Are you leaving your IRA to someone other than your spouse?

An IRA can be a powerful wealth-building tool, offering tax-deferred growth (tax-free in the case of a Roth IRA), asset protection and other benefits. But if you leave an IRA to your children — or to someone else other than your spouse — these benefits can be lost without careful planning.

“Inherited IRA” stretches tax benefits
A surviving spouse who inherits an IRA is permitted to roll that IRA into his or her own IRA, allowing the funds to continue growing tax-deferred or tax-free until the funds are withdrawn in retirement or after age 70½. Beneficiaries who are not your spouse are treated differently.

To take advantage of an IRA’s tax benefits, nonspouse beneficiaries must transfer the funds directly into an “inherited IRA.” Even then the beneficiaries will have to begin taking distributions by the end of the following year, but they’ll be able to stretch those distributions over their life expectancies.

This option is only available to your children or other non-spouse beneficiaries if you name them as beneficiaries (or secondary beneficiaries) of your IRA. If you leave an IRA to your estate, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your actuarial life expectancy).

If you name multiple nonspousal beneficiaries (several children, for example), each beneficiary will have to establish a separate inherited IRA account by the end of the year after the year of your death in order to take distributions over their respective life expectancies. If any beneficiary misses the deadline, he or she can still roll the distribution into an inherited IRA but he or she will have to use the oldest beneficiary’s life expectancy as the time over which they must remove the monies.

Be aware that, unlike other IRAs, inherited IRAs aren’t protected from creditors in bankruptcy.

Inherited IRA rules
The following special rules apply to an inherited IRA:

  • The IRA must be a new IRA set up for the specific purpose of receiving the inherited account.
  • The IRA must be specially titled in the deceased account owner’s name.
  • No other contributions may be made to the IRA.
  • No other amounts may generally be rolled into or out of the IRA.
  • Required minimum distributions will need to be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.

Please contact us if you have questions about how to address your IRA in your estate plan.

Divorce Necessitates an Estate Plan Review

There are few events that can completely upend a person’s life more than divorce. Of course, there’s the emotional toll on you and your family, but you also have to consider the divorce’s impact on your estate plan.

When you originally crafted your plan, you likely centered many of its strategies around your spouse. Thus, when divorce proceedings begin and when they conclude, it’s crucial to update your estate plan as soon as possible to avoid unintended outcomes. Don’t wait until the divorce is final.

Who’s next in line for your wealth?

Unless you wish to provide your soon-to-be former spouse with an inheritance, amend your will and any trusts to minimize or eliminate him or her as a beneficiary. In addition, unless you’re comfortable with him or her administering your estate or trust, you should designate someone else as executor or trustee. This is a good idea even if you live in one of the states where divorce automatically nullifies any gifts or bequests to an ex-spouse and automatically revokes an appointment of a former spouse as executor or trustee.

There are several reasons for this. First, if you die before the divorce is final even if you have lived separately for some time, your spouse will still inherit in accordance with your will or revocable trust, and his or her appointment as executor or trustee likely will stand.

Second, the laws in some states treat your estate plan as if your former spouse had predeceased you if you are living separately and are in the midst of divorce proceedings. If you’ve named contingent or residual beneficiaries, any property your estranged spouse would have received will go to them. If not, the property will pass according to the laws of intestate succession. But relying on these laws can be risky.

Finally, keep in mind that in many states, as long as you’re legally married, your spouse will retain elective share or other property rights to a portion of your estate. So while updating your plan soon after you decide to divorce can reduce the amount your spouse will receive if you die while you’re still married, it can be difficult to disinherit him or her completely before the divorce is final.

Seek peace of mind

If you’re going through divorce proceedings, contact us. We can help review and revise your estate plan to ensure that the proper heirs are provided for in the event of your death.

On Air: Daniel Ruttenberg Shares Why You Should Have a Will in Order on ABC 7

A court confirmed that music superstar Prince died without a will, which leaves complicated questions about who inherits his vast fortune. There are at least six siblings, including half siblings, who may inherit, and the confusion is just starting. In an interview on ABC 7, SmolenPlevy Principal Daniel Ruttenberg explained the problems that may occur when you die without a will, and why it’s vital to make sure that doesn’t happen to you.

Ruttenberg explained that without a will, Prince could not direct where his assets should go. “I think that’s a travesty,” said Ruttenberg. Often, people avoid estate planning because they don’t think they have enough assets. But Ruttenberg said you don’t need to own much to learn from Prince’s mistake — plan now and prevent the heartache and need for the court’s intervention after you’re gone.

A will can dictate to whom your money goes, protect your children’s interests in their inheritance and help avoid taxation. News reports predict Prince’s siblings will split the multi-million dollar estate, but Ruttenberg indicates that someone who claims to be Prince’s child could trump all of that.

Ruttenberg told ABC 7’s Kimberly Suiter that whoever does inherit Prince’s estate isn’t necessarily going to be better for it. Sudden wealth has its own set of problems, and many people who inherit a fortune overnight end up blowing it all quickly. They can end up broke, homeless, and in a worse position than they were before getting the money.

NewsChannel 8: Jason Smolen’s Tips for Protecting Digital Assets

Traditionally, estate planning addresses one’s property and finances. Today, more and more people are looking to include their intangible assets like social media accounts, and online photos and videos in their wills. SmolenPlevy Co-Founding Principal Jason Smolen visits NewsChannel 8 to discuss the growing trend of protecting digital assets through estate planning on Let’s Talk Live.

Although laws regarding digital assets are evolving, Smolen says there are ways to ensure your online accounts and media are taken of upon your death. Some websites like Facebook have a feature that allows you to elect someone you’re “friends” with as your “legacy contact”.

For websites and services that haven’t caught on this feature, Smolen suggests going “old school” by designating who takes over each digital asset, and including a comprehensive list of all online accounts and login information in your will.

Digital information like downloaded music, video and books may not be considered assets after all, according to Smolen. Sometimes, purchasing art only means you’re only licensed to use the it while you’re alive.

Watch Smolen on Let’s Talk Live above.

In The Media: Jason Smolen Takes a Close Look at Proposed Changes to the Capital Gains Tax

Jason D. Smolen

The proposal to end the “step up” provision in the capital gains tax could mean substantive changes in how inheritances are taxed. Just published, SmolenPlevy Co-Founding Principal Jason Smolen takes a closer look at the proposal in Wealth Management and MainStreet.

President Obama’s plan to close the “trust fund loophole” could affect more than just the rich. Any beneficiary would have to look up the original cost of just about any asset they inherit—causing them to spend time and money sorting out the financial details.

Without the “step up” provision, beneficiaries may need to set up additional trusts to protect their assets from increased taxation. Some people can transfer assets to trusts, which would take them out of the tax picture, or sell the assets entirely instead of passing on potentially huge tax bills to their heirs.

The proposal is a long way from reality, but its adoption will make estate planning more complicated, according to Smolen. Families may need additional professional advice from estate attorneys and accountants to devise a strategy to maximize assets and minimize taxes.

Read Smolen’s exploration of the proposed changes on WealthManagement.com and MainStreet.

The Wrong Way to Avoid “Trust Fund Kids” And Other Lessons from Philip Seymour Hoffman’s Will

SmolenPlevy Co-Founding Principal Jason D. Smolen

According to media reports, the late actor Philip Seymour Hoffman didn’t leave any money to his three children directly because he feared they would become “Trust Fund Kids”. While his concerns were understandable—many people worry about giving their children too much money too soon—there are a number of estate planning strategies that he could have used to better provide for his family after his death. Hoffman died in February 2014, leaving an estimated $35 million estate to his long-time companion, Marianne O’ Donnell.

Jason Smolen suggests that Hoffman’s estate may face a large and unnecessary estate tax bill because the actor and O’Donnell weren’t married. His estate may be hit with both federal and New York state estate taxes, which could total $14 million dollars. Had they tied the knot, the money would have passed tax free from Hoffman to O’Donnell.

As for the “Trust Fund Kids” concern, Smolen certainly understands the issue. “Earning and spending money are two different activities,” says Smolen. “If your children haven’t engaged in the first, they may not manage the second well.” A possible solution is to work with an estate planning attorney to set up a revocable living trust crafted to provide your children with a secure future without creating a disincentive to work. The trusts can provide for the payment of expenses associated with college, health and financial issues, and can make distributions when the children have achieved certain life goals or even match salaries once they’ve grown and started careers.

Another key is naming a trustee who will make sure your trust is appropriately administered. “It should be someone who understands your values,” says Smolen. In Hoffman’s situation, while his partner may know and understand what he wanted for the children, she will still be making those financial decisions without guidance or restrictions. Essentially, without a trust to set parameters, O’Donnell can do whatever she wants. While there’s no reason to believe she’ll misspend the money or deprive the children, life is unpredictable—she could be hit with illness, emergencies or even a future divorce that depletes the funds. Further depending on what estate planning O’Donnell does before she dies, the money could be taxed again, whether she gives it to the children, charity or to family and friends.

Smolen points out that trust funds aren’t just for the very wealthy. They are useful tools for anyone who will leave behind an estate and wants some control over their legacy. Also, a trust can help heirs avoid the delay caused by having an estate go through probate, where all the assets in the estate are legally accounted for before distributions are made.

A revocable living trust can be altered, updated and even cancelled. By spelling out your wishes, you can control how and when money passes—and to whom. Like many others, Philip Seymour Hoffman was legitimately concerned about how their inheritance would impact his children—but unfortunately, the lesson of his will is that he did not do all he could have to increase the positive and minimize the negative impact of his wealth on his children.

Jason Smolen and Dan Ruttenberg can assist you with your estate planning questions and concerns. Please contact SmolenPlevy at 703-790-1900.

For more insights and developments in the law, please read SmolenPlevy’s quarterly Report from Counsel.

Estate Planning: Lessons Learned from the Deaths of Mickey Rooney & Casey Kasem

Jason D. Smolen

Casey Kasem was the iconic voice of American Top 40. Mickey Rooney was a celebrated actor. But as they aged, the news became about their medical, financial and legal end-of-life issues. For Kasem, it was the battle between his children and their stepmother over his care as he suffered from Lewy Body dementia. For Rooney, it was claims of elder abuse against a stepchild, a will that disinherited his children and estranged wife, and a modest $18,000 estate upon his death, despite his 80-year career.

“These cases demonstrate the problems that can occur regardless of whether you’re a celebrity or not,” said SmolenPlevy co-founding Principal and estate planning attorney Jason Smolen. “ The key is to plan so none of your family has to face these kinds of heartbreaking situations.”

Smolen said conflicts can erupt between spouses from second (or subsequent) marriages and children from prior marriages. They can also occur between siblings, especially when one child primarily cares for an ill parent and the others are less involved. In Mickey Rooney’ s case, it was reported that the actor claimed he lost most of his fortune because of elder abuse and financial mismanagement by one of his stepsons. Rooney executed a new will just before he died in which he left the little he had to another stepchild.

“Wills can be considered political statements,” said Smolen. “ If the reports are accurate, Rooney’ s is especially so.” Smolen opined that Rooney may have been sending a message to his ex and his children: They didn’t take care of him, so he cut them out. However, the more important and potentially divisive issue is the decision as to who will serve as caretakers for aging parents.

Smolen said the Rooney case highlights the need to confront these issues early. If one child is going to be the primary caretaker, the decision has to be made as to which child. How much will that child be allowed to spend of the parent’ s assets—and will that access cause issues with the other children? For instance, if the caretaker takes the parent to dine out often, and uses the parent’s money to pay for the meals, will that become an issue that will cause problems with the other children?

Smolen said the Rooney situation also points out the need to update wills, trusts and estate documents. At SmolenPlevy, absent a significant change in the law or a client’s request, the attorneys review clients’ documents with them every three years. Sometimes changes need to be made repeatedly. After all, Rooney was married eight times, divorced seven and separated from his current wife when he died. Each change in marital status should have resulted in changes in beneficiary designations and potentially trustees, and the execution of new advanced health directives and guardianship designations. While Rooney’ s case is extreme, everyone should have and maintain up-to-date estate plans.

Read more articles from SmolenPlevy’s summer 2014 Report from Counsel