Hardly a week goes by without news of a celebrity dying without a will, breaking up a family and supporting a lawyer. Maybe you are smarter than that. You have a will and have designated powers of attorney for finances and health care. But unless you regularly update these documents and beneficiary designations, your heirs could find themselves in a legal quagmire after you die or pay more taxes than they should (this are also explained). Worse, some of the assets may end up in the wrong heirs.
The basic components of an estate plan include a will and/or living trust, a living will, and a financial and medical power of attorney (also known as a medical power of attorney). A POA designation gives an individual you trust the authority to manage your finances and make medical decisions if you become incapacitated. You can also use powers of attorney to designate individuals to manage your digital assets, such as your online and social media accounts.
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Some individuals use living trusts to bypass probate and designate a trustee to manage their assets after death ( When does a living trust make sense?). But whether the property is simple or multi-layered, all papers must be checked by him every three to five years. And if there’s a big change in your life, you should check back even more often, says Marcos Segrera, his advisor at Evensky & Katz in Miami. I’ve provided a checklist on the opposite page. Use this to determine if you need to update your estate plan.
Your Beneficiaries Are Key
Certain assets, such as retirement accounts and insurance policies, require you to designate a beneficiary who will inherit the account upon death. This ensures that these assets pass directly to your beneficiaries after you die, outside of probate.
Because beneficiary designations usually take precedence over instructions in a will or living trust, it’s important to get the beneficiary designations right, says an attorney at the Hook Law Center and a fellow at the National Academy of Elder Law Attorneys. Chairman Letha McDowell said. You should also specify the names of any contingent beneficiaries in case you and the primary beneficiary (usually a spouse) die at the same time or within a short period of time, she says McDowell. 401(k) plans regularly prompt participants to identify beneficiaries but rarely advise them to designate contingent beneficiaries, she says.
If you do not designate a beneficiary, or if the primary beneficiary dies first and you do not designate a new beneficiary, the proceeds will be paid to the estate. In other words, probate will take place. This can significantly delay the process of distributing assets within the estate, causing headaches and costs for heirs.
Federal law requires that eligible plans, such as 401(k) plans, be offered to the surviving spouse unless the spouse agrees to waive that protection. If you want these funds to go to someone other than your spouse (for example, if you remarry and want your adult children to inherit the money), your spouse must sign a waiver that waives your right to receive the funds.
This spousal protection does not apply to IRAs. Most states allow anyone to be named as a beneficiary of her IRA (requires spouse waiver if no spouse is named and lives in community state on her property). may be). So while a spouse may be the default beneficiary of her 401(k), that protection is gone once the funds roll over to the IRA.
Consider your non-retirement account
Although not required, outside of probate, you can arrange to have your bank or brokerage account passed directly to your heirs. This process is commonly known as remittance on death (TOD) or accounts payable on death, and a form is available at your financial institution. This option may be preferred over joint accounts. A joint account also bypasses probate, but gives joint owners equal rights to the assets in the account. A TOD or Payable-on-Death account allows you to maintain control of your account until you die. Beneficiaries may claim accounts outside of probate by submitting identification and death certificates.
As with beneficiary designations, these accounts supersede your will or trust, so it is important to ensure they are current and have contingent beneficiaries.
If you change your payee designation, you must receive confirmation from your account. Keep that confirmation with your other property planning documents, McDowell says.
marriage or divorce
State laws differ regarding current and former spouses, but there have been some unfortunate cases where life insurance payments have gone unchallenged because the original owner did not renew the policy beneficiary. In 2013, the Supreme Court ruled that proceeds from a $124,500 federal life insurance policy entered into by Warren Hillman, who died of leukemia in 2008, should go to his ex-wife, who was named as the beneficiary of the policy. made a judgment. Hillman’s widow received no money at all.
death of spouse
Since most married couples name each other as beneficiaries, surviving spouses should renew their beneficiary designations as soon as possible. When you’re grieving, this may not be the first thing that comes to your mind, but it makes probate much easier for children and other survivors after you die. If you have named any contingent beneficiaries, you may not need to perform this step, but you should ensure that those beneficiary selections have not changed.
Change account
If you’ve rolled over your 401(k) plan to an IRA, or opened a new bank or brokerage account, you’ll need to make sure your payee (or TOD) designation is correct. If you transfer your brokerage account to another company, make sure that your beneficiary designation is also transferred. When doing so, make sure all beneficiary-designated accounts are up to date, including her 401(k) left with her previous employer.
How to reduce inheritance tax
Beneficiary designations and living trusts protect your assets from probate, but these measures do not protect your heirs from federal or state estate taxes.
In 2023, up to $12.92 million in real estate ($25.84 million for married couples) will be exempt from federal property taxes. However, it will drop to about $6 million by 2025 unless Congress extends the estate tax provisions of the Tax Cuts and Jobs Act. Additionally, 12 states and the District of Columbia have much lower property tax exemptions. Oregon focuses on properties valued at $1 million or more. https://www.kiplinger.com/retirement/inheritance/601551/states-with-scary-death-taxes
You can reduce or avoid federal and state property taxes by donating money while you are alive. In 2022, you can donate up to $16,000 to as many people as you like without reducing your estate tax deduction, and your spouse can contribute the same amount.
New IRA Rules. The $6 million threshold still exempts most properties from federal estate taxes, but if adult children (or non-spousal heirs) inherit a traditional IRA, they can be charged a hefty tax. There is a nature.
However, under the All Communities Set Up for Post-Retirement Strengthening (SECURE) Act of 2019, adult children and other non-spousal heirs who inherit an IRA receive a lump sum and are paid in full. must pay taxes or send money to the inherited IRA. It must be used up within 10 years after the death of the original owner. Also, in guidance issued by his IRS earlier this year, many heirs who choose the latter approach would have to make annual withdrawals based on their life expectancy, and would have to deplete their account balances at year 10. there is. The heir can wait until her tenth year to exhaust the account. )
The 10-year rule does not apply to surviving spouses. They can roll the money into their own IRA and allow the account to grow and the taxes to be deferred until they have to take the RMD starting at age 72 now. Average life.
Ross workaround. Converting some or all of the IRA to Roth is one option he has if he wants to minimize taxes for his heirs. An inherited Roth IRA is also subject to her 10-year rule for non-spousal heirs, but with a crucial difference. Withdrawals are tax-free.
If you convert traditional IRA money into Roth, you will have to pay taxes on the conversion. But this is an example of how a bear market can be on your side. This is because the tax is based on the IRA value at the time of conversion.
Before converting funds, compare your heir’s tax rate with yours. If the tax rate were much lower, the conversion might make sense. If your heir has a lower tax rate than yours, this calculation is less compelling, especially if the conversion could drive you to a higher tax rate. and taxes on Social Security benefits may be higher.
According to IRAhelp.com founder Ed Slott, one of the benefits of converting towards the end of the year is that you’ll have a pretty accurate picture of your 2022 income. This makes it easy to estimate how much the conversion will cost.
