have created these legal documents. In fact, assembling an inventory can be an excellent first step when it comes to your estate planning. This preliminary effort will allow your attorney to immediately begin focusing on the creation of a will or a trust that takes into account each of your accounts and pieces of property and how they should be coordinated with your estate planning goals. If you take this step, your attorney is guaranteed to be impressed and grateful for your preparation.

How to Create an Inventory

Creating an inventory of your accounts and property does not need to be very complicated. It can be a simple word processing document or even a handwritten list. Many individuals create spreadsheets in software programs like Microsoft Excel, Numbers, or Google Sheets. There are also numerous online services that can help you create a thorough inventory of your property. Many of these services enable you to automatically share your inventory with chosen individuals at a time that you designate before death or disability strikes. The bottom line is that any of these methods can work well—the important thing is that you create an inventory. Below is an example of an inventory formatted as a spreadsheet with columns and rows:

Of course, this is just an example of what an inventory could look like. You should include any information that you think will be helpful to someone who is put in charge of collecting your property after you have passed away. You might include additional details, such as where the property is located. For example, if you keep certain items of jewelry in a safe, or a boat you own is stored in dry storage, this would be crucial information to include.

In addition, though you will not share this with your attorney, consider using a software program or other service to store passwords for online accounts and even store digital copies of your important documents. 

Probate and Your Property

As you create your inventory, you will review how each item is titled or who is named as the beneficiary on certain accounts, which will enable you to identify those items of property that will have to go through probate. Probate is the court process that appoints an executor or personal representative to inventory your probate property and distribute the property according to state law or the terms of your will, if you have one. Generally speaking, any account or property that meets the following conditions will have to go through the probate process: (a) is owned only in your name, (b) is not owned jointly with another person, (c) is not titled in the name of a trust or business entity (like an LLC or partnership), and (d) does not have a named pay-on-death (POD) or transfer-on-death (TOD) beneficiary associated with the property. 

Probate can be an expensive, time-consuming, and public process that most people would rather avoid. If avoiding probate is a goal of yours, preparing an inventory well before you pass away can alert you to those items of property that will require a probate so that you can take steps prior to your incapacity or death to transfer ownership or retitle them.

Additional Benefits of a Complete Inventory

By creating an inventory with the type of information demonstrated in the example above, you can help your loved ones understand their next steps with regard to taking control of your property for management and distribution. Certain items and accounts, such as the following, may be distributed according to the unique legal aspects of that type of property:

  • Property owned in joint tenancy with rights of survivorship (such as real estate or bank accounts) will pass automatically to the surviving joint owner and outside of a trust or probate.
  • Some bank or investment accounts may have POD or TOD designations that allow those accounts to skip the probate process and be paid directly to a named beneficiary such as a child, spouse, trust, or charity.
  • Life insurance proceeds typically will not have to go through probate if you have properly completed the beneficiary designation form by naming your loved ones, a trust, or a charitable organization as beneficiaries on the policy. 
  • Accounts and property titled in the name of a trust (i.e., owned by the trust) can be distributed outside of probate according to the terms of the trust agreement.
  • Retirement accounts usually require the listed beneficiaries to file a claim with the account custodian before the account will be paid out. Probate courts and trusts usually have no control over retirement accounts.
  • Vehicles will typically need to be transferred through the local department of motor vehicles, which requires an affidavit along with a death certificate and the physical car title.
  • Certain items of personal property (e.g., furniture, jewelry, art, collections, etc.), if above the value determined by state law, may be subject to probate, unless they are transferred into a trust before death.

What to Do with Your Inventory Once Created

After creating your inventory, make sure to store a copy where your loved ones will be able to easily find it should something happen to you. Consider the following locations:

  • an estate planning portfolio or binder 
  • a file folder that is clearly marked and easily accessible to your loved ones
  • your client file with your estate planning attorney
  • an electronic document format that can be shared with your trusted loved ones online
  • a clearly labeled USB drive in your safety deposit box or safe (as long as you let your loved ones know what to look for, where to find it, and how to access it)
  • your client file with your other professional advisors (so that they can help your loved ones easily identify all of your property if your loved ones call them first after your death)

Once you have created and shared your inventory, you should create a plan for updating it. Over time, accounts get closed or consolidated with other accounts, property is sold or acquired, stocks get converted to cash, and retirement accounts get depleted. If you do not regularly update your inventory, there is a chance that you could create confusion and send your loved ones down rabbit holes as they try to handle your affairs. 

Some people find it helpful to choose a specific date each year when they will review and update their inventory and also review their estate planning documents. Whatever will work best for you, make a plan, implement it, and then stick with it. Your loved ones will praise your name for years to come if you do. If you need assistance or have questions reviewing your important documents, feel free to give us a call.

Is Your Estate Plan Incapacity Proof?

For most people, it is perfectly natural to think about estate planning only in terms of planning for death. While planning for your death is very important, if that is all you plan for, your planning can quickly become woefully inadequate. As medical knowledge and technology have improved over the decades, so too has modern medicine’s ability to keep people alive for much longer. It is no accident that in many areas of the country, long-term care facilities such as assisted living centers and nursing homes are being built at record pace.  

At first blush, staying alive longer would seem to be a good thing. However, longevity coupled with physical or mental incapacity can be extremely challenging if you fail to make arrangements for someone to assist you during that period of time. On the other hand, with proper incapacity planning, you can rest assured knowing that your affairs are in good hands, out of the public eye, and being handled without the expense of lawyers, courts, and unnecessary complications. 

What Is Incapacity?

Before we discuss how to plan for incapacity, it is important to clarify what it means to be incapacitated. Each state has its own method for determining legal incapacity, and most have enacted laws that define what incapacity is. For example, in states that have adopted the Uniform Probate Code, an incapacitated person is typically defined as follows:

“Incapacitated person” means an individual who, for reasons other than being a minor, is unable to receive and evaluate information or make or communicate decisions to such an extent that the individual lacks the ability to meet essential requirements for physical health, safety, or self-care, even with appropriate technological assistance.

Although some states have defined incapacity more broadly or more narrowly, in most states, this is a common definition of legal incapacity. From a purely practical perspective, however, incapacity can be described as an ongoing condition where you simply do not have the mental ability to take care of routine tasks for yourself without assistance from someone else. Such tasks might include paying your bills, cooking your meals, bathing, grooming or dressing yourself, taking your own medications, or being unable to protect yourself from financial or physical exploitation.

Why a Will Alone Will Not Cut It

Almost all estate plans created in this country include a will. A will is a legal document that allows you to memorialize your wishes for what you would like to happen after you have died.  For example, a will allows you to 

  • authorize someone to handle your final affairs after your death (an executor or personal representative);
  • name who will receive your accounts and property and in what shares, including successor or backup beneficiaries; and
  • designate guardians of your minor children.

Did you notice a theme in the list above? They are all things that must be handled only after you have died. That is an important point. A will only becomes effective once you are dead. 

So does a will help you if you become incapacitated? The short answer is no. A will is not any help if you become incapacitated. To provide some level of incapacity planning in your will-based estate plan, you must obtain additional legal documents, including at least a financial power of attorney and an advance directive. 

Financial Power of Attorney

A financial power of attorney (POA) is a legal document that you sign before you become incapacitated that allows you to appoint a trusted individual to act as your agent (meaning the appointed individual can act on your behalf). In this document, you spell out what an agent may do: a general POA allows an agent to handle most of your financial affairs whereas a limited POA restricts an agent’s actions to certain things or for a limited amount of time. Legally, your agent must act in your best interests when handling your property and legal affairs. A POA can, and in many cases should, grant the power to take the following actions: 

  • handle your deposit and banking accounts
  • withdraw funds from your retirement accounts
  • enter into contracts
  • collect your mail
  • deal with your various insurance companies
  • make investment decisions on your behalf
  • sell, mortgage, lease, and manage real property

You can also determine when your agent is allowed to act on your behalf. It can be restricted to only after you have become incapacitated (a springing POA) or take effect as soon as you sign the document (an immediate POA). When planning for your incapacity, it is important that your POA be durable, which means that your incapacity will not affect the validity or effectiveness of the document.

If you have a will-based estate plan and no financial POA (or an invalid one), your loved ones will have to go to court to have someone appointed to take care of these matters for you through a process known as guardianship or conservatorship. This can be a very costly, public, and time-consuming process for your loved ones during a stressful and emotional time.

Advance Directives

An advance directive is a document or set of documents in which you can appoint an individual to act on your behalf regarding medical decisions and, if authorized under your state law, also memorialize some of your medical and end-of-life wishes. Similar to a financial POA, a medical durable POA is one kind of advance directive that allows you to appoint an agent, often referred to as a medical or healthcare agent or proxy, who has the ability to make medical decisions on your behalf when you are unable to communicate your wishes yourself (i.e., if you are unconscious, even temporarily).

Another kind of advance directive is a living will, which is a legal document in which you can specify the kinds of end-of-life decisions that you want your doctors or healthcare agent to make on your behalf. In some states, an advance healthcare directive will contain both a power of attorney and end-of-life instructions; other states require separate legal documents. Regardless of the format, these documents are a critical component of making your estate plan incapacity proof. By naming someone you trust to make healthcare decisions for you, similar to the decisions you would have made if you could still communicate your wishes, you can ensure that you receive the care and medical treatment that is most appropriate for you.

If you do not have an advance healthcare directive, your loved ones will be forced to go to the court and have a judge decide who can make medical decisions for you if you are not able to make or communicate your wishes. 

Trust-Based Estate Planning and Incapacity

For those who want to make their estate plans truly incapacity proof, a revocable living trust can be a powerful legal tool. This type of trust has become the foundation of many well-constructed estate plans in this country. A living trust is a legal agreement between a trustmaker (a person with the money and property, sometimes called a trustor, settlor, or grantor) and a trustee (the person charged with managing, investing, and handing out the money and property). For most revocable living trusts, the trustmaker changes the ownership of the trustmaker’s accounts and property from the trustmaker as an individual to the trustee of the revocable living trust, who is often initially the trustmaker himself or herself. The trustee agrees to manage and protect the money and property for the benefit of beneficiaries. In a revocable living trust, the trustmaker is also the beneficiary during the trustmaker’s lifetime. Holding the property in this type of legal structure creates a great deal of flexibility to deal with incapacity issues as they arise.

For example, if you created a revocable living trust, named yourself as trustee, and transferred most of your property into the trust, you could use and enjoy your property just as you do today. But if you suddenly became incapacitated, a successor trustee (named by you beforehand in your trust document) could quickly and seamlessly step into your shoes as trustee to continue managing the trust property for your benefit throughout any period you were incapacitated. All of this could be accomplished outside of the courtroom, maintaining privacy and eliminating burdensome court and attorney fees in the process. Then, when you die, your successor trustee would have the authority to continue to manage the trust property or give it to remaining living beneficiaries (typically, your loved ones that you leave behind). Again, this can be done completely outside of the court system, thereby eliminating significant cost, delay, and invasion of your and your loved ones’ privacy.

Do not forget that this incapacity planning is only as good as the individuals you choose to serve in these roles. If the person or people you named can no longer fulfill their responsibilities, you will need to change your legal documents as soon as possible to ensure that the best possible people are serving in these crucial roles.

Finally, it is important to remember that a trust-based plan should still include a will, financial POA, and advance healthcare directive. Each of these documents has important legal functions designed to address circumstances that a trust alone cannot.

By carefully crafting each of these legal documents with our help, you can feel confident that your loved ones and the property that you have worked your whole life to obtain will be in good hands if incapacity strikes. We are here to help you think through and implement each decision that goes into making your estate planning truly incapacity proof. Give us a call today.

Getting Ready for 2021

This year is quickly coming to a close. For many of us, December 31 cannot come soon enough, as 2020 has been anything but a walk in the park. 

The first quarter of 2020 brought a worldwide pandemic. Not only did this raise concerns about everyone’s health and safety, but it also fundamentally changed the way we all live. Many people found themselves either working from home or out of work. The pandemic also created market volatility that impacted many people’s investment and retirement accounts. Along with the pandemic, many areas of the country experienced severe natural disasters such as hurricanes, earthquakes, and fires, leaving them without homes. Lastly, the 2020 presidential election proved to be just as unprecedented, with many states taking days after the election to count all of the votes and certify the election results. 

While there is reason to be optimistic that 2021 will bring a COVID-19 vaccine and the promise of a return to some level of normalcy, this will not happen immediately on January 1, 2021. In the meantime, life marches on. We are just as busy as ever with supervising kids attending school and other activities (in-person or virtually), pursuing new employment opportunities or adapting to new work environments, and adjusting savings and investment goals. With so much going on in your life, it can be easy to forget the details that can help you prepare for whatever 2021 may bring. That is why we are here: to remind you of those things that can make your life easier when it comes to your estate, financial, and tax planning. Here are a few important things to consider as the year comes to a close.

Maximize Contributions to Retirement Accounts

This year brought plenty of employment disruptions for many of us. These disruptions may have resulted in a job change and the establishment of a new 401k account with your employer. Or they may have caused you to reduce or even suspend making regular paycheck contributions to your retirement account given the uncertainty of the job market as the pandemic escalated. As a result, you may not have maximized your annual contributions to your retirement accounts in 2020. Depending on your current employment status, perhaps you have forgotten to restart your contributions and are at risk of missing out on the opportunity to maximize your annual contribution limits. Although the IRS has routinely allowed for contributions to be made even after the first of the year for the preceding year, it is typically good practice to make such contributions before the end of the year if possible.

Tax Return Preparation

December is the perfect time to begin pulling together your tax records in preparation for filing your 2020 tax returns. The sooner you can begin to get a sense of what your tax bill will be for 2020, the sooner you can prepare to write that check to the IRS or carefully plan how you will use any tax refund if you are entitled to one. In either case, preparing now for tax season can be an easy way to reduce stress over the holidays by knowing that you are ready to begin working on your returns just as soon as January 1 comes around.

You can begin gathering the following information and documentation in preparation for filing your tax returns:

  • Social Security numbers and birthdates for everyone to be listed on your return
  • W-2 forms, any 1099 forms, bank or financial institution tax statements, miscellaneous income records (e.g., gambling or lottery winnings)
  • Property tax payment records
  • Charitable donations
  • Receipts for medical expenses and health insurance coverage records
  • Business expense records
  • Mileage records
  • Home office expenses

Last-Minute Gifts

A frequently forgotten tax benefit that exists for all US citizens is the ability to gift up to $15,000 per person (in 2020) without incurring any gift tax liability and without the need to file a gift tax return. This annual gift tax exclusion amount is noncumulative, so it is a use-it-or-lose-it tax benefit. Because the pandemic has caused financial hardship for many people, utilizing the annual gift tax exemption may be a great way for you to help family and friends without incurring tax liability. And despite some of the recent presidential election drama, it appears increasingly likely that Joe Biden will be inaugurated as the forty-sixth president in January, which presents a distinct possibility that the lifetime unified gift and estate tax exclusion amount will be decreased in the near future. 

If you have significant wealth, you should seriously consider leveraging this annual gift tax exclusion in 2020 as a part of an ongoing strategy for reducing your estate’s size and thereby avoiding potential future estate taxes. Although writing a check for $15,000 to each child or grandchild annually is one way to use this tax benefit, it may not be the best way. Forming a trust can add significant benefit and protection to this kind of gifting strategy.

For example, forming an irrevocable life insurance trust continues to be a highly effective way to leverage the annual gift tax exclusion by using the annual cash gifts to purchase life insurance on you, your spouse, or both of you. At your death, the life insurance benefits pass income tax-free to the trust and can then be managed and used on behalf of your trust beneficiaries in a much more protective and strategic manner.

If you have questions about how to best leverage this annual gift tax exclusion, we would welcome a phone call to visit with you about it and help you understand the available options.

It Might Be Time to Review Your Estate Planning

This year also brought significant changes to the law surrounding retirement accounts and how to coordinate them with your estate planning. The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in late December 2019, had a major impact on estate planning for those with significant savings in tax-deferred retirement plans. No longer can required minimum distributions from an inherited IRA be stretched out over the lifetime of the person inheriting the IRA. Unless a beneficiary is a spouse or otherwise qualifies as an Eligible Designated Beneficiary, the retirement account must now be paid out within ten years of the plan owner’s death. Although this received some attention in the media early in the year, it paled in comparison to the COVID-19 pandemic coverage, so it is not surprising that many people are still very unaware of these changes and how they could impact their estate planning. 

With all of the changes that 2020 has brought, it is more important than ever to review your estate planning documents. If it has been a few years, you will want to make sure that your plan still reflects your wishes. Give us a call to schedule a review of your plan if you or your loved ones have experienced any of the following life changes:

  • Marriage or divorce
  • Birth or death in the family
  • Moving
  • New job
  • Retirement or loss of employment
  • Acquiring new accounts or property

If you currently have a trust-based estate plan, carefully reviewing your financial accounts before the end of the year to determine how your accounts are titled and how the beneficiary designations have been made can ensure that you catch critical mistakes and identify accounts unintentionally left out of your living trust.

Taking the steps described above can go a long way toward preparing you for the upcoming year. When you are prepared, there is not much room left for uncertainty and fear. Instead, you can feel confident heading into the holiday season that you will be ready for whatever 2021 has in store for you.

Election Update: Planning under the Biden Administration

After several days of counting ballots, Joe Biden has been declared the winner of the 2020 Presidential election by many major news outlets. Although we await the official certification of the election by each state, an official concession by President Trump, and the outcome of several pending lawsuits–which could take us into December or even January–the 2020 election and its aftermath promise significant changes in how Americans will be taxed. While it is unlikely that every proposal discussed during President-Elect Biden’s campaign will become the law of the land, we can still glean essential details from all the campaign rhetoric to help us prepare to weather these possible changes.

Proposed Policy Adjustments under a Biden Presidency

Here is what we know so far about some of President-Elect Biden’s key proposals that are most relevant to your estate planning:

Estate, Gift, and Generation-Skipping Transfer (GST) Taxes

For 2020, the estate and gift tax exemption is set at $11.58 million (indexed for inflation), with any wealth over that amount taxed at 40 percent as it passes to heirs. This exemption amount is scheduled to be lowered in 2025 to $5 million (also indexed for inflation) unless new legislation is passed before then.

President-Elect Biden suggested during his campaign that he would support legislation that would reduce both the estate and GST tax exemptions to $3.5 million per individual and would lower the lifetime gift tax exemption to $1 million. President-Elect Biden has discussed other proposed legislation, favorably proposed by Senator Bernie Sanders, that aims to place annual, aggregate donor limits on gifts to certain types of entities such as irrevocable life insurance trusts and certain pass-through entities such as family limited partnerships.

In addition to reduced transfer tax exemption amounts, several Democratic tax reform proposals have suggested returning estate tax rates to historical norms. What does that mean? In the 1940s, the top estate tax rate was 77 percent, and under 2001 federal tax law, it was as high as 45-55 percent. As a result, we may well see an upward adjustment in the estate and gift tax rates. If this comes to fruition, coupled with a lowered exemption amount, means more people should be looking at tax planning as part of their strategy.

Capital Gains Taxes

Our current law taxes capital gains as regular income if those gains are realized on property held for less than one year. For long-term capital gains (gains on property held for a year or longer), there is a graduated tax rate depending upon the tax filer’s income level (0 percent, 15 percent, or 20 percent). For individuals and couples who earn more than $200,000 and $250,000 per year respectively in net investment income, there is an additional 3.8 percent surtax added to their capital gains tax rate.

The current law also allows for a step-up in basis of appreciated property if the property is held until the owner dies. This allows for inherited property to be sold or liquidated shortly after the owner’s death with little to no capital gains taxes assessed on the sale of the property.

Today’s law also allows for like-kind exchanges on appreciated property such as artwork and rental properties. This allows people to reinvest the gains that they earn on appreciated property into similar types of property without ever having to pay capital gains taxes when the property is sold. If the individual keeps making such like-kind exchanges on appreciated property until the individual’s death, the capital gains built up in that property will be erased by the basis step-up rules.

Proposed changes under a Biden presidency would either (1) eliminate the step-up basis rule for inherited property and impose a carryover basis rule for inherited property or (2) impose recognition of gain on property at the owner’s death. Additionally, the Biden tax plan proposes eliminating like-kind exchanges and imposing a 39.6 percent long-term capital gains tax rate on individuals earning more than $1 million per year. And if the 3.8 percent surtax on net investment income remains in place, the effective federal tax rate on long-term capital gains could exceed 43 percent.

If these changes are implemented along with the changes to the estate tax laws discussed above, many estates could see significant tax bills at the death of the estate owner.

What to Do in the Meantime

Although it may be too early to know exactly what the tax laws will look like in 2021, we can still take some concrete steps to prepare while we wait for answers. Tax issues, while certainly important, should not overshadow the need to get your affairs in order in case of an untimely death or disability. If it has been some time since you reviewed your estate planning documents such as wills, trusts, powers of attorney, and healthcare directives, now is a great time to do so. Reviewing these important aspects of your estate planning can go a long way toward creating peace and security for you and your loved ones in these uncertain times.

We Are Here to Help

No one knows for sure what the future holds for our country. However, what is certain is that we will continue to monitor the latest tax law developments closely and keep you updated as they unfold. In the meantime, if you have any questions or concerns, please do not hesitate to contact us. We are here for you.

Protecting Your Significant Other’s Future

October is a popular month for couples to tie the knot in the United States. While wedding planning most often includes tuxedos, dresses, rehearsal dinners, and guest lists, an often overlooked part of pending nuptials is estate planning.
For young couples beginning a life together and getting married for the first time, estate planning may not be a terribly complicated endeavor. With minimal property and savings, simple wills, financial powers of attorney, and healthcare directives may be sufficient planning for the first years of marriage.

The age at which couples are getting married for the first time continues to creep upward, however. It is therefore common for individuals to accumulate significant amounts of property, savings, and investments during their single years. When couples with property beyond the most simple items marry, estate planning becomes much more urgent. It is even more crucial when children are born into the marriage or when entering a second or third marriage.

If you are considering marriage or have already tied the knot, reviewing the following information can help you tackle the critical task of planning for the management and distribution of your property should you become unable to manage your affairs or die sooner than you expect.

Challenge Your Assumptions

An all too common mistake that married couples make when approaching estate planning is to assume that their spouses will see things the same way they do. The following questions should be asked of each spouse:

• How do you feel about the necessity of purchasing and maintaining life insurance?
• Do you feel that the other could handle the family finances on their own if either of you were to die or become unable to manage your affairs?
• Who should care and raise your minor children if you die?
• To what extent should the money and property left to each other be protected from future creditors or new spouses?
• Who is best prepared to make end-of-life decisions for you should you become critically ill and unable to communicate your wishes?
• Do you expect that all of your wealth should be left to your spouse?
• Do you want to leave some of your money or property to aging parents, children from another marriage, or to a charity or other cause that is important to you?
• How should your property be left to your spouse or your children and grandchildren? Should these individuals inherit the money and property outright (no strings attached), or should the inheritance be left to your spouse and loved ones in trust (with specific instructions as to when and how the inheritance is to be used)?

The answers to these questions regularly surprise couples. If you are unsure of how you or your spouse would answer these questions, now is a good time to discuss them. Couples who communicate and challenge their assumptions will be far better prepared to successfully complete their estate plan.

Joint or Separate Estate Plans

The decision to jointly engage an attorney to assist you with your estate plan may not be as simple as it would seem at first blush. Depending upon your circumstances, it may be advisable for a couple to engage separate legal counsel to assist with the estate planning process. If any of the following circumstances apply to you, you should give serious thought to hiring separate counsel for your estate planning:

• Do you or your spouse have children from a prior marriage or relationship? If yes, is there any tension between you and your spouse when discussing how you would want the accounts and property divided upon the death of one or both of you?
• Did one of you bring far more money or property into the marriage?
• Is there anything in your estate plan that you want to keep hidden from your spouse (for example, a child from outside the marriage that you do not want to reveal)?
• Note: Honesty in marriage might well be the best policy in the long run.
• Do you and your spouse have very different ideas about philanthropic goals in your estate planning?
• Have you and your spouse entered into a prenuptial or postnuptial agreement?
• If you have a prenuptial or postnuptial agreement, do you now want to change the terms of that agreement through an amendment or through your estate plan?

There may be other reasons to seek separate counsel in estate planning. A good rule of thumb is that if there are aspects of your financial and family relationship that will likely breed contention and misunderstanding between you and your spouse, you should consider using separate counsel to help negotiate and resolve the legal and estate planning issues that intersect with these problem areas.

On the other hand, for those who are willing to communicate and resolve the differences discussed above, it may be possible to jointly engage legal counsel to assist with your estate plan. One of the advantages of jointly hiring legal counsel is that the attorney can act in some ways as a mediator and educator, helping you identify and craft creative solutions to challenges that may arise during the estate planning process. Additionally, jointly hiring legal counsel tends to be a less expensive solution and communication tends to flow much more freely when fewer individuals are involved.

Elective Share Laws

It is important to understand that even if you do separate estate planning with your spouse, the United States has elective share laws designed to ensure that a married individual cannot completely disinherit a spouse or minor child from another marriage. The reason for these types of laws is that traditionally, lawmakers felt that these family relationships deserved protection from financial ruin by individuals who perhaps would unwittingly or unwisely attempt to disinherit a spouse or child dependent upon that individual for support.

These elective share laws are designed to allow a disinherited spouse or child who is still dependent upon the deceased individual to legally claim a percentage share of the individual’s accounts and property regardless of what the will or trust provides.
If you have agreed as a couple to leave your entire estate to someone other than the surviving spouse, you will likely need to sign a prenuptial or postnuptial agreement in which the disinherited spouse waives elective share rights. Such a waiver must meet certain requirements to be valid, which can vary by state. For example, most state laws require that the disinherited spouse must have been represented by independent legal counsel when negotiating the waiver.

Unmarried Couples

Marriage today is less common than it was a few decades ago, with more couples choosing to live together without the legal consequences of marriage. If you find yourself in such a relationship and nevertheless feel committed to your partner, you may be in even greater need of a carefully crafted estate plan, either together with your partner or on your own, depending upon your goals.

In nearly every state, the default laws (intestacy laws) that govern how your property is to be managed if you die without a valid will or trust or are unable to manage your affairs typically do not allow an unmarried partner to receive your property. To ensure that your property passes to your partner, certain legal steps must be taken:

• Jointly titling property (such as bank accounts and real estate) with your partner so that it passes to the survivor automatically at the deceased partner’s death
• Naming your partner as the payable-on-death or transfer-on-death beneficiary of certain financial accounts
• Naming your partner as the beneficiary on your IRA, 401(k), 403(b), or other retirement plan
• Drafting a will or trust and naming your partner as a beneficiary
• Naming your partner as the beneficiary on a life insurance policy

Each of these methods of leaving property to your partner has pros and cons. For instance, jointly titling your home with your partner may be an easy way to ensure that your partner will inherit the home that you share when you die. However, if you and your partner split, your former partner now jointly owns that property and can force the sale of the property to liquidate their share. Additionally, there may be gift tax consequences to adding a partner to the title of your banking or investment accounts that could later affect you. Even worse, jointly titling your property with a partner can subject it to your partner’s lawsuits or creditor claims in the future even though your intent was merely to allow your partner to inherit that property upon your death.
You should also consider planning for your potential incapacity and whether your significant other will be your designated agent (decision maker) by drafting documents that address financial or healthcare matters:

• A financial power of attorney can name your partner as the trusted individual to make financial decisions for you should you become unable to manage your own affairs
• A healthcare power of attorney and living will (also called an advance healthcare directive) can name your partner as your medical decision maker should you be unable to make or communicate your medical decisions for yourself

Estate Planning When Your Marriage Is on the Rocks

Sadly, many marriages ultimately end in divorce. If in the process of divorcing, it is important to consider your current estate planning implications should something suddenly happen to you. Some decisions that you might want to change immediately include the following:

• The person named as your medical decision maker. Choosing a different decision maker can usually be done at any time. Most people would not want their soon-to-be-ex in charge of making life and death decisions on their behalf.
• The person appointed to make financial decisions on your behalf. Depending upon the type of financial power of attorney that has been prepared, your ex might be authorized to act on your behalf only when you are no longer capable of handling your affairs (a springing power of attorney)—or your ex might be authorized to act on your behalf now (an immediate power of attorney).
• The guardian of your minor children from a prior relationship or marriage if you no longer want your soon-to-be ex-spouse to be the guardian.
• The person named in your will as personal representative or trustee of your trust (if you have a separate trust from your spouse).
However, there are some things that you may not be able to change until after the divorce is finalized. For example, when a divorce case is pending in court, the couple is legally prevented from changing the following:
• Legal title to bank accounts, real estate, and other types of investments
• Beneficiary of a will or trust
• Beneficiary designations on retirement accounts
• Beneficiary designations on life insurance
• Ownership of personal property such as vehicles, art, furnishings, etc.

Once a divorce has become final and the property division is memorialized in the divorce decree you have the right (and should not delay) to revise your estate plan in whatever manner you wish, keeping in mind any requirements imposed by the divorce decree, elective share laws for child support, or continuing spousal support obligations.

As you can see, obtaining solid legal estate planning counsel when you have a significant other—whether it is a spouse or partner—or minor children can be critically important. Without careful planning, you are almost guaranteeing that your loved ones will experience frustration, expense, and delays when it comes to the management and distribution of your property if something happens to you. Conversely, a carefully crafted estate plan can provide significant peace of mind for you, your significant other, and your children for years to come. Call our office today for a virtual or in-person consultation to discuss how we can help you with your estate planning goals.

Protect Your Family from Lawsuits with a Domestic Asset Protection Trust

Conversations with family, friends, and colleagues can sometimes wander into the topic of lawsuits, divorces, bankruptcies, and other threats that put one’s property at risk of loss to a creditor. Such conversations often leave people shaking their heads, asking what the world is coming to, and feeling vulnerable and frustrated. However, an important tool has become increasingly available to even those of modest means to protect their property from such threats at a reasonable cost and with relatively few hoops to jump through.

The Domestic Asset Protection Trust

A domestic asset protection trust (DAPT) is a legal structure into which you (in your role as the grantor or trustmaker) transfer your accounts and property such as your home, cash, stocks, or other investments.  Once transferred into the DAPT, the property is legally protected from future lawsuits, divorcing spouses, bankruptcies or creditors, and similar threats. Although you have transferred these accounts and property to the trust, you can continue to enjoy the benefit of this property in the DAPT with minor limitations.

DAPTs work on the legal principle that someone cannot take away from you something that you no longer own. When you transfer ownership of your property to a DAPT, you are actually making a gift of it to the trustee (the person or entity you have chosen to manage, invest, and use the accounts and property) on behalf of the irrevocable trust. The trustee is then under a legal obligation to use this property for your benefit, or for the benefit of those you have named in the trust.

How a DAPT Works

When you create a DAPT, you sign a trust document and permanently gift some of your property into the trust. The trust is irrevocable, meaning you cannot change the trust agreement (the document that creates the trust and establishes the rules that control the trust). The trustee can make distributions to you as the grantor, thereby allowing you to continue enjoying some benefits of the property in the trust. However, the trustee in most cases needs to be an independent trustee (someone who is not related or subordinate to you or any other beneficiary and will not inherit anything from the trust) in order to preserve the asset protection properties of the trust. Still, many states allow for a grantor to be a co-trustee and exercise authority with respect to the investment decisions of the trust.

Which States Have DAPT Laws?

Currently, the following states have legislation that authorizes the creation of a DAPT: Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.

It is important to remember that DAPT laws can vary significantly by state. Residency requirements of the grantor or trustee of a DAPT vary from state to state, as does the required connection of the grantor with the DAPT state. In some instances you can live in one state but have a DAPT in a different state. Some DAPT laws are better than others, and their effectiveness may depend upon the location of the property that you plan to gift into the trust. Given these considerations, it is critical that you speak with an experienced attorney when setting up a DAPT. Key differences in state law that can significantly impact the effectiveness of a DAPT include the following:

  • how a DAPT must be set up
  • who can serve as the trustee
  • how much of your property can be placed in the trust
  • which creditors will be blocked from reaching the trust property
  • what additional powers you, as the grantor, can exercise over the trust
  • how much time must pass before the property placed in a DAPT is protected from creditors

What Kind of Creditor Protection Does a DAPT Provide?

In general, a DAPT will allow you to shield accounts or property owned by the DAPT from any creditor claims that arise after the DAPT is funded and after any applicable time periods or notice requirements imposed by state law have been met. In many states, this protection can even include future claims of a current or future spouse, child, or creditor. It is important that you consult an experienced attorney regarding the protections your state’s DAPT statutes offer, as these can vary by state.

Despite the protection offered by a DAPT, some creditors will be able to reach the property owned by the DAPT regardless of which state law you use. Currently, no state’s DAPT laws allow a DAPT to be used to

  • spend down or qualify a grantor or the grantor’s spouse for Medicaid eligibility;
  • defeat state or federal reimbursement claims or rights of recovery for Medicaid benefits paid to the grantor or the grantor’s spouse; or
  • defeat creditor claims if property is transferred to a DAPT with the intent to prevent, hinder, or delay a known or present creditor from reaching the property.

Most states’ DAPT laws also provide the following exceptions to the creditor protections:

  • taxes (state and federal tax claims must still be paid from trust assets)
  • family support obligations such as alimony and spousal support (state laws differ significantly on this topic)
  • medical bills of a beneficiary (certain states allow access to the trust property to pay these medical bills)

Who Is Likely to Need a DAPT?

Not everyone will need a DAPT because not all people face the same kinds of risks. However, there are certain professions and circumstances for which you may want to consider using a DAPT as part of your estate planning.

  • High-risk occupations. Lawsuits are increasingly common against those in certain professions, such as doctors, accountants, lawyers, real estate developers, builders, architects, and business executives. Creating a DAPT to protect a portion of your assets can be an effective shield against risks associated with lawsuits if you are in one of these occupations.
  • Owning a business. Owning a business can put you at a higher risk of lawsuits. Using a DAPT can protect your home and other personal property against claims brought against your business.
  • Personal injury and accidents. Unfortunately, accidents happen to everyone. Moreover, it is common today for even innocent accidents to lead to litigation and potential loss of personal wealth. A tool such as a DAPT can be a critical part of protecting your property for your family both now and in the future.

Deciding If a DAPT Is Right for You

Deciding whether to use a DAPT should not be undertaken without good legal advice. The following factors, among others, should be carefully considered with the help of a qualified estate planning attorney:

  • How much of your property do you want to place in the DAPT?
  • What kind of access to the trust accounts or property will you need in the future?
  • Who will serve as the independent trustee responsible for making distributions to you?
  • Who, besides you, will be a beneficiary of the DAPT?
  • In which state will you form the DAPT?
  • What types of creditors are you most concerned about, and do the relevant state’s DAPT laws protect you against such creditors?

Once you have answered these questions, you will have a much better sense of whether a DAPT is a tool that will work for you. If you have additional questions about DAPTs, please give us a call. We would love to visit with you either in person or virtually.

Strike While the Rates Are Low: Low Interest Rate Planning Strategies for Passing on Your Wealth

COVID-19 has deeply impacted the economy in the United States and will likely continue to do so for some time. While most would agree that this pandemic is not a positive development, there are nevertheless some silver linings. One such silver lining is that certain powerful estate planning strategies have become much more attractive and feasible based on the current low interest rate environment. If you have a relatively large estate (over $10 million individually or $20 million as a married couple), you may want to talk with your estate planning attorney about the following planning strategies.

1. A Grantor Retained Annuity Trust (GRAT) is a tool that can be created by an experienced estate planning attorney to transfer significant wealth at a reduced transfer tax cost. This strategy requires a grantor (the person creating the trust) to transfer accounts or property into a carefully drafted irrevocable trust. The trust is designed to pay the grantor a stream of income at least annually and over a specific term of years. At the end of the specified term, the payments end and any property left in the trust not paid to the grantor is transferred (gift tax-free) to a third-party remainder beneficiary. This beneficiary is usually a child or descendant of the grantor.

The goal of a GRAT is for the assets in the trust to grow faster (at a higher interest rate) than the low interest rate published by the Internal Revenue Service (IRS), also known as the Section 7520 rate, used to calculate the present value of the payments made back to the grantor. If this occurs, the accounts or property remaining in the GRAT are transferred to the remainder beneficiaries free of gift taxes.

The following factors can impact the effectiveness of a GRAT:

  • The health of the grantor and whether the grantor can be expected to live beyond the GRAT term
  • The interest rate (Section 7520 rate) for the month in which the accounts or property are transferred to the GRAT
  • The nature of the accounts or property being contributed to the trust and their growth potential
  • The remaining lifetime gift tax exclusion amount available to the grantor

It is also important to note that the creation of a GRAT will require the filing of a gift tax return to report the gift. With deliberate planning, however, the amount of the gift to be reported can be negligible.

2. A Charitable Lead Trust (CLT) can also offer significant tax savings if you intend to make charitable giving a part of your estate plan and legacy. This is particularly true in today’s low interest rate environment. Similar to a GRAT, a CLT is an irrevocable trust that makes payments out of the trust to a beneficiary (a qualifying charity) over a specified period and is tied to the IRS Section 7520 rate. The period can be a set number of years or for the lifetime of the grantor. Unlike a GRAT, however, a CLT names a charity as the recipient of the annual payments over the trust term. Upon completion of the trust term and payments, the accounts and property remaining in the trust pass to chosen beneficiaries (often children or descendants) free of gift and estate tax.

The value of the gift reported on the gift tax return for the year in which the gift was made is calculated as the difference between the amount of the initial gift and the present interest of the sum of all of the payments payable to the charity. Because that present interest value is calculated using the currently low Section 7520 rate, the aim is for the money and property in the CLT to grow at a higher rate, thus allowing more of the growth to be transferred tax-free to remainder beneficiaries at the end of the trust term. In addition, and depending upon how it is structured, a CLT can provide valuable income tax deductions during the grantor’s lifetime.

It is important to remember that the payments to the charity must be made each year regardless of the performance of the trust assets. Poor investment performance can result in the need to use trust principal to cover the required charitable payments.

3. Intrafamily loans are another often overlooked strategy to transfer additional wealth to family members without unnecessarily using up your gift tax and estate tax exemption amounts. These kinds of loans can be an excellent way to help family members recover from low credit scores or eliminate certain high interest commercial home loans, consumer debt, business loans, or education loans, all while keeping interest payments within the family rather than enriching commercial lenders.

In a low interest rate environment, you could loan a family member money using the Applicable Federal Rate (AFR) as the interest rate over the term of the loan. The loaned money could then be invested by the borrower in assets that are likely to grow faster than the AFR built into the loan. The difference between the AFR payable to the lender and the realized rate of growth of the invested loan proceeds would accrue to the benefit of the borrower and outside of your estate (leaving less to be taxed upon your death). Thus, you can indirectly transfer this growth to your family members without the need to report the “transferred” amount as a gift to the IRS.

As a reminder, even though these are intrafamily loans, this does not mean that they can be informal. Such loans must be properly documented with executed promissory notes and, where appropriate, secured with collateral as if they were arm’s-length transactions so that the IRS cannot reclassify all or part of the loan as a gift.

There are several other strategies beyond those discussed that can help you take advantage of these historically low interest rates. Now is a great time to give us a call so we can review strategies for taking advantage of low interest rates. Doing so can maximize your wealth and the wealth of succeeding generations, even in these economically challenging times. We are available for in-person or virtual meetings, as you prefer.

Preparing Your Beneficiaries to Receive Their Inheritance

When you hire an estate planning attorney, you are often looking for help with preparing your accounts and property to ultimately pass smoothly and safely to your loved ones. This is a key component of estate planning. An experienced estate planning attorney will put much thought and effort into ensuring that an appropriate estate plan is created using a variety of legal documents including wills, trusts, powers of attorney, and health care directives. These important tools can ensure that what you own ends up in the right hands, at the right time, and with as little cost and delay as possible.

Prepare beneficiaries to receive assets. An often-overlooked aspect of estate planning, however, is preparing beneficiaries to receive money and property. With all of the thought that goes into making sure taxes are minimized, probate is avoided, and accounts and property are protected, few clients give sufficient thought as to whether their beneficiaries have been adequately prepared to suddenly receive large amounts of cash or manage property. Working through the following questions with your beneficiaries can pay huge dividends by ensuring that they are prepared to receive your accounts and property.

Identify successors for a family business. If a family business makes up a large portion of your family’s wealth, have you identified who will continue to run the business if you become incapacitated or suddenly pass away? Will your successor be a family member who has been working in the business, and is this person fully prepared to take over your role? If a family member will take over, does the person understand the extent to which they will manage the business for the benefit of other family members? Or does the successor have expectations about the financial rewards of participating in the business that differs from those of the rest of the family? These questions can cause a great deal of discord within a family if left unanswered.

Consider complicated assets. Perhaps the wealth of your estate is made up of a complicated portfolio of stocks, bonds, cash, and investment accounts. If that is the case, do your beneficiaries understand the basics of investing with these types of accounts? Do they understand the tax implications? Are your beneficiaries used to taking advice from attorneys, financial advisers, and tax professionals, which will allow them to achieve the most benefits from the accounts left to them? Or do your beneficiaries consider such advice needless, expensive, or untrustworthy, and will such attitudes come back to haunt them down the road?

Discuss the challenges of co-owning real estate. If you have a large amount of real estate, farmland, or commercial property or rentals, have your beneficiaries been taught how to manage such properties? Will these properties be passed on to beneficiaries through a trust or through a business entity such as a limited liability company or family limited partnership? If an entity is being used, how has the management structure been set up? Do all beneficiaries understand their roles within the management structure? What if one of the beneficiaries no longer wants to be in a partnership with his or her siblings? Is there a clear path for the beneficiary’s exit from such an arrangement that is fair to both the departing beneficiary and the remaining beneficiaries? Is that exit spelled out clearly in an operating, partnership, or other types of the agreement for later reference by your beneficiaries?

Even something as seemingly innocuous as passing on a family vacation property to adult children can pose a significant risk of rekindling old sibling rivalries. Have you and your attorney met with the beneficiaries, either as a group or individually, to make sure your goals and hopes are clear with regard to the property being left to them? What do you hope your beneficiaries will do with the property you leave to them? Have you asked them whether they even want the property, or in what manner they would like to receive it? Many parents have been completely surprised at their children’s responses to these questions.

Consider asset protection. Parents sometimes think that their children are not at all concerned about asset protection and believe their children would be upset if they were left anything with “strings attached” or conditions on how to use the money or property. Imagine the parents’ surprise when the children share their reasons for why receiving an inheritance outright would be a disaster. Parents are not always aware of the marital or financial challenges their children may be facing that have the potential to lead to a significant, if not total, loss of their inheritance.

Gift today rather than at death. In many cases, it makes sense for parents, during their lifetime, to give their children a portion of the accounts and property that they ultimately want to leave them at death so that the parents can observe how their children will manage and use the property. In some cases, parents have learned a great deal about how their children are likely to handle even larger infusions of cash or property from an inheritance after they are gone. On a more positive note, giving children a substantial amount of their inheritance prior to death can provide a valuable opportunity for parents to mentor their children in the appropriate use and management of the accounts and property, preparing them for the additional accounts and property earmarked for them at the parents’ passing.

We are here to help. Preparing your beneficiaries to receive money and property can in many ways be an even greater challenge than preparing your money and property for your beneficiaries. Nevertheless, putting sufficient effort into such an undertaking has the potential to pay huge dividends by helping to ensure the money and property you have spent your life accumulating will be used to truly benefit your loved ones in the way that would be most satisfying to you. If you are uncertain about where you should start, please reach out to us. We have significant experience helping our clients determine the right questions to ask to begin this important process. We are here to help—call today to set up a virtual or in-person meeting.

College Student Protection Plan™

Are You Prepared?

If you are like most parents you are concerned about being allowed to get information, and make decisions, about your young adult college student in case of a medical emergency. Without the correct written authority, you may be unable to get information about your child because of the medical privacy laws. You see, your child is now an adult in the eyes of the law and his/her information is private unless your child authorizes a medical provider to share that information. Obviously, that can become a big problem if your child cannot give authorization due to some emergency.

The good news is that our team at the Like Law Group has created the College Student Protection Plan™ which will ensure you legally will be able to get information and make decisions for your college age student in any situation. Take this time while your student is at home, or before your recent high school graduate heads off to college this fall, to get this important planning done.

Our Process

We have a process that will make this easy for both you and your student.  Here is what to do. First, call our Practice Manager, Jennifer Price @ 812-323-8300 or email her jennifer@likelawgroup.com to set a phone or video appointment to get started. Second, we will help guide you and your child on the decisions that are needed which will also allow us to prepare the documents. Third, we will get your child the completed legal documents with instructions on properly executing them, or they can come to our office for us to oversee the proper execution.

What’s Included

Included in this plan will be the legal documents to ensure you can get access to all needed information and be able to make important health care and financial decisions if the need arises, all without the stress and expense that might be incurred if a court had to be involved.  We will include a medical power of attorney, HIPAA medical privacy authorization, living will, and financial power of attorney, as well as detailed instructions on how to execute these documents. If you chose, we can oversee the execution and provide the needed witnesses and notary.

Not Just for College Students

And, by the way, even though we are calling this the College Student Protection Plan™, this applies to all young adults regardless of whether they are in school or not. So, if you have a young adult child give us a call.  We can help.

Please Share this Information

Finally, if you know someone that has young adult children please pass this along to them. We would love to help them too!

Time to Review Clients’ Retirement Accounts

The COVID-19 pandemic has led to volatile markets, resulting in retirement accounts with much smaller balances than only a few short months ago. In response to the economic fallout stemming from the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020. The CARES Act was primarily aimed at providing quick and substantial relief to individuals and businesses affected by the economic shutdown in response to the spread of COVID-19. Several relief measures have a significant impact on clients’ ability to benefit from their retirement accounts. You can provide significant peace of mind to your clients by keeping them informed about how they can use their retirement funds now without penalties if necessary, as well as benefit from other tax relief provided by the new legislation.

The CARES Act creates new distribution options for those adversely impacted by coronavirus, expands the availability of plan loans, and waives required minimum distributions for most retirement plans for 2020.

Early Distributions. Pursuant to Section 2103(a) of the CARES Act, the 10% early distribution penalty tax under I.R.C. Section 72(t) that would otherwise apply to the majority of distributions made before a participant turns age 59 ½ is waived for “coronavirus-related distributions” (CRD) made at any time during 2020 from qualified retirement plans for distributions of up to $100,000. The distribution option is permissive, not mandatory, for eligible plans such as IRAs, 401(k)s, 403(a) and (b) plans, and 457 plans.

A CRD is a distribution from an eligible retirement plan made during 2020 to a qualifying individual who is diagnosed with coronavirus, or whose spouse or dependent has been diagnosed with it, or who has experienced adverse financial consequences from a coronavirus-related quarantine, furlough, layoff, work reduction, business closure or reduction in hours (for business owners) or an inability to work due to lack of child care related to coronavirus. The distributions will be subject to income tax, but the qualifying individual may opt to spread the payments evenly over three years rather than having to pay it all in 2020. The participant may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan.

Loans. During the 180-day period from the date of enactment of the CARES Act, plans can increase their loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance for qualified individuals, up from the previous limits of $50,000 or 50% (note that loans are not permitted from IRAs) for participants adversely affected by coronavirus as discussed above. Qualified individuals with an existing loan from a retirement plan that is due to be repaid by December 31, 2020 can delay repayment by one year. Later repayments will be adjusted to reflect the delayed due date plus interest accruing during the delay. In addition, the one-year period of delay in repayment is disregarded in determining the maximum five-year loan period.
Required Minimum Distributions. For participants in 401(k), 403(a) and (b) plans, 457, and IRAs (not defined benefit plans), the CARES Act waives required minimum distributions (RMDs) for the calendar year 2020. Under the new SECURE Act, effective January 1, 2020, account owners are typically required to take an RMD from their plan upon reaching age 72. The CARES Act waiver also applies to RMDs for account owners who reached age 70 ½ in 2019 but deferred taking an RMD in 2019 until April 1, 2020. Normally, account owners in this category would also have to take a second RMD for 2020 by December 31, 2020, but this RMD is waived as well.

Under the previous tax law, an RMD taken by an account owner cannot be rolled back into an IRA unless this is done within 60 days after the distribution, and a rollover from one IRA to another IRA (or from one Roth IRA to another Roth IRA) can be done only one time per year (365 days). Under the CARES Act, those who had already taken an RMD prior to the passage of the new law are allowed to roll it over into the original account within 60 days, and this time limit was extended by IRS Notice 2020-23 for distributions—including RMDs—taken between February 1st and May 15th if the rollover occurs by July 15th. If the account owner took an RMD in January, it may not be returned unless the IRS provides additional relief.
Although the once-per-year IRA rollover rule is still in effect, if the account owner has already used their IRA rollover, they are permitted to do a rollover to a non-IRA retirement account such as a 401(k). The once-per-year rule does not apply to RMDs taken from a 401(k) or to Roth conversions.

The waiver is also applicable to designated beneficiaries who have inherited retirement accounts. Further, 2020 is not counted for purposes of the post-death payout “five-year rule” applicable to non-designated beneficiaries[1] when the owner died before his or her own required beginning date.

However, the CARES Act has no impact on the new 10-year payout rule required by the SECURE Act, which precludes most non-spousal beneficiaries from stretching their distributions over their lifetime, as 2020 is the first year that non-eligible designated beneficiaries [2] would be subject to that rule when they inherit a retirement account. Because the 10-year payout does not start until the year after the year in which the account owner died, 2021 counts as year one rather than 2020.

Note: The CARES Act does not affect the ability of clients who are 70 ½ years old to make an annual qualified charitable distribution (QCD) of up to $100,000 from his or her IRA directly to a qualified charity in 2020 without taking the distribution into taxable income. However, the suspension of RMDs reduces the incentive for doing so because the distribution will not offset the client’s RMD, thus enabling the client to avoid taxable income. However, a QCD will reduce clients’ taxable IRA balance, so it will still provide a tax benefit to them. Further, under the CARES Act, for 2020, individuals who itemize their deductions can elect to deduct up to 100% (up from 60%) of their adjusted gross income for cash charitable contributions, so if clients choose to take a cash distribution from their IRA and contribute that cash to a qualified charity, they can potentially completely offset the tax attributable to the distribution using the charitable deduction.

Review Beneficiary Designations. In any discussions with clients about their retirement accounts, it is always prudent to remind them to regularly review their beneficiary designations. As you know, life circumstances can change very quickly. If a marriage, death, or divorce has occurred since they last reviewed their beneficiary designations, they should give some thought to whether their current beneficiary designations are still consistent with their estate planning objectives. It would be unfortunate if their retirement funds went to an ex-spouse or someone else a client no longer wants to benefit. In addition, alternate beneficiaries should be named in case the primary beneficiary passes away before inheriting the account.

In addition, if a trust is the beneficiary of their retirement account, make sure your clients are aware of the new 10-year rule established under the SECURE Act, which precludes most non-spousal beneficiaries from stretching the distributions over their lifetime. Before the SECURE Act was passed, some clients may have created trusts with “conduit” provisions so that the trust would qualify as a designated beneficiary of a retirement account, allowing the RMDs to pass through to the trust’s primary beneficiary for their individual life expectancy. Now, conduit trusts are ineffective after ten years, at which point the retirement account balances must be paid directly to the trust’s beneficiaries, possibly increasing their income taxes and making the funds available to claims by creditors or divorcing spouses. If your clients were utilizing this type of trust in their estate planning, now is a good time for a review of their documents, as this type of trust may no longer achieve their goals.

Now Is a Great Time to Meet with Clients

As a result of the uncertainty, clients are likely in need of reassurance and advice, so it is an opportune time to meet with them—virtually or by telephone if they prefer. You know your clients’ circumstances, both financial and personal, so you are perfectly positioned to advise them about the best strategies for their retirement plans. We have all been affected by COVID-19 in one way or another: Strengthen your relationships with clients by empathizing with the stress they may be feeling and letting them know that you are available to help. Clients are best served by a collaborative team, so please contact us if we can help your clients with their estate planning needs, whether this involves their retirement account or any other concerns.


[1] The plan participant’s estate, a charity, or a trust that does not qualify as a see-through trust.
[2] Beneficiaries who do not fall within one of five categories (surviving spouse, minor child of participant, disabled beneficiary, chronically ill individuals, beneficiaries less than 10 years younger than the plan participant) of beneficiaries that are still allowed to use the life expectancy payout.