Should Young Families have an Estate Plan?

Young families are always on the go. New parents are busy with diapers, feeding schedules and trying to get a good night’s sleep. As a result, it’s hard to think about the future when you’re so focused on the present. Even so, young parents should think about estate planning.

Wealth Advisor’s recent article entitled, “Why Young Families Should Consider an Estate Plan,” explains that the word “estate” might sound upscale, but estate planning isn’t just for the wealthy. Your estate is simply all the assets you have when you die. This includes bank accounts, 401(k) plan, a home and cars. An estate plan helps to make certain that your property goes to the right people, that your debts are paid and your family is cared for. Without an estate plan, your estate must go through probate, which is a potentially lengthy court process that settles the debts and distributes the assets of the decedent.

Estate planning is valuable for young families, even if they don’t have extensive assets. Consider these key estate planning actions that every parent needs to take to make certain they’ve protected their child, no matter what the future has in store.

Purchase Life Insurance. Raising children is costly, and if a parent dies, life insurance provides funds to continue providing for surviving children. For most, term life insurance is a good move because the premiums are affordable, and the coverage will be in effect until the children grow to adulthood and are no longer financially dependent.

Make a Will and Name a Guardian for your Children. For parents, the most important reason to make a will is to designate a guardian for your children. If you fail to do this, the courts will decide and may place your children with a relative with whom you have not spoken in years. However, if you name a guardian, you choose a person or couple you know has the same values and who will raise your kids as you would have.

Review Your Beneficiaries. You probably already have a 401(k) or IRA that makes you identify who will inherit it if you die. You’ll need to update these accounts, if you want your children to inherit these assets.

Consider a Trust. If you die before your children turn 18, your children can’t directly assume control of an inheritance, which can be an issue. The probate court could name an individual to manage the assets you leave to your child. However, if you want to specify who will manage assets, how your money and property should be used for your children and when your children should directly receive a transfer of wealth, consider asking an experienced estate planning attorney about a trust. With a trust, you can name a designated person to manage money on behalf of your children and provide direction regarding how the trustee can use the money to help care for your children as they grow. Trusts aren’t just for the very well-to-do. Anyone may be able to benefit from a trust.

Reference: Wealth Advisor (April 13, 2021) “Why Young Families Should Consider an Estate Plan”

What Qualifies as a Qualified Charitable Distribution?

Qualified charitable distributions allow individual retirement holders to divert some of their federally taxable required distributions to charity, reports a recent article “A tax break for retirees is back. Here’s how to use it–and what to avoid,” from The Washington Post. Known as QCDs, they were not a big deal until 2017, when a change in the tax law changed the number of people itemizing deductions, including charitable contributions, from 31 percent to 11 percent, according to the IRS.

Tax laws let you put tax-deductible money into “defined contribution” accounts, including IRAs, 401(k)s and 403(b)s, until you reach age 72, when you are required to start taking withdrawals—federally taxable Required Minimum Distributions–from the accounts.

The size of the distribution depends upon the year-end retirement account balances and your age. If you had $100,000 in a retirement account last December 31 and turned 75 this year, the RMD is about $4,370. For an 80-year-old, the number would be around $5,350, and at 85, it would be $6,760.

In 2020, QCDs were of little interest because the CARES Act cancelled any RMD requirements. You could still use a QCD, but there was no tax advantage of reducing taxable income by offsetting required distributions.

In 2021, RMDs are back, and QCDs are worth doing again. To make a QCD, you ask the IRA administrator to send a check made out to a registered charity. You are permitted to donate as much as $100,000 per year. Let’s reinforce the message: the check must be made out to the charity, not to you. You also may not send the money to your own donor-advised fund.

IRAs can be used for QCDs, but not 401(k)s or 403(b)s.

You will need to keep track of the QCDs yourself. Do not expect the IRA custodian to do that for you. The retirement plan does send a tax form, the 1099-Rs, to the IRS that shows your total distributions for the year. The QCDs are subtracted from your 1099-R income by you or your tax preparer.

It sounds great, but there is a problem, created by the SECURE Act of 2019. That law let people aged 70½ and older make tax-deductible contributions to their IRAs. However, if you make a tax-deductible contribution to your IRA that you use for a QCD, it triggers a reduction in the amount of the QCD that you can deduct from your federally taxable income.

Do not make QCDs from the same IRA to which you are making tax-deductible contributions. You can set up a solo 401(k) if you are self-employed or use a SEP-IRA to make deductible contributions. Here again, trouble lurks; do not make a QCD from a SEP-IRA in the same year you are claiming an income tax deduction for contributing to the SEP-IRA.

Reference: The Washington Post (March 18, 2021) “A tax break for retirees is back. Here’s how to use it–and what to avoid”

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A Health Savings Account Can Improve Financial Outlook

A health savings account or HSA can be a great help when it’s needed to tap the funds and it’s a tool to save money for retirement.

Money Talks News’ recent article “3 Ways a Health Savings Account Can Improve Your Finances” explains that an HSA can help you stretch your health care dollars and build your retirement savings at the same time, provided you’re eligible for one and you spend the money in your HSA on eligible expenses.

Let’s look at the benefits of HSAs and tips for opening one:

HSAs are tax-free. Depositing funds in a health savings account is one of the very few ways you can do to entirely avoid paying any taxes on that money at any point. Compare that to money in tax-advantaged accounts, like 401(k)s and individual retirement accounts (IRAs), that may grow tax-free. However, you will pay taxes on at least the principal at some point.

However,with an HSA, you get a tax deduction for the money you put into the account. The earnings grow tax-free, and provided that you use it for qualified health care expenses, you don’t pay taxes on the money you withdraw from the account. It’s truly tax-free.

HSAs are more flexible than FSAs. A health flexible spending account (FSA) is another type of tax-advantaged account for stretching health care dollars.

However, FSAs have a big drawback: FSAs are subject to a “use-or-lose” provision. This means workers are usually required to spend any money in their FSAs within their health insurance plan year or else lose the money.

However, with an HSA, your money stays in the account and thus can grow year after year.

You can invest the money in your HSA. You are allowed to invest the money that’s in your HSA, so it can grow faster with investment options. The investment options will vary depending on where you open your HSA.

It is fairly easy to start an HSA, but you must be eligible for one. The IRS says that the primary requirement to qualify is that you are covered by a high-deductible health insurance plan. To open an HSA, you pick a custodian—an institution that offers HSAs.

Reference: Money Talks News (May 26, 2020) “3 Ways a Health Savings Account Can Improve Your Finances”

What Debts Must Be Paid after I Die?

When you pass away, your assets become your estate, and the process of dividing up debt after your death is part of probate. Creditors only have a certain amount of time to make a claim against the estate (usually three months to nine months).

Kiplinger’s recent article entitled “Debt After Death: What You Should Know” explains that beyond those basics, here are some situations where debts are forgiven after death, and some others where they still are required to be paid in some fashion:

The beneficiaries’ money is partially protected if properly named. If you designated a beneficiary on an account — such as your life insurance policy and 401(k) — unsecured creditors typically can’t collect any money from those sources of funds. However, if beneficiaries weren’t determined before death, the funds would then go to the estate, which creditors tap.
Credit card debt depends on what you signed. Most of the time, credit card debt doesn’t disappear when you die. The deceased’s estate will typically pay the credit card debt from the estate’s assets. Children won’t inherit the credit card debt, unless they’re a joint holder on the account. Likewise, a surviving spouse is responsible for their deceased spouse’s debt, if he or she is a joint borrower. Moreover, if you live in a community property state, you could be responsible for the credit card debt of a deceased spouse. This is not to be confused with being an authorized user on a credit card, which has different rules. Talk to an experienced estate planning attorney, if a creditor asks you to pay off a credit card. Don’t just assume you’re liable, just because someone says you are.
Federal student loan forgiveness. This applies both to federal loans taken out by parents on behalf of their children and loans taken out by the students themselves. If the borrower dies, federal student loans are forgiven. If the student passes away, the loan is discharged. However, for private student loans, there’s no law requiring lenders to cancel a loan, so ask the loan servicer.
Passing a mortgage to heirs. If you leave a mortgage behind for your children, under federal law, lenders must let family members assume a mortgage when they inherit residential property. This law prevents heirs from having to qualify for the mortgage. The heirs aren’t required to keep the mortgage, so they can refinance or pay off the debt entirely. For married couples who are joint borrowers on a mortgage, the surviving spouse can take over the loan, refinance, or pay it off.
Marriage issues. If your spouse passes, you’re legally required to pay any joint tax owed to the state and federal government. In community property states, the surviving spouse must pay off any debt your partner acquired while you were married. However, in other states, you may only be responsible for a select amount of debt, like medical bills.

You may want to purchase more life insurance to pay for your debts at death or pay off the debts while you’re alive.

Reference: Kiplinger (Nov. 2, 2020) “Debt After Death: What You Should Know”

Does My Estate Plan Need an Audit?

You should have an estate plan because every state has statutes that describe how your assets are managed, and who benefits if you don’t have a will. Most people want to have more say about who and how their assets are managed, so they draft estate planning documents that match their objectives.

Forbes’ recent article entitled “Auditing Your Estate Plan” says the first question is what are your estate planning objectives? Almost everyone wants to have financial security and the satisfaction of knowing how their assets will be properly managed. Therefore, these are often the most common objectives. However, some people also want to also promote the financial and personal growth of their families, provide for social and cultural objectives by giving to charity and other goals. To help you with deciding on your objectives and priorities, here are some of the most common objectives:

Making sure a surviving spouse or family is financially OK
Providing for others
Providing now for your children and later
Saving now on income taxes
Saving on estate and gift taxes in the future
Donating to charity
Having a trusted agency manage my assets, if I am incapacitated
Having money for my children’s education
Having retirement income; and
Shielding my assets from creditors.

Speak with an experienced estate planning attorney about the way in which you should handle your assets. If your plan doesn’t meet your objectives, your estate plan should be revised. This will include a review of your will, trusts, powers of attorney, healthcare proxies, beneficiary designation forms and real property titles.

Note that joint accounts, pay on death (POD) accounts, retirement accounts, life insurance policies, annuities and other assets will transfer to your heirs by the way you designate your beneficiaries on those accounts. Any assets in a trust won’t go through probate. “Irrevocable” trusts may protect assets from the claims of creditors and possibly long-term care costs, if properly drafted and funded.

Another question is what happens in the event you become mentally or physically incapacitated and who will see to your financial and medical affairs. Use a power of attorney to name a person to act as your agent in these situations.

If, after your audit, you find that your plans need to be revised, follow these steps:

Work with an experienced estate planning attorney to create a plan based on your objectives
Draft and execute a will and other estate planning documents customized to your plan
Correctly title your assets and complete your beneficiary designations
Create and fund trusts
Draft and sign powers of attorney, in the event of your incapacity
Draft and sign documents for ownership interest in businesses, intellectual property, artwork and real estate
Discuss the consequences of implementing your plan with an experienced estate planning attorney; and
Review your plan regularly.

Reference: Forbes (Sep. 23, 2020) “Auditing Your Estate Plan”

Do I Have to Pay Taxes during Retirement?

Paying taxes when you aren’t working but are instead receiving income from a lifetime of working and Social Security is a harsh reality of retirement for many people. Figuring out how much of your income will be consumed by taxes is a tricky task, according to the article “What You Need to Know About Taxes and Your Retirement” from Next Avenue. Ignore it, and your finances will suffer.

Most households will pay about six percent of their retirement income in federal income tax, but that number varies greatly, depending upon the size of their retirement income. The lowest income groups may pay next to nothing, but as income rises, so do the taxes. Married couples with an average combined Social Security benefit of about $33,000, 401(k)/IRA balances of $180,790, and personal financial wealth of $87,000 could find themselves paying 10.5% to 20.9%.

Income taxes and health costs are most people’s biggest expenses in retirement. Income taxes are due on pensions and withdrawals from tax-deferred accounts, including traditional IRAs, 401(k)s, 403(b)s, and similar retirement accounts. The same goes for tax-deferred annuities. Required minimum distributions must be taken starting at age 72.

Roth IRA and 401(k) distributions are tax free, since taxes are paid when the funds go into the accounts, not when they are withdrawn.

If you have investments in addition to your tax-deferred funds, like stocks or bond funds, you also pay taxes on the dividends and interest paid to you. If you sell them, you’ll likely need to pay any capital gains taxes.

Learning that a portion of your Social Security benefits are subject to federal income tax is a shocker to many retirees, but about 40% of recipients do pay taxes on their benefits. The higher your income, the more taxes you’ll need to pay.

There may also be state taxes on your Social Security benefits, depending on where you live.

However, here’s the biggest shocker–if you work part time, you may forfeit benefits, temporarily, if you claim before your Full Retirement Age, while you are working. Claiming before FRA means that your benefits are subject to earnings limits—the most you can make from work before triggering a benefit reduction.

Social Security withholds $1 in benefits for every $2 earned above the annual earnings limitation cap. If you reach your FRA after 2020, that’s $18,240. If you reach your FRA in 2020, the annual exemption amount is $48,600.

Pension, investment income and any government benefits, like unemployment compensation, don’t count towards earned income.

Benefits that are withheld will be returned to you once you hit FRA when Social Security bumps up your monthly benefit to make up for the withholding, but this takes place over time.

Reference: Next Avenue (Sep. 17, 2020) “What You Need to Know About Taxes and Your Retirement”

What If Grandma Didn’t Have a Will and Died from COVID-19?

The latest report shows about 1.87 million reported cases and at least 108,000 COVID-19-related deaths were reported in the U.S., according to data released by Johns Hopkins University and Medicine.

Here’s a question that is being asked a lot these days: What happens if someone dies “intestate,” or without having established a will or estate plans?

If you die without a will in California and many other states, your assets will go to your closest relatives under state “intestate succession” statutes.

Yahoo Finance’s recent article entitled “My loved one died without a will – now what?” explains that there are laws in each state that will dictate what happens, if you die without a will.

In Pennsylvania, the laws list the order of who receives upon your death, if you die without a will: your spouse, your children, and then your parents (if still alive), your siblings, and then on down the line to cousins, aunts and uncles, and the like. Typically, first on every state’s list is the spouse and the children.

You may also have some valuable assets that will not pass via your will and aren’t affected by your state’s intestate succession laws. Here are some of the common ones:

Any property that you’ve transferred to a living trust
Your life insurance proceeds
Funds in an IRA, 401(k), or other retirement accounts
Any securities held in a transfer-on-death account
A payable-on-death bank account
Your vehicles held by transfer-on-death registration; or
Property you own with someone else in joint tenancy or as community property with the right of survivorship.

These types of assets will pass to the surviving co-owner or to the beneficiary you named, whether or not you have a will.

It’s quite unusual for the government to claim a deceased person’s estate. While it might be allowed in some states, it’s considered a last resort. Typically, we all have some relatives.

If you have a loved one who has died without a will, speak with an experienced estate planning attorney about your next steps.

Reference: Yahoo Finance (June 1, 2020) “My loved one died without a will – now what?

Estate Planning Blog Articles

Estate & Business Planning Law Firm Serving the Providence & Cranston, RI Areas

Should Young Families have an Estate Plan?

What Qualifies as a Qualified Charitable Distribution?

A Health Savings Account Can Improve Financial Outlook

What Debts Must Be Paid after I Die?

Does My Estate Plan Need an Audit?

What If Grandma Didn’t Have a Will and Died from COVID-19?

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Should Young Families have an Estate Plan?

What Qualifies as a Qualified Charitable Distribution?

A Health Savings Account Can Improve Financial Outlook

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What If Grandma Didn’t Have a Will and Died from COVID-19?

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