Estate Planning Questions for Couples with a Big Age Gap

June 28, 2024

Even if it was never an issue in the past, when couples with a significant age gap reach their 60s and 70s, the age difference can present challenges. When one partner is ten or more years younger than the other, assets need to last longer, and the impact of poor planning or mistakes can be far more complex. The article in Barron’s “Big Age Gap With Your Spouse? What You Need to Know” explains several vital issues.

Examine healthcare coverage and income needs. Health insurance can become a significant issue, especially if one partner is old enough for Medicare and the other does not yet qualify. How will the couple ensure health insurance if the older partner retires and the younger depends on the older partner for healthcare? The younger partner must buy independent healthcare coverage, which can be a budget-buster.

Be strategic about Social Security. Experts advise having the older spouse delay taking Social Security benefits if they are the higher-income partner. If the older spouse passes, the younger spouse can get the bigger of the two Social Security benefits. Delaying benefits means the benefits will be higher.

Planning for RMDs—Required Minimum Distributions. Roth conversions may be a great option for couples with a significant age gap. Large traditional tax-deferred individual IRAs come with large RMDs. When one spouse dies, the surviving spouse is taxed as a single person, which means they’ll hit high tax brackets sooner. However, if the couple converted their IRAs to Roths, the surviving spouse could withdraw without taxes.

Estate planning becomes trickier with a significant age gap, especially if the spouses have been married before. Provisions in their estate plan need to be made for both the surviving spouse and children from prior marriages. An estate planning attorney should be consulted to discuss how trusts can protect the surviving spouse, so no one is disinherited. Beneficiary accounts also need to be checked for beneficiary designations.

Couples with a significant age gap need to address their own mortality. A younger partner who is financially dependent on an older partner needs to be involved in estate and finance planning, so they know what assets and debts exist. Life has a way of throwing curve balls, so both partners need to be prepared for incapacity and death.

Plans should be reviewed more often than for couples in the same generation. A lot can happen in six months, especially if one or both partners have health issues.

Reference: Barron’s (May 19, 2024) “Big Age Gap With Your Spouse? What You Need to Know.”

Another Lesson in Updating Beneficiary Designations

June 21, 2024

If you’re among the many who have IRAs, 401(k)s and other retirement accounts with beneficiary designations, now is the time to ensure they have been updated to reflect your current wishes. This is the vital lesson sent by a federal court case described in the article “Court Backs 401(k) Beneficiary Designation in Estate Claim” from the National Association of Plan Advisors.

Jeffrey Rolison worked for Proctor & Gamble for many years. When he enrolled in the company’s 401(k) plan, he named his then-girlfriend, whom he lived with, as the sole beneficiary of his 401(k). The couple broke up in 1989—just two years after he had enrolled in the 401(k) plan.

Over the years, the account grew to $754,000. However, Rolison never changed the beneficiary. According to the court decision, The Proctor & Gamble U.S. Business Services Co. et al. v. Estate of Jeffrey Rolison et al., heard in the U.S. District Court for the Middle District of Pennsylvania, P&G notified Rolison many times over the years of his ability to change the beneficiary designation. The option was sent by mail in the earlier years of his enrollment, and as time passed, it became an option he could have taken care of online.

The court said he was given notice and direction but never changed his beneficiary. Estate planning attorneys reading this already know the outcome. However, the estate devoted countless years and resources to battling this issue, with many motions for summary judgment, a denied motion for certification to appeal and many, many motions for reconsideration.

The judge in the case for summary judgment, where the court decides without going to trial, explained the party seeking summary judgment is responsible for informing the court of the reason for its request and demonstrating the absence of a genuine dispute of fact. The court said it failed to do so.

Rolison’s estate claimed that Proctor & Gamble violated its fiduciary duty under ERISA (a federal law governing employee benefits) by not disclosing material information to Rolison. The estate said P&G should have told him who his designated beneficiary was, not just his option to make a change. The argument was that the company only provides “generic beneficiary information” to employees and doesn’t inform them of their “specific beneficiary status.”

Proctor & Gamble argued that the Court had, in previous decisions, determined that the company had fulfilled all disclosure requirements. The estate didn’t disprove that P&G informed Rolison and all employees how to change their beneficiary designations. The judge agreed.

The court said Rolison had been informed of his options over the course of thirteen years. If he didn’t go online to add a designation, the paper beneficiary designation would stand.

Although the relationship had ended two decades earlier, Rolison had such a large account that he didn’t update his beneficiary designation. Was this what he intended? It’s possible, but it stands as a strong example of why beneficiary designations need to be updated: to ensure that assets pass to the right person and to prevent an estate from being depleted by long, costly litigation.

Any time you meet with your estate planning attorney to update your estate plan should be a reminder to update beneficiary designations. However, if you haven’t reviewed these accounts in years, review them immediately.

Reference: National Association of Plan Advisors (May 6, 2024) “Court Backs 401(k) Beneficiary Designation in Estate Claim”

How Do IRAs and 401(k)s Fit into Estate Planning?

July 5, 2022

When investing for retirement, two common types of accounts are part of the planning: 401(k)s and IRAs. J.P. Morgan’s recent article entitled “What are IRAs and 401(k)s?” explains that a 401(k) is an employer-sponsored plan that lets you contribute some of your paycheck to save for retirement.

A potential benefit of a 401(k) is that your employer may match your contributions to your account up to a certain point. If this is available to you, then a good goal is to contribute at least enough to receive the maximum matching contribution your employer offers. An IRA is an account you usually open on your own. As far as these accounts are concerned, the key is knowing the various benefits and limitations of each type. Remember that you may be able to have more than one type of account.

IRAs and 401(k)s can come in two main types – traditional and Roth – with significant differences. However, both let you to delay paying taxes on any investment growth or income, while your money is in the account.

Your contributions to traditional or “pretax” 401(k)s are automatically excluded from your taxable income, while contributions to traditional IRAs may be tax-deductible. For an IRA, it means that you may be able to deduct your contributions from your income for tax purposes. This may decrease your taxes. Even if you aren’t eligible for a tax-deduction, you are still allowed to make a contribution to a traditional IRA, as long as you have earned income. When you withdraw money from traditional IRAs or 401(k)s, distributions are generally taxed as ordinary income.

With Roth IRAs and Roth 401(k)s, you contribute after-tax dollars, and the withdrawals you take are tax-free, provided that they’re a return of contributions or “qualified distributions” as defined by the IRS. For Roth IRAs, your income may limit the amount you can contribute, or whether you can contribute at all.

If a Roth 401(k) is offered by your employer, a big benefit is that your ability to contribute typically isn’t phased out when your income reaches a certain level. 401(k) plans have higher annual IRS contribution limits than traditional and Roth IRAs.

When investing for retirement, you may be able to use both a 401(k) and an IRA with both Roth and traditional account types. Note that there are some exceptions to the rule that withdrawals from IRAs and 401(k)s before age 59½ typically trigger an additional 10% early withdrawal tax.

Reference: J.P. Morgan (May 12, 2021) “What are IRAs and 401(k)s?”

What are Penalties When Contributing to or Withdrawing From Retirement Accounts?

April 5, 2022

Money Talks News’ recent article entitled “3 Tax Penalties That Can Ding Your Retirement Accounts” reviews some penalties to avoid when contributing to or withdrawing from retirement accounts.

Excess IRA Contribution Penalty. Building a large amount of retirement savings is a super goal. However, contributing too much to an IRA can cost you. It is possible to commit this offense by (i) contributing an amount of money that exceeds the applicable annual contribution limit for your IRA; or (ii) improperly rolling over money into an IRA.

What happens if you get a little too eager to build a nest egg and make one of these mistakes? The IRS says that excess contributions are taxed at 6% per year provided the excess amounts remain in the IRA. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of the tax year.

The IRS offers a remedy to fix your mistake before any penalties will be applied: you must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year. Therefore, if you contributed too much to an IRA for 2021, you have until April 18, 2022, to withdraw the excess and thus avoid a penalty.

Early Withdrawal Penalty. Taking money out too soon from a retirement account is another potentially big error. If you withdraw cash from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty. The IRS says, however, that there are several scenarios in which you are allowed to take early IRA withdrawals without penalties. For example, if you lose a job, you are allowed to tap your IRA early to pay for health insurance premiums.

The same penalties apply to early withdrawals from retirement plans like 401(k)s. However, there are again exceptions to the rule that allow you to make early withdrawals without penalty. The exceptions that let you to make early retirement plan withdrawals without penalty sometimes differ from the exceptions that allow you to make early IRA withdrawals without penalty.

Missed RMD Penalty. Retirement plans are neat because they let you to defer paying taxes on your contributions and income gains for decades. However, the IRS is eventually going to want its share of that cash. Taxpayers were previously obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½. However, the Secure Act of 2019 raised that age to 72. The consequences of failing to make these mandatory withdrawals still apply. If you do not take your RMDs starting the year you turn 72, you face harsh penalties, and you may have to pay a 50% excise tax on the amount not distributed as required.

Remember that the RMD rules do not apply to Roth IRAs. You can leave money in your Roth IRA indefinitely, but another part of the Secure Act says your heirs have to be careful if they inherit your Roth IRA.

Reference: Money Talks News (March 1, 2022) “3 Tax Penalties That Can Ding Your Retirement Accounts”

How Does an Inherited IRA or 401(k) Work?

May 18, 2021

The rules for inheriting retirement assets are complicated—just as complicated as the rules for having 401(k)s and IRA to begin with. Mistakes can be hard to undo, warns the article “Here’s how to handle the complicated rules for an inherited 401(k) or IRA” from CNBC.

The 2019 Secure Act changed how inherited tax deferred assets are treated after the original owner’s death. The options depend upon the relationship between the owner and the heir. The ability to stretch out distributions across the heir’s lifetime if the owner died on or after January 1, 2020 ended for most heirs. Exceptions are the spouse, certain disabled beneficiaries, or minor children of the decedent. Otherwise, those accounts must be depleted within ten years.

Non-spouses with flexibility include minor children. That’s all well and fine, but once the minor child turns 18 (in most states), the 10-year rule kicks in and the individual has 10 years to empty the account. Before that time, the minor child must take annual required minimum distributions (RMDs) based on their own life expectancy.

These required withdrawals typically begin when a retiree reaches age 72, and the amount is based on the account owner’s anticipated lifespan.

Beneficiaries who are chronically ill or disabled, or who are not more than ten years younger than the decedent, may take distributions based on their own life expectancy. They are not subject to the ten- year rule.

Beneficiaries subject to that ten-year depletion rule should create a strategy, including creating an Inherited IRA and transferring the funds to it. If the inherited account is a Roth or a traditional IRA, the process is slightly different. Distributions from a Roth IRA are generally tax-free, and traditional IRA distributions are taxed when withdrawals occur. One point about Roths—if you inherit a Roth that’s less than five years old, any earnings withdrawn will be subject to taxes, but the contributed after-tax amounts remain tax-free.

If an heir ends up with a retirement account via an estate, versus being the named beneficiary on the account, the account must be depleted within five years, if the original owner had not started taking RMDs. If RMDs were underway, the heir would need to keep those withdrawals going as if the original owner continued to live.

For spouses, there are more options. First, roll the money into your own IRA and follow the standard RMD rules. At age 72, start taking required withdrawals based on your own life expectancy. If you don’t need the income, you can leave the money in the account, where it can continue to grow. However, if you are not yet age 59½, you may be subject to a 10% early withdrawal penalty if you take money from the account. In that case, put the money into an Inherited IRA account, with yourself as the beneficiary.

IRAs and 401(k)s are complicated. Speak with your estate planning attorney to make an informed decision when creating an estate plan, so your inherited assets will work with, not against, your overall strategy.

Reference: CNBC (April 11, 2021) “Here’s how to handle the complicated rules for an inherited 401(k) or IRA”

Should I Name a Living Trust Beneficiary of a Roth IRA?

April 29, 2021

The simple answer is yes, a living trust can be the beneficiary of a Roth IRA. However, without knowing more about an individual’s specific circumstances, it’s hard to know if this is a wise move.

A November 2018 article from NJ Money Help entitled, “Be careful when choosing a beneficiary,” explains that there are several things you need to know when considering a living trust as the beneficiary of a Roth IRA.

By designating a living trust as your beneficiary, the distributions from the Roth at your death will become mandatory based on the life expectancy of the oldest beneficiary named in the trust.

This is an important point if you’re currently married. That’s because you’ll forfeit the ability for a spousal rollover, by naming the trust as your beneficiary.

Current law permits IRAs to be passed to a spouse as a beneficiary, and the spousal beneficiary can treat the account as if it was their own IRA.

In the case of a Roth IRA, this means the surviving spouse can continue to defer distributions tax-free for their lifetime.

By naming the living trust as beneficiary, this benefit is lost no matter if your spouse is one of the living trust beneficiaries.

Why?

Distributions are required to begin immediately, if the beneficiary is anyone other than a spouse.

Thus, you would forgo the ability to allow the funds to continue to grow tax-free for a longer period of time.

You should talk about this with an experienced estate planning attorney. He or she will be able to look at your entire financial situation before you determine if this is a wise move for you.

Reference: NJ Money Help (Nov. 2018) “Be careful when choosing a beneficiary”

The Stretch IRA Is Diminished but Not Completely Gone

April 15, 2021

Before the SECURE Act, named beneficiaries who inherited an IRA were able to take distributions over the course of their lifetimes. This allowed the IRA to grow over many years, sometimes decades. This option came to an end in 2019 for most heirs, but not for all, says the recent article “Who is Still Eligible for a Stretch IRA?” from Fed Week.

A quick refresher: the SECURE Act—Setting Every Community Up for Retirement Enhancement—was passed in December 2019. Its purpose was, ostensibly, to make retirement savings more accessible for less-advantaged people. Among many other things, it extended the time workers could put savings into IRAs and when they needed to start taking Required Minimum Distributions (RMDs).

However, one of the features not welcomed by many, was the change in inherited IRA distributions. Those not eligible for the stretch option must empty the account, no matter its size, within ten years of the death of the original owner. Large IRAs are diminished by the taxes and some individuals are pushed into higher tax brackets as a result.

However, not everyone has lost the ability to use the stretch option, including anyone who inherited an IRA before January 1, 2020. This is who is included in this category:

Surviving Spouses.
Minor children of the deceased account owner–but only until they reach the age of majority. Once the minor becomes of legal age, he or she must deplete the IRA within ten years. The only exception is for full-time students, which ends at age 26.
Disabled individuals. There is a high bar to qualify. The person must meet the total disability definition, which is close to the definition used by Social Security. The person must be unable to engage in any type of employment because of a medically determined or mental impairment that would result in death or to be of chronic duration.
Chronically ill persons. This is another challenge for qualifying. The individual must meet the same standards used by insurance companies used to qualify policyowners for long-term care coverage. The person must be certified by a treating physician or other licensed health care practitioner as not able to perform at least two activities of daily living or require substantial supervision, due to a cognitive impairment.
Those who are not more than ten years younger than the deceased account owner. That means any beneficiary, not just someone who was related to the account owner.

What was behind this change? Despite the struggles of most Americans to put aside money for their retirement, which is a looming national crisis, there are trillions of dollars sitting in IRA accounts. Where better to find tax revenue, than in these accounts? Yes, this was a major tax grab for the federal coffers.

Reference: Fed Week (March 3, 2021) “Who is Still Eligible for a Stretch IRA?”

The Biggest Social Security Blunders in Retirement

November 3, 2020

Fox News’ recent article entitled “These mistakes will take a huge bite out of your Social Security income” shares what we should and shouldn’t do.

Not working a full 35 years. Your Social Security benefits are calculated based on your wages during your 35 highest-paid years of work. However, for each year you don’t have an income on record, you’ll have a $0 factored into your personal equation. That’s going to mean a lower monthly benefit. Therefore, to avoid this, be sure you put in a full 35 years in the workforce. It may actually help boost your benefit, by avoiding those dreaded $0 years. It will also potentially factor higher wages into your calculation.

Many people earn more money later in their careers. If your earnings are now at their highest, and you work another year to make it a full 35, you may be adding a salary that’s far more than what you earned 30 years before (even though your previous wages will be adjusted for inflation when determining what monthly benefit you get).

Not delaying until your full retirement age to file. You won’t be entitled to collect all of your benefits until you reach full retirement age (FRA). Your FRA will depend on your year of birth, and if you were born in 1960 or later, it’s 67. Born in 1959 or before? It’s 66, or 66 and a number of months.

You can file for Social Security as early as age 62, but for each month you sign up prior to your FRA, your benefits are reduced on a permanent basis. That’s bad news if you don’t have a lot of money in retirement savings and need those benefits to ensure that you’re able to make ends meet in retirement.

Delaying benefits beyond age 70. Just as you get the option to sign up for Social Security before FRA, you can also delay benefits past FRA and boost them by 8% a year in the process. But don’t postpone your filing too long! When you hit age 70, you stop accruing the delayed retirement credits that increase your benefits. Therefore, delaying beyond that point could mean missing out on income.
Retire in a state that taxes your benefits. Social Security benefits may be taxed on the federal level, if your earnings exceed a certain threshold. However, some states also tax Social Security. These 13 states tax benefits to some degree: CO, CT. KS, MN, MO, MT, NE, NM, ND, RI, UT, VT, and WV. Some states have lower earner exemptions.

Don’t slash your Social Security income and struggle in retirement because of these mistakes.

Avoid these mistakes to be certain that you get as much money from Social Security as you’re entitled.

Reference: Fox News (Sep. 14, 2020) “These mistakes will take a huge bite out of your Social Security income’

Estate Planning Blog

Serving Clients Throughout North Central Missouri

Another Lesson in Updating Beneficiary Designations

How Do IRAs and 401(k)s Fit into Estate Planning?

What are Penalties When Contributing to or Withdrawing From Retirement Accounts?

How Does an Inherited IRA or 401(k) Work?

Should I Name a Living Trust Beneficiary of a Roth IRA?

The Stretch IRA Is Diminished but Not Completely Gone

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Another Lesson in Updating Beneficiary Designations

How Do IRAs and 401(k)s Fit into Estate Planning?

What are Penalties When Contributing to or Withdrawing From Retirement Accounts?

How Does an Inherited IRA or 401(k) Work?

Should I Name a Living Trust Beneficiary of a Roth IRA?

The Stretch IRA Is Diminished but Not Completely Gone

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