Wills, Trusts & Estates Prof Blog

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

A Member of the Law Professor Blogs Network

Thursday, November 27, 2014

Roth IRA Conversions No Longer on Sale

Black friday

Black Friday is right around the corner, but there won’t be any deals on Roth IRA conversions.  For Roth IRA account owners who did conversions in November 2012, the two-year increase of 5,200 points or 41 percent has been a windfall. These individuals have benefitted in three different ways:

  1. Elimination of income tax on 100 percent of Roth IRA appreciation. Those who did a Roth IRA conversion in November 2012 have eliminated taxation on 100 percent of sizable appreciation in the value of their Roth IRA in just two years.  Yet, even with the inevitable stock market downturn, the opportunity for further appreciation and elimination of additional income tax liability remains a real possibility for most individuals who did Roth conversions two years ago.
  2. Roth IRA not subject to required minimum distribution (RMD) rules. Roth IRA beneficiaries may continue to extend the life of Roth IRA assets with one difference: they are required to take annual minimum distributions beginning the year following the year of the original owner’s death.
  3. Reduced exposure to RMDs for remaining traditional IRAs. When you do a partial Roth IRA conversion, you reduce your exposure to RMDs on any remaining traditional IRAs. 

See Robert Klein, No Bargains on Roth IRA Conversions this Friday, Market Watch, Nov. 25, 2014.

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

November 27, 2014 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 26, 2014

8 Common 529 Plan Misconceptions

Student loan

A 529 college savings plan is a vehicle allowing families to save for college costs with tax-deferred earnings growth and tax-free distributions.  Additionally, many states offer a tax break for residents contributing to their plans. 

However, the rules about purchasing the plan and using the money can be difficult to digest, and there can be much confusion about how the plans operate.  Below are some of the common misconceptions:

  1. You are limited to your home state’s plan. Many individuals believe they are limited to plans offered by their state of residence.  However, a buyer can select any state’s plan, but first look to see if your state offers tax benefits or reductions for residents.
  2. Contribution limits equal those of your IRA. 529 plan contribution limits are set by the states and can be as high as $380,000.  To avoid gift tax consequences, federal law allows single taxpayers to contribute up to $14,000 in one year or make a lump-sum contribution of $70,000 to cover five years.  “It’s not limited to $5,500 if you’re under 50 like it is with an IRA.”
  3. Your income is too high to contribute. Some investors confuse a 529 plan with a Coverdell Education Savings Account, which is only available to people with income below $110,000 for singles or $220,000 for those married filing jointly.  529 plans have no income limits.
  4. The account must be in your child’s name. The donor, not the beneficiary is in charge of a 529 plan.  Thus, it is best to have the account with the parent listed as the owner or the trustee with the child as the beneficiary.
  5. The money will be lost if your child does not go to college.  If the beneficiary does not use the money in the 529 plan for some reason, the assets can be transferred to another beneficiary.  A 529 plan is very flexible.
  6. The money can only be used for a four-year college. Funds from a 529 plan can be used toward many postsecondary education programs, not just traditional colleges.
  7. The beneficiary must be below a specific age. A 529 plan can be opened for a beneficiary of any age, and the funds can be distributed regardless of how old the beneficiary is when he or she attends college or graduate school.
  8. It will hurt your child’s chance of getting financial aid. Although 529 plans will factor into the financial aid calculation, the benefits usually outweigh the drawbacks.

See Kate Stalter, 8 Common Misconceptions About 529 Plans, U.S. News & World Report, Nov. 24, 2014. 

November 26, 2014 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Risks of Retained Death Benefit Life Settlements

RiskA retained death benefit life settlement allows the seller to retain the contractual right to death benefits, such as a life insurance policy, to have the purchaser maintain the policy  and pay some death benefits to the seller. However, these policies can be risky for sellers. In addition to the risk of the policy lapsing despite notice requirements to the seller, tax consequences can vary by each agreement and are often unfavorable for sellers. The tax consequences depend on how the transaction is treated, such as being considered an annuity or loan or other type of transaction. These policies can be complicated, and require careful consideration and balancing of risk versus reward.

See Robin S. Weinberger and Peter N. Katz, Retained Death Benefit Life Settlements: Considering the Uncertainties, Life Health Pro, Nov. 21, 2014.

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

November 26, 2014 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Duties of a Trustee

QuestionWhen a family member is named as trustee of a trust after the death of a family member, the new role and fiduciary duties that come with it can be confusing and stressful. In addition to considering seeking legal assistance, here are some key duties of a trustee:

  • Find all assets of the trust.
  • Protect those assets.
  • Separate the trust's property from all other property.
  • Make sure all laws and trust terms are followed.
  • Act with the care that a prudent person would act with.
  • Act as a loyal and impartial trustee.
  • Make sure to avoid conflicts of interest.
  • Protect the trust by enforcing both claims the trust may have and defending the trust in claims of others.
  • When discretionary matters come up make sure to act reasonably.
  • Make sure to provide beneficiaries with accounting reports.
  • Ensure co-trustees fulfill their duties as well.
  • Keep confidential information confidential.

See Wayne M. Zell, You Have Been Named as Trustee for a Living Trust--Now What?, The National Law Review, Nov. 20, 2014.

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

November 26, 2014 in Estate Planning - Generally, Non-Probate Assets, Trusts | Permalink | Comments (0) | TrackBack (0)

Monday, November 24, 2014

Using Life Insurance To Fill Social Security Gaps

InsuranceBy combining life insurance  and social security benefits in retirement and estate planning, some risks of a social security only retirement plan can be solved. If a couple is planning retirement income on social  security only, they run the risk of the surviving spouse's monthly income being drastically cut in retirement when one spouse dies. This can cause serious financial problems for the surviving spouse since some large expenses are fixed and will not reduce when one spouse dies. However, by having a life insurance policy for both spouses the surviving spouse can still receive additional income from the policy to supplement their own income and can pass the value of their own life insurance policy to the couple's children, which will have favorable tax results.

See William Rainaldi & Frank Rainaldi, Social Security and Life Insurance, Wealth Management, Nov. 19, 2014.

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

November 24, 2014 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Sunday, November 23, 2014

Cut Costs with Joint Life


First-to-die life insurance, or “joint life,” may be a more cost effective way for a couple to concurrently get life insurance. 

The policy pays off when the first of the insured couple dies.  It generally costs less than individual coverage because underwriting two people is cheaper than one, especially if they are in good health. 

There are not many companies that sell this product, but in today’s volatile markets, people want insurance products that offer an economical approach paired with flexibility and an opportunity for constant cash accumulation. “[T]he policy builds account value from which loans and withdrawals are available.  It gives customers the flexibility of a permanent life insurance product with living benefit features at a more affordable price to households, business owners and others.”

The coverage can also provide for an orderly transfer of a business interest.  For a family owned business, it can help those interested in continuing the business, while also providing for heirs who are not interested in the business.

However, some professionals are skeptical of first-to-die coverage.  “We might recommend first-to-die in a circumstance where we have a prosperous, relatively young and healthy couple and we want to protect estate value at the lowest cost, although, to be candid, we would probably load them up with separate term policies.”  One of the major drawbacks of joint life is that a couple can get more term insurance individually at a lower cost or they could find universal life policies for about the same price as first-to-die coverage. For high net worth families, second-to-die insurance can be used for wealth replacement or to pay taxes.

See Alan Lavine, Insuring Two Lives is Cheaper Than One, Wealth Management, Nov. 18, 2014.

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

November 23, 2014 in Disability Planning - Health Care, Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Why Reconsidering IRAs May Be Beneficial

IRATraditional IRAs have been a popular and often beneficial form of retirement planning. However, changing tax consequences and common misconceptions for IRAs create a need to reconsider if these accounts are still the best route for saving for retirement.  Since these accounts are tax deferred rather than deductable, account holders can be hit with increasing tax liability as marginal tax brackets change over time and tax rates rise. In addition, the required minimum distributions that must be taken out after age 70 and a half creates confusion for many and can result in large penalties if not taken.                

See Andrew McNair, 3 Reasons to Ditch Your IRA, Market Watch, Nov. 11, 2014.

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

November 23, 2014 in Estate Planning - Generally, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Friday, November 21, 2014

Holiday To-Dos


The holidays are right around the corner, and now is the best time to work on your retirement finances.  Below is a list of finance needs to get out of the way so you can start enjoying the holidays:

  • 401(k). The current 401(k) contribution limit is $17,500.  For individuals 50 and older, you can add up to another $5,500 as a catch-up contribution.  Right now you should check your 401(k) account to see how much you have contributed since the beginning of the year.  If you have not maxed out your 401(k), this is your last chance to increase your contribution for 2014.
  • Roth IRA. The Roth IRA contribution limit is $5,500 for those under 50. If you are 50 or older the limit is $6,500.  Now is a good time to check your contributions and see if you can add any money to a Roth IRA account for 2014.  By contributing to a Roth, you will never have to pay tax on any gains after you meet withdrawal qualifications.
  • 529 Savings Plan. If you have a child, there is even more savings to do.  If you have any money leftover after taking care of retirement contributions, consider adding to a 529 college savings plan.  This can offset your state income tax and save you some cash next year.  The fund will also grow tax free for the purpose of funding higher education.  Since tuition costs are rapidly increasing, this may not be a bad idea.

See Joe Udo, 5 Financial Matters to Resolve Before the Holidays, Yahoo Finance, Nov. 20, 2014. 

November 21, 2014 in Estate Planning - Generally, Income Tax, Non-Probate Assets | Permalink | Comments (0) | TrackBack (0)

Thursday, November 20, 2014

Year-End Tax Tips

Tax planning

As 2014 is headed to a close, year-end tax planning will soon take the stage.  Below are a few strategies that may help in producing substantial tax savings:

  • Trust Distributions. Tax brackets for trust are more compressed compared to brackets for individuals.  Thus, trustees should consider making discretionary distributions of income to beneficiaries at the end of 2014 to reduce taxes. 
  • Harvesting Ordinary Income. This may be considered in order to “fill-up” your marginal tax bracket, which is especially true today with the advent of seven different ordinary income tax brackets. 
  • Harvesting Capital Gains. Taxpayers with a lower long-term capital gain bracket in 2014 should consider selling appreciated assets to take advantage of a lower tax rate. 
  • Harvesting Capital Losses. If a taxpayer recognized capital gains anytime this year, it might be best to harvest capital losses to offset the gains recognized.
  • Charitable Remainder Trusts. Taxpayers planning to make large sales at the end of the year should consider creating a CRAT or CRUT to smooth income. 
  • Charitable Lead Trusts. Consider creating a charitable lead trust (CLT) at the end of the year.  With a CLT, payments are made to the charitable beneficiary and at the end of the term any assets remaining in the trust pass to non-charitable remaindermen with favorable gift tax results.
  • Roth IRA Conversions. Whether a Roth IRA conversion is favorable for a taxpayer is fact dependent.  There are several ways to reduce the cost and risk associated with conversion.  One way to reduce cost is by staging it over several years to hold down the marginal tax rate applied to the conversion amount. 

See Robert S. Keebler, 2014 Year-End Tax Planning, Blog for Estate Planning Professionals, Nov. 3, 2014. 

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

November 20, 2014 in Estate Planning - Generally, Gift Tax, Income Tax, Non-Probate Assets, Trusts | Permalink | Comments (0) | TrackBack (0)

Wednesday, November 19, 2014

Avoid These 5 IRA Beneficiary Form Mistakes


Individual retirement accounts are the single largest asset for many retirees and their heirs.  Yet, all too often IRA owners make costly errors on their beneficiary forms that negate their best intentions, leaving loved ones in the dust.  Below are five beneficiary form mistakes to avoid:

  1. Outdated forms. One of the most common mistakes is forgetting to update your beneficiary form after you divorce or remarry.  Your beneficiary form should be reviewed and updated after every major life event since “The IRA beneficiary form overrides your will.”
  2. Naming your estate. By naming your estate as your IRA beneficiary, you deprive your heirs of a significant growth opportunity.  “[I]t limits the beneficiaries’ ability to stretch the IRA after the owner’s death.  It speeds up the income taxes on the distributions as well and can amount to hundreds of thousands of lost growth potential.”  Furthermore, the probate court would consider that asset to be part of your estate when you die, and it would be subject to creditors.
  3. Lack of financial control. Do not name your child as sole beneficiary without establishing controls, especially if he or she lacks financial maturity.  If a loss of control is concerning, consider naming a trust as beneficiary instead.  This enables you to stipulate how much your beneficiaries will receive and when.
  4. Forgetting to name a guardian. If you die when your child is still a minor, the court will appoint a guardian to oversee your assets until your child reaches the age of majority.  It might not be someone you would choose.  When selecting a minor child as a beneficiary, consider how you want that money controlled and select your own trustee or guardian. 
  5. Missing form.  Even if you did everything right, this does nothing if your heirs cannot track the beneficiary form down after you pass away.  Without an IRA beneficiary form, the courts have no choice but to subject your heirs to the faster payout schedule, causing them to miss out on the tax-deferred stretch IRA.  To avoid needless headaches, get a copy of your beneficiary form from your IRA custodian, keep it in a secure location and tell your beneficiaries where to find it.

See Shelly Schwartz, 5 IRA Beneficiary Form Mistakes to Avoid, Bankrate.

November 19, 2014 in Estate Administration, Estate Planning - Generally, Non-Probate Assets, Trusts | Permalink | Comments (0) | TrackBack (0)