Estate Planning Archives - Benenati Law Firm, P.C.

SECURE Act – IMPORTANT LEGISLATIVE UPDATE

Craig Backus — Tue, 28 Apr 2020 22:19:00 +0000

The SECURE Act was passed in late 2019 and affects IRAs and 401(k)s (included in this description are other qualified retirement plans) as of January 1, 2020. Many of our clients have asked how this could affect their planning. As expected, the law is not simple and there is not one universal approach. This article outlines our thoughts and general recommendations regarding the impact of the SECURE Act on planning for our clients.

The SECURE Act eliminates the ability to stretch the distributions from an IRA or 401(k) over the life expectancy of a non-spouse beneficiary and replaces that life expectancy stretch with a requirement that the beneficiary must take full distribution of an IRA or 401(k) by the tenth (10th) anniversary of the participant’s death (“10 Year Rule”). There are exceptions to the 10 Year Rule for special situations, which will not be discussed here. For purposes of this article, we will assume it is your desire to leave your IRA and 401(k) assets to your children.

Under the new SECURE Act, there are 3 options for naming children as beneficiaries of your IRA and 401(k):

Option 1: Individual is Named as Beneficiary

Option 2: Conduit Trust is Named as Beneficiary

Option 3: Accumulation Trust is Named as Beneficiary

Please review the summary below with respect to each option.

Option 1: Individual is Named as Beneficiary:

Update Beneficiary Designation Language “BDL” to name individual as beneficiary
No trust is involved, therefore no trust protections apply
10 Year Rule applies, meaning the beneficiary has the following options: o take lump sum immediately – income tax liability accrues immediately
- take distributions over time –income tax liability can be spread out over time
- take no distribution at all until 10th anniversary of participant’s death – income tax liability accrues in year 10 (Note: higher potential for increase in overall tax rate for that year.)

Option 2: Conduit Trust Named as Beneficiary:

Update “BDL” to name trust as beneficiary
Trust protections apply so long as funds retained in trust (up to the 10-year period)
10 Year Rule Applies, meaning at the end of the 10-year period, the trust must distribute the entire value of the IRA to the trust beneficiary. For example, if the balance of the IRA in year 10 is $400,000, that $400,000 is distributed directly to your child, no matter what age your child is at that time, trust protections do not apply to the $400,000 distribution, and your child bears the income tax liability.
The conduit trusts are allowed to have non-natural persons as beneficiaries (i.e., charities).
No changes to your estate planning documents are needed if you desire the results outlined herein.

Option 3: Accumulation Trust Named as Beneficiary:

Update “BDL” to name trust as beneficiary
Trust protections apply so long as funds are retained in trust (there is no requirement to distribute from trust within 10-year period)
10 Year Rule applies, meaning the Trustee has the following options: o take lump sum immediately – income tax liability accrues immediately to the trust
- take distributions over time – income tax liability can be spread out over time to the trust
- take no distribution at all until 10th anniversary of participant’s death – income tax liability accrues in year 10 to the trust

The difference with the Accumulation Trust is that the Trustee can elect to retain the distributions in trust (i.e., not make those distributions to the beneficiary), then trust protections remain in place with respect to such funds, but the trust bears the income tax liability (usually at a higher income tax bracket than your child). However, the Trustee can elect to distribute some or all of such distribution to your child, which permit the distributed amount to be taxed on your child’s income tax return at your child’s income tax rate, but the trust protections are lost with respect to the distributed amount.

Allows the Trustee to allocate the income tax burden between the trust and your child in the most tax-advantageous way.
The accumulation trust cannot name any non-natural persons as beneficiaries (i.e., charities). If a non-natural person is named as a beneficiary, then the 10 Year Rule referenced above is reduced to a 5 Year Rule.
You must implement changes to your estate planning documents if you desire the results outlined herein.

Prior to the SECURE Act (and in most situations), planning for our clients implemented Option 2: Conduit Trust as Beneficiary for the benefit of their children. While this option remains viable, in our opinion, it is no longer the best option because it does not permit the Trustee to retain distributed IRA and 401(k) funds beyond the 10 Year Rule thus such funds lose all trust protections by year 10. Post-enactment of the SECURE Act, it is our general recommendation to clients that Option 3: Accumulation Trust as Beneficiary be utilized for the benefit of their children as it permits the Trustee to retain distributed IRA and 401(k) funds beyond the 10 Year Rule, thus extending the trust protections over those funds for a longer period of time.

As a reminder, under current law, trust protections include, but are not limited to, the following:

Creditor Protection – trust assets are protected from your child’s creditors, meaning if your child is sued for liability, trust assets cannot be reached to satisfy that claim for liability

Segregation from Marriage – trust assets are segregated from marital assets, thus offer far greater protection in case of divorce.

3. Management – Management of trust assets by the Trustee so that another person has decision making authority with respect to those assets until your child reaches the age specified in your estate planning documents, when he or she can become his/her own Trustee

4. Income Tax Flexibility – The Trustee has the power (but is not required) to make distributions of income to your child, as the beneficiary of the trust, in order to take advantage of a child’s lower income tax bracket. As a trust reaches the maximum income tax bracket at $15,000 of income, this allows an opportunity to reduce overall income tax liability by distributing income out of the trust to your child and then that distributed income is taxed at your child’s individual income tax rate. The Trustee can consider other factors to determine whether the reduced income tax liability outweighs the benefits of holding income inside the trust. This is a case by case determination to be made by the Trustee. Example of factors: child has creditor issues, child is not good with money, child is in an unstable marriage.

In the event you determine Option 3: Accumulation Trust as Beneficiary meets your planning goals, we have developed an amendment that can be tailored to your estate plan that will update such plan to align with what we perceive as the most flexible beneficiary designation option available under the SECURE Act. Our fee for such amendment is $345.

This article is intended to be informative but cannot adequately address each client’s unique situation. If you would like a meeting or teleconference to discuss the impact the SECURE Act has on your estate plan, we are happy to coordinate that with you. Time for such a meeting or teleconference will be billed at our normal hourly rates and will be billed in addition to any fee charged for amending your planning.

Please let us know if we can be of any assistance to you in this regard.

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Understanding the Basics of Beneficiary-Grantor Trusts

Craig Backus — Tue, 28 Apr 2020 21:32:38 +0000

As published in Texas Lawyer, November 2010. Written by Pete Benenati and Shannon G. Guthrie. Many Americans, especially the wealthy, seek to abide by the Internal Revenue Code while also reducing taxes. One tool estate-planning lawyers have in their arsenal is the beneficiary-grantor trust. For purposes of this article, we will assume that some form of estate tax will apply, even though current tax laws provide that there is no estate tax for tax year 2010. The gift tax remains applicable for the tax year 2010. Understanding a beneficiary-grantor trust requires some general background about income tax and estate planning rules. Income tax may result when an individual sells an asset for more than his basis — basis generally being what he or someone else paid for it, with some adjustments. A trust is a taxpayer and is subject to income taxes earned on its assets (including capital gains). Finally, if an individual gives away an asset but keeps its benefit, it will be included in his estate for transfer-tax purposes. Given those rules, can an individual sell an asset to a trust of which he is the beneficiary and not recognize gain — i.e., not be subject to income tax on the profit? He can, and lawyers should know how to help him do so. A grantor is simply the creator of a trust. The grantor-trust rules, found at Internal Revenue Code §§671-678, sometimes tax a trust beneficiary on the trust income. In a beneficiary-grantor trust an individual (the grantor) creates a trust for another individual’s benefit (the beneficiary). For example, parents create a trust for their child, permitting distributions for the child’s health, education, maintenance and support. The child is the primary beneficiary and also serves as trustee of the trust. The parents make a gift to the trust of no more than $5,000. The lawyer structures the trust so the child has the right to withdraw the $5,000 when the parents contribute that money and also so the child knows about the right of withdrawal. Quite often, the child never exercises this withdrawal power. Because the child has given up a right to remove available funds, the $5,000 stays in the trust, where it is held and managed for the child’s benefit. The child, who is also the trustee, gets to decide not only how to invest the $5,000 but how to make distributions under the standard of health, education, maintenance and support. The child-trustee also has the power, exercisable in his will, to dispose of the remaining trust assets to a class of individuals and entities that can include family members and charities but not himself, his estate, his creditors or his estate’s creditors. By giving up the right to remove the $5,000 yet continuing to control the disposition of the assets left inside the trust, the child becomes the taxpayer for income generated by the $5,000 and, as a result, includes all items of income and deductions on his personal income tax return. But the child doesn’t really own the trust assets. As a result and under current Texas law, the trust’s assets are not subject to the claims of the child’s creditors. It is almost the perfect trust: It is for the child’s benefit, the child is in control as trustee, but the assets are protected from the child’s creditors and are not part of the child’s estate for estate tax purposes. Further, because the child is treated as the owner of the trust for income tax purposes, if he lends money or sells assets to the trust, he does so without income tax consequences, because the trust and the lender or seller are the same person. Yet, again, the child remains the beneficiary of the trust. This strategy is quite useful where the child owns an interest in an entity that is expected to increase substantially in value. Usually, the child wants to protect the increased value from his creditors — including the government, should a death tax apply — but also receive the benefit of the asset. The child sells

Disclaimer:

This information does not constitute the rendering of legal, accounting or other professional services by Pete Benenati or Benenati Law Firm, PC. This information is not intended to create or provide an attorney-client relationship. Although care is taken to present the material accurately, any implied or actual warranties as to any materials herein are hereby disclaimed along with any liability with respect thereto.

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Online Accounts and Your Estate Plan

Craig Backus — Tue, 28 Apr 2020 21:27:30 +0000

You may be surprised to know that the provisions of your Will or Trust may not allow for control of your online accounts, such as Google, Facebook, Amazon, iTunes, etc. When you sign up for an online service, you accept the terms of the Agreement, which governs your use, even after your death. For example, a Company could terminate your account upon notice of your death and you may have a credit that could not be accessed. It is very important to plan for such accounts at your death. You should have a list of accounts, passwords and other pertinent information in a safe place with your other documents to enable the people you leave behind to manage your digital assets.

Remember, any account that has your financial information leaves you vulnerable to identity theft after death. Please remember to treat these accounts in the same way you would desire for any other asset to be managed after your death.

Disclaimer:

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Children’s Issues in Estate Planning

Craig Backus — Tue, 28 Apr 2020 21:20:41 +0000

Below is a brief bullet point summary of some issues to consider when planning for your minor children:

1. If you have minor children, the hardest question is who should raise your children in case of death? In other words, who should be named as guardian of your children?

2. In conjunction with item 1 above, who will take care of the money for your children? Who will be Trustee of your child’s trust?

3. In making a decision about who should raise your children and who should be trustee, there is a school of thought that the guardian and the trustee should be different so each will keep an eye on the other. However, I believe if you need to worry about such a situation, you named the wrong people.

4. There are times where I think it makes sense to name different people as guardian and trustee. Specifically, where the person you name as guardian is perfect to raise your child, but does not have a clue about money or investments. Thus, in that case, it makes sense to name different people.

5. Do not name your minor children as beneficiary of life insurance, retirement accounts or any other assets that pass by beneficiary designation. Those accounts will not be distributed until the court gets involved, which means it will be more expensive and the proceeds managed with court involvement. More importantly, the account will be distributed to them, at the latest, by 25 years of age, which may not be in their best interest. Therefore, it is better to do your own plan that provides a trust for your children. This allows you to determine the terms of the trust rather than state law and the court, including the ability to defer distributions until your child is older or to make distributions in stages. There are many other options available when you draft a trust for your children.

6. I am not a licensed insurance agent; however, life insurance is an important asset to protect your family. If one parent dies, life insurance on the life of that parent is important to provide security to the family, reduce stress on the surviving parent, and give the surviving parent options on how to deal with the unexpected loss of their spouse.

7. One final thought – I strongly recommend to my clients that they do what I refer to as a “Letter of Desires.” You may do more than one:

One to the guardian(s) – let them know about items you want them to consider when raising your children.
One to the trustee – let them know how to use the investments, what you want them to consider. Many times people are much more conservative when they are responsible for other people’s money. Let them know it is okay to make distributions for extraordinary events, i.e., graduation, marriage and births. Also, it is okay to make distributions for unusual items like a walking tour in Europe!

These are examples, however, you can do more. This letter needs to be in your own handwriting and each parent should write their own letter. The reason for the letter to be handwritten is, I believe, it makes it harder to ignore. You are speaking to that person when they read your handwritten letter.

This article does not attempt to address all issues or concerns, but merely to make you aware of things to consider when planning for your family.

Disclaimer:

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