Texas Estate Planning

Will Moving to a New State Impact My Estate Planning?

Since the coronavirus pandemic hit the U.S., baby boomers have been speeding up their retirement plans. Many Americans have also been moving to new states. For retirees, the non-financial considerations often revolve around weather, proximity to grandchildren and access to quality healthcare and other services.

Forbes’ recent article entitled “Thinking of Retiring and Moving? Consider the Financial Implications First” provides some considerations for retirees who may set off on a move.

1. Income tax rates. Before moving to a new state, you should know how much income you’re likely to be generating in retirement. It’s equally essential to understand what type of income you’re going to generate. Your income as well as the type of income you receive could significantly influence your economic health as a retiree, after you make your move. Before moving to a new state, look into the tax code of your prospective new state. Many states have flat income tax rates, such as Massachusetts at 5%. The states that have no income tax include Alaska, Florida, Nevada, Texas, Washington, South Dakota and Wyoming. Other states that don’t have flat income tax rates may be attractive or unattractive, based on your level of income. Another important consideration is the tax treatment of Social Security income, pension income and retirement plan income. Some states treat this income just like any other source of income, while others offer preferential treatment to the income that retirees typically enjoy.
2. Housing costs. The cost of housing varies dramatically from state to state and from city to city, so understand how your housing costs are likely to change. You should also consider the cost of buying a home, maintenance costs, insurance and property taxes. Property taxes may vary by state and also by county. Insurance costs can also vary.
3. Sales taxes. Some states (New Hampshire, Oregon, Montana, Delaware and Alaska) have no sales taxes. However, most states have a sales tax of some kind, which generally adds to the cost of living. California has the highest sales tax, currently at 7.5%, then comes Tennessee, Rhode Island, New Jersey, Mississippi and Indiana, each with a sales tax of 7%. Many other places also have a county sales tax and a city sales tax. You should also research those taxes.
4. The state’s financial health. Examine the health of the state pension systems where you are thinking about moving. The states with the highest level of unfunded pension debts include Connecticut, Illinois, Alaska, New Jersey and Hawaii. They each have unfunded state pensions at a level of more than 20% of their state GDP. If you’re thinking about moving to one of those states, you’re more apt to see tax increases in the future because of the huge financial obligations of these states.
5. The overall cost of living. Examine your budget to see the extent to which your annual living expenses might increase or decrease in your new location because food, healthcare and transportation costs can vary by location. If your costs are going to go up, that should be all right, provided you have the financial resources to fund a larger expense budget. Be sure that you’ve accounted for the differences before you move.
6. Estate planning considerations. If this is going to be your last move, it’s likely that the laws of your new state will apply to your estate after you die. Many states don’t have an estate or gift tax, which means your estate and gifts will only be subject to federal tax laws. However, a number of states, such as Maryland and Iowa, have a state estate tax.

You should talk to an experienced estate planning attorney about the estate and gift tax implications of your move.

Reference: Forbes (Nov. 30, 2021) “Thinking of Retiring and Moving? Consider the Financial Implications First”

Why Do I Need Estate Planning?

Many people who failed to plan their estate with the help of an experienced estate planning attorney have their assets tied up in lengthy, and often messy, legal battles that were decided by people not of their choosing.
Forbes’ recent article entitled “Everyone Needs An Estate Plan: Here's What You Need To Know” says that although many of us don't have quite as much at stake financially, it doesn't mean that estate planning is any less important. In fact, leaving a legacy, passing down wealth and helping family aren’t things that are just for the ultra-rich.
The biggest misstep is not creating an estate plan at all. This is more than just a last will and includes powers of attorney, healthcare directives, a living will and a HIPAA waiver. People put this important responsibility off because they do not want to contemplate their own death. They try to avoid the subject. Some others may have complex family dynamics, and still others are hesitant to confide their complicated relationships with a lawyer. However, all these are just excuses.
We know that life is full of changes, and people get married, divorced, have children and grandchildren, relocate to different states, change careers and get inheritances. Each of these events could make you reconsider your goals. This may necessitate an update to your estate plan.
You need to review the beneficiaries on your IRAs, life insurance policies and pensions. You should look at how you want your heirs to receive your assets and any charitable or philanthropic notions. With powers of attorney, healthcare directives, living wills and HIPAA waivers, you need to think about who you’ll entrust to make important medical and financial decisions for you, if you become incapacitated. You see these critical questions and many others are fluid and prone to change every few years as your life changes.
Remember that your assets receive different treatment from the IRS based on the type and who owns legally owns them. For example, individual retirement accounts (IRAs), Roth IRAs, traditional brokerage accounts, life insurance policies and bank accounts are different than the family home. Therefore, it’s important to be mindful of which assets are left to whom.
Don’t wait. Speak to an experienced estate planning attorney to be certain that you give this process the attention it deserves for the well-being of you and your family.
Reference: Forbes (Feb. 26, 2021) “Everyone Needs An Estate Plan: Here's What You Need To Know”

Due Diligence Needed, If Retirement Depends on Inheritance, Selling Business

The first sentence in this article from Hometown Life, “Playing off charge card debt a major priority,” tells the entire story: “I…have never taken an active interest in my finances.” The person never had his business evaluated by a professional and learned at age 60 that his business had no resale value. In addition, he learned that his parents were supporting a sister and any inheritance he was anticipating would not be enough to live on.

Making matters worse, he has more than $80,000 in credit card debt on various cards, at interest rates between 18% and 21%. With next to no equity in his home and a home equity loan and a mortgage, this person has only one asset: an IRA worth around $100,000.

At some point in their lives, most people realize that they must be active participants in their financial lives. They need a budget to contain spending and a savings plan, so they can enjoy their retirement and control of their credit card debt. It sounds like this man just got a wake-up call.

He wonders how to resolve his credit card debt, but it seems there are a number of other issues that need to be addressed.

First, he should pay off his credit card debt. At 18% to 21%, there is no investment he could make that would come near that rate. One way to do this, is to increase his monthly payments. It may take many years to knock down such a large debt, so another option is to use his IRA to pay off the money immediately.

Equally important is for him to commit to use the money he would have otherwise used to pay off credit card debt and invest that into a retirement fund. It doesn’t matter if he uses an IRA, a SEP or a Roth, but he needs to be disciplined and start putting money away for his retirement.

Potential inheritances are troublesome for people who count their chickens before they hatch. Until the inheritance is safely in your own bank account, you cannot count on it. In a time where living expenses are high and people are living longer, fewer and fewer people are expecting to receive inheritances. Basing a lifestyle around an expected inheritance, can only lead to financial disaster.

Preparing for retirement and taking an active role in managing your finances, is a life-long task and part of our responsibility as adults. Another responsibility is to have an estate plan in place, so even people who die in debt, can be assured that what assets they do have will go to their heirs.

There’s more than a Roth or an IRA to Your Retirement

Most people work at a company that offers them a way to contribute to a retirement account, usually an IRA.  However, there are more options available, according to a recent article from Forbes titled “10 Retirement Accounts You Should Know About.”

Few of us need less money in our retirement accounts. Most of us enjoy the tax benefits we get from retirement accounts. Americans, in general, do a terrible job of saving for retirement. Some say the IRA, Roth IRA and other similar accounts were created to give us an incentive to do a better job. The tax advantages of these accounts make it more attractive to sock away money every year. These accounts were also set up with deliberate penalties, so people wouldn’t raid their accounts every time they needed a few extra dollars. 

If you are among those who work for companies that have a retirement savings plan match, make the most out of it. If you put in the annual percentage or amount your plan requires, your employer will match that contribution. Most workers walk away from this money.  However, it’s free money!

Employees usually are offered a 401(k), 403(b) or 457 plan from their employer. The financial institution is already chosen, the money is automatically taken out of your paycheck and often you can only make decisions about what kind of funds you can select at certain times of the year. In 2018, you can contribute up to $18,500. If you’re 50+, you can make an additional $6,000 contribution, known as a catch-up contribution. 

Self-employed? You need a retirement plan more than someone who works for a company. Self-employed people have many more options. If you need help, talk to your CPA. There may be some plans that are better suited or have more tax advantages than others.

For self-employed people, the basic choices are the solo 401(k) for a sole proprietor or someone working with their spouse. You can make contributions as both the employer and the employee. You could contribute as much as $55,000 in 2018 (or, if you are 50+, $61,000). Your total contributions are determined by your net business income.

Another choice for retirement savings for the self-employed is a SEP IRA, the Simplified Employee Pension. It’s easier to set up than a 401(k)and is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to a quarter of your income, or $55,000, or whichever is less. There are no catch-up contributions for a SEP IRA. 

Self-employed or working for a company, your retirement plan needs to include an estate plan. Your estate planning attorney will be able to help you with a will, power of attorney and healthcare directive. She will also be able to give you valuable insights, as to how your retirement plan and your estate plan can work together to minimize taxes and maximize the estate you leave behind.

Resource: Forbes July 23, 2018 “10 Retirement Accounts You Should Know About” 

Stretch IRAs Coming to an End?

Stretch IRAs are an important tax and estate planning tool for many wealthy people. They allow a non-spousal beneficiary to inherit an IRA account and stretch any taxes owed on it throughout their lifetimes. This allows for more funds in the account to be used to grow wealth than would be possible if taxes were due immediately.

Many members of Congress have long sought to eliminate this possibility, but their attempts have failed.

The Senate Finance Committee has now voted to eliminate stretch IRAs by making all taxes due within five years of inheritance, as Financial Advisor reports in "Stretch IRA: Are Its Days Numbered?"

The legislation is unlikely to pass on its own, but it still stands a good chance of becoming law as part of a larger tax overhaul that Republicans in Congress are expected to propose. For that overhaul to work, the Republicans hope it can be presented as revenue neutral overall.

They want to have any tax cuts paid for by raising other revenue, cutting spending or covered through expected financial growth. Although the revenue consequences of eliminating stretch IRAs are disputed, some believe it could bring in billions more per year. As a result, it is likely to be included as a way to help pay for other tax cuts.

If this does become law, many wealthy people will want to revisit and update their estate plans as soon as possible.

Reference: Financial Advisor (Dec. 23, 2016) "Stretch IRA: Are Its Days Numbered?"

What to Know When You Inherit an IRA

The rules concerning IRAs are different for people who inherit the accounts than they are for people who initiate the accounts. This is often a source of confusion for those who inherit, especially when it comes to required minimum distributions.

Recently, the American Legion published some information about what inheritors need to know in "Five things to know about inheriting an IRA."

The list includes:                                                                                                                                                         

• People who create their own Roth IRAs are not required to take minimum distributions. However, those who inherit them are required to do so.
• All of the money in an IRA does not need to be taken out at once. Those who inherit can elect to take required minimum distributions based on their own life expectancy. This option must be initiated by December 31 of the year following the death of the original account holder.
• People who choose not to take out required minimum distributions must withdraw the full amount of the IRA within five years of the account owner's death. This option is available when the account originator passed away before reaching the age of 70½.
• Spouses can choose to treat the IRA as their own or as an inherited IRA. The rules must then be followed for whichever option the surviving spouse elects.
• Transferring an inherited IRA can only be done by moving it directly from one custodian to another. The funds cannot be withdrawn by the inheritor and later moved into a new IRA.

Contact an estate planning attorney to learn more about these rather complex rules.

Reference: American Legion (March 16, 2016) "Five things to know about inheriting an IRA."

IRS Now Allows IRA Distribution Deferrals

deferment option now allows seniors the opportunity for more retirement account growth.

Required minimum distributions from retirement accounts such as IRAs and 401Ks have been problematic for many seniors who do not necessarily need to take money out of their accounts to meet their expenses. The rules have required seniors to withdraw minimum amounts from their retirement accounts beginning at age 70½ based on their life expectancies as determined each year by complicated IRS charts.

However, as Smoke Signals reports in "A new, liberating IRA option is available," seniors now have the choice to take lower amounts out of their retirement accounts.

The new policy allows account holders to defer up to $125,000 or 25% of the total amount in their accounts, whichever is lower. The amount deferred does not factor into the required minimum distribution calculation.

The deferment can be taken until age 85, but the money must be placed in a qualified longevity annuity contract as the only premium payment of that annuity. The money placed into the annuity will continue to grow and payments will be made on the annuity when the deferment age is reached.

For seniors who do not need to take money out of their retirement accounts, this new option allows them to continue to increase their income if they wish to preserve those accounts as part of their estates or if they anticipate living longer and might need the money later.

Reference: Smoke Signals (March 31, 2016) "A new, liberating IRA option is available"

It Is Important to Designate a Contingent Beneficiary for Your IRA

Individual retirement accounts are an important part of many estate plans. By designating a beneficiary for the account the funds can pass to another person automatically without having to go through probate. However, if the primary beneficiary of your IRA passes away before you do, then the IRA might have to go through your estate. That can cause problems as a recently released private letter ruling by the IRS illustrates.

This was the subject of a recent Wealth Management article titled "The Importance of Naming a Contingent Beneficiary of a Retirement Account."

In this case the primary beneficiary of an IRA and a Roth IRA passed away before the testator. As a consequence the accounts had to go through the estate. As the sole beneficiary of the estate, the IRA and Roth IRA went to the deceased's spouse.

The spouse elected to roll over the IRA and Roth IRA into her own IRA. The IRS determined that she could do that. However, she was only allowed to do so because of the particular facts of this case and some language in the preamble of the regulations, not the body of the regulations.

This is important because the ruling seems to indicate that in other situations the result would not be as favorable. Naming a contingent beneficiary on your IRA can guard against such outcomes. If the primary beneficiary has already passed away, the contingent beneficiary will receive the funds instead.

Reference: Wealth Management (March 21, 2016) "The Importance of Naming a Contingent Beneficiary of a Retirement Account."

Charitable IRA Tax Break Made Permanent

Seniors trying to spend down the size of an estate for estate tax purposes often find it helpful to donate to charities. Other seniors donate for philanthropic reasons. 

In 2006, Congress made it much easier for many people over 70½ to make donations. They could donate up to $100,000 directly from their traditional IRAs to charity without facing income tax penalties. However, as Congress so often does this charitable rollover exclusion was not made a permanent part of the tax code. It required periodic reauthorization.

It has recently been made permanent retroactive to Jan. 1, 2015 as reported by the Wills, Trusts & Estates Prof Blog in an article entitled "Congress Makes Permanent IRA Charitable Rollover Exclusion." Of course, this does not mean the exclusion cannot be taken out of the tax code by Congress later. It just means that it does not need reauthorization to stay in the code.

While this is a great benefit for elderly people trying to spend down their estates, it is important to remember not to start the spend down process without first consulting an estate planning attorney. Dealing with the estate tax and reducing the size of an estate should be handled as part of a larger estate plan. 

Using the charitable rollover exclusion might not be the best idea for everyone, so talk to an estate planning attorney about other options that might be better for you and your estate.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 20, 2015) "Congress Makes Permanent IRA Charitable Rollover Exclusion."

 

The Lowdown on IRAs

Which plan is the one for you? The main features and the pros and cons of each are listed in Physician’s Money Digest, “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan.” 

An SEP-IRAis similar to a traditional IRA in that the investment earnings grow taxed-deferred until they are withdrawn. However, a self-employed individual can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are calculated as the lesser of 20% of net business income or $52,000 for 2014, $53,000 for 2015. 

A Solo 401(k) is for self-employed individuals with no employees. Your spouse is not included in the employee count and is permitted to contribute to the plan if he or she is employed by the business. This 401k can be structured as a traditional 401(k) or as a Solo Roth. The maximum 2015 contribution is $53,000 or $59,000 for those 50 and older. The contribution includes (i) an annual employee deferral up to 100% of compensation or earned income for a self-employed individual (to a maximum of $18,000 and $24,000 if 50 or older), which allows some to contribute more to a Solo 401(k) than to a SEP-IRA; and (ii) an employer discretionary contribution of up to 25% of compensation as defined by the plan or 20% of earned income for a self-employed individual.

One advantage a 401(k) offers over an IRA is that you can borrow from a 401(k). If you opt for Solo Roth 401(k), there’s no deduction, but withdrawals are tax-free if you wait until you’re 59½. The plan lets you save much more than a Roth IRA. Another advantage for the Solo Roth 401(k) is that contributions aren’t subject to income limits (unlike the Roth IRA).

Which is better… a Roth or traditional IRA?It depends on many factors. If you expect to be in a higher tax bracket in the future, the Roth version may make more sense, but if your current tax rate is low, it might be better to forgo a deduction now in order to withdraw money tax-free when you’re in a higher bracket in the future. What’s nice is that it doesn’t have to be an “either-or” proposition: you can have both traditional and Roth 401(k) plans and divide contributions between them. 

For most self-employed individuals, the SEP-IRA may be a better choice than a traditional IRA because the contribution limits are much higher. Also, deductions for traditional IRA contributions are limited by income for participants who are covered or whose spouse is covered by a retirement plan at work.

Talk to a qualified estate planning attorney to see how these IRA options may fit into your strategy.

Reference: Physician’s Money Digest (August 27, 2015) “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan”