Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

A Member of the Law Professor Blogs Network

Tuesday, July 29, 2014

Roth IRA Conversions

Roth ira

When the income limits on Roth IRAs were lifted in 2010, they grew significantly in popularity.  As a result, the ability to recharacterize a conversion is being used proactively.  To take advantage, advisors help clients convert traditional IRAs into Roth IRAs, then watch the investment.  If it is up, the conversion stays, and if it is down, the account becomes recharacterized, available for a future conversion. 

When an entire traditional IRA is converted into a Roth and subsequently recharacterized, the entire Roth IRA is transferred back to a traditional IRA, since it will already include any gains or losses that occurred during the temporary conversion period.  When the original conversion becomes only a portion of the account, Treasury regulations stipulate that the recharacterizaiton must include a pro rata share of the gains or losses of the entire account. 

See Michael Kitces, Roth IRA Conversions: How to Profit from Hindsight, Financial Planning, July 28, 2014. 

July 29, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Tools to Calculate Benefits Online

Social security 1

Individuals on the cusp of retirement are turning to a growing number of free online programs to help them maximize their Social Security benefits.  Yet before implementing these recommendations, it is important to verify the results with a financial advisor or service with expertise in Social Security.

Online tools typically generate similar results, however, some of the tools do not handle projections for widows, widowers, divorcees and spouses with age gaps.  Provided below are a few of these tools and their overall effectiveness:

  • Social Security Calculator. User friendly but does not allow you to input estimates of your future salary or longevity.
  • SSAnalyze! User friendly and easy to customize.
  • Social Security Planner.  Easy to use, but it is not as customizable as some.
  • Social Security Benefits Evaluator.  Easy to use, but it does not always produce optimal results.
  • Social Security Maximizer.  Deals with many situations, but the system has various glitches.

See Anne Tergesen, Free Online Tools for Optimizing Social Security Benefits, The Wall Street Journal, July 26, 2014.

July 29, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Monday, July 28, 2014

Top 5 Myths About Trusts

Seymour hoffmanRecently, Philip Seymour Hoffman declined to take the advice of his attorney who advised him to create a trust.  Hoffman said he did not want his three children to be “trust fund kids.”  Because of Hoffman’s aversion to proper estate planning, his 34 million dollar estate faces a huge tax bill and other problems that could have been avoided if he listened to the legal and financial advice he was given.  Similarly, Sting expressed a similar sentiment and did not want his children to have a trust fund. 

While Sting and Hoffman may have good intentions, their beliefs highlight the myths surrounding trusts, especially revocable living trusts.  Provided below are the most common myths:

  1. Trust Funds = Spoiled Children. While a large trust fund can lead to spoiled children, it doesn’t have to.  Trusts can help the creator do the opposite.  A person who sets up a trust with an attorney can craft language to tie the distributions to conditions or events, based on that person’s values and goals, this way money can be passed based on how grantor’s see fit. 
  2. Trusts are for the Rich. Trusts are for anyone who wants their heirs to avoid the expense, hassle and stress of probate court.  A living trust also helps by setting up one or more people to manage their assets during their life if they become incapable.
  3. Losing Control. In the case of a revocable trust, it can be changed, amended, or canceled altogether.  Trusts also foster control even after someone passes away.
  4. I Have a Will. Wills, unlike trusts, have to pass through probate court to work.  This means they are public record, more expensive, and difficult to administer.  They can also lead to family fighting.  With trusts, there are tax benefits with which wills and joint bank accounts cannot achieve.
  5. I Must Leave All My Money to My Kids. Anyone can set up a trust and name whomever they want to receive their money, including charities, other family members, close friends, trusted employees, etc.

See Danielle and Andy Mayoras, Philip Seymour Hoffman and Sting Highlight Five Myths About Trusts, Forbes, July 28, 2014.

July 28, 2014 in Estate Planning - Generally, Income Tax, Trusts, Wills | Permalink | Comments (0) | TrackBack (0)

Monday, July 21, 2014

529 Plans for Grandparents


Many grandparents want to help their grandchildren pay for college, but do not know the best way of going about it.  According to a Fidelity Investments study, nearly half of grandparents expect to contribute to their grandkids’ college savings, with more than a third expecting to give $50,000 or more.  While very generous and thoughtful in nature, these contributions can also have significant tax and estate planning benefits for grandparents. 

A 529 plan is a college savings investment account that provides tax-free growth as long as the money is put toward tuition and most types of college expenses such as fees and books.  Grandparents can use 529 accounts to procure tax deductions or diminish the value of their taxable estates. 

One way to showcase 529 accounts is to highlight their advantages over other savings strategies.  For example, grandchildren who receive Series EE bonds as gifts can later be inundated with federal income taxes on the interest if they do not use funds for college.  Contrastingly, a 529 plan provides for tax-free distribution.  It also allows grandparents to give the funds to another grandchild if the intended recipient does not go to college. 

One of the caveats of a 529 plan is that it could make a grandchild ineligible for financial age.  This is because once the money is withdrawn for the beneficiary, it will count as income that schools use to determine financial aid awards.  However, grandparents can avoid this problem by waiting until their grandchild’s junior or senior year to distribute the money. 

See Robyn Post, Your Practice—Selling Grandparents on the Perks of 529 College Savings Plans, Reuters, July 18, 2014.

July 21, 2014 in Elder Law, Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Section 7520 Rates for August

RatesThe IRS has released the updated Section 7520 rates, which are used for charitable contributions. The updated August rates can be seen here.

See, IRS Updates Applicable Federal Rates for August 2014, Charitable Planning, July 18, 2014.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.

July 21, 2014 in Estate Planning - Generally, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

Friday, July 18, 2014

Article on ESBTs After the Sale of S Corporation Shares


Chris D. Saddock (Saddock Co., Dallas) recently published an article entitled, Qualifying a Grantor Trust as an ESBT After the Sale of S Corporation Shares, Probate & Property Vol. 28 No. 4, 58-60 (July/August 2014).  Provided below is a portion of the article’s introduction:

Often successful small businesses look to the S corporation as a mechanism for avoiding the corporate tax while taking advantage of a corporate entity structure.  Statutory restrictions on S corporation ownership, however, may significantly limit the shareholder’s asset protection and estate planning opportunities.  Specifically, to maintain an S election, stock must be held by a U.S. citizen or a qualified entity.  Only three types of trusts are qualified to hold S corporation shares: grantor trusts, qualified Subchapter S trusts (QSSTs), and electing small business trusts (ESBTs.) 

July 18, 2014 in Articles, Estate Planning - Generally, Income Tax, Trusts | Permalink | Comments (0) | TrackBack (0)

Tuesday, July 15, 2014

The Ins and Outs of Social Security

Social security 1

Like tax loopholes, Social Security benefits are not palpable and require knowledge, familiarity, and understanding of intricate rules and regulations.  There are various tactics that can be used to maximize Social Security retirement benefits.  For example, one of the most popular strategies is the file-and-suspend strategy.  This strategy has been touted for years as a way for married individuals to maximize their benefits as a couple. 

For those unfamiliar with the strategy, it allows a couple at full retirement age to increase each individual’s worker’s benefit by 8% annual delayed retirement credits for each year that the benefit start date is deferred until age 70—while triggering a spousal benefit for one individual.  This is accomplished when one of the spouses applies for their worker’s benefit and subsequently files a notice to suspend payment of benefits.  This permits the other spouse to file for their spousal benefit which will equal 50% of the filing and suspending spouse’s benefit. 

It is also possible for single individuals to take advantage of the file-and-suspend strategy.  The benefit of filing and suspending retirement benefits if you are single is that it enables you to go back to the Social Security Administration before age 70 to request payment of a retroactive lump sum of monthly benefits that you would have received had you started collecting benefits when you reached full retirement age.  The key is to be aware of strategies that will work in your situation and to implement them in a timely manner.

See Robert Klein, Social Security Loophhole’s Huge Windfall Opportunity, Market Watch, July 10, 2014. 

July 15, 2014 in Estate Planning - Generally, Income Tax, New Legislation | Permalink | Comments (0) | TrackBack (0)

Keogh Plans Are Not Extinct

Keogh plan

At one time the Keogh plan was the hottest retirement planning commodity around.  Today however, Keoghs are regarded by many as relics.   Nonetheless, this type of plan may still hold value for some practitioners.

As a review, the Keogh plan was intended to provide a feasible option for unincorporated small business owners who were otherwise restricted or closed out of qualified retirement plans.  There are two main types of Keogh plans: the defined contribution Keogh and the defined benefit Keogh.  For the defined contribution Keogh, the maximum deductible contribution in 2014 is equal to the lesser of $52,000 or 15% of earned income.  With the defined benefit Keogh, the limit is based on actuarial computations.  The plan may provide an annual retirement benefit equal to the lesser of 100% of earned income for the three highest-paid years or a specific dollar amount adjusted for inflation. 

Be aware that in computing “earned income” for a plan, your earnings from self-employment are reduced by your contributions and one-half of the self-employment tax you pay.  Also not the maximum amount of compensation allowed for this calculation is limited in 2014 to $260,000. 

Due to subsequent tax law modifications and the emergence of solo 401(k) plans the Keogh plan is not as prevalent as it was in past years.  Yet the plans are not extinct, and have the ability to provide a fast way for unincorporated business owners to build up a nest egg. 

See Ken Berry, Retirement Plans for Small Businesses: The Keogh Plan Is Not Extinct, CPA Practice Advisor, July 11, 2014.

July 15, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Monday, July 14, 2014

Your First IRA Distribution


The deadline for the required minimum distribution for an IRA is April 1st of next year. 

By law you must begin withdrawing money from a regular IRA and other retirement plans “when you reach age 70 ½.”  The IRS website indicates that the deadline for that distribution is “April 1 of the year following the calendar year in which you reach age 70 ½.”

Yet waiting until next year may not be the best option.  “For each subsequent year after your required beginning date, you must withdraw your RMD by Dec. 31.”  It is recommended that you check to see how the distributions will affect your tax planning before withdrawaling any money.  

See Tom Herman, The Deadline for Your First Required IRA Distribution, The Wall Street Journal, July 13, 2014.    

July 14, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Sunday, July 13, 2014

ABC's of the AMT

Empty pockets

While many individuals do not look upon taxes favorably, the Alternative Minimum Tax (AMT) has a particularly beastly reputation.  The original intent of the AMT was to prevent wealthy individuals from using loopholes to avoid paying their share of taxes by taking to many deductions or write-offs. 

However, over the years what was once considered “high income” is now upper middle class, and the AMT has not been adjusted accordingly.  Thus, earners who are not necessarily very wealthy will be hit with the tax bill. 

Generally, you may be subject to the AMT if your income falls between $150,000 and $750,000.  Your chances of paying the tax increase if you have a high gross income relative to your taxable income, have a large number of dependents, hold incentive stock options, and have large deductions on your Schedule A. 

If you are unsure whether the AMT will apply to you, you can consult an accountant or an attorney that will help you find out before tax time, therefore you can find ways to strategize and minimize your exposure to the tax. 

See Kate Ashford, How Much Do You Know About The Alternative Minimum Tax? Forbes, July 11, 2014.

July 13, 2014 in Estate Planning - Generally, Income Tax | Permalink | Comments (0) | TrackBack (0)