Can I Decline an Inherited IRA?

The rules governing inherited Individual Retirement Accounts (IRAs) have changed over the years. They have become even more complex since the passage of the original SECURE Act with the passage of SECURE 2.0. The inheritor of an IRA may be required to empty the account and pay taxes on the resulting income within 10 years. In some situations, beneficiaries might choose to execute a Qualified Disclaimer and avoid inheriting the IRA, according to a recent article, “How to Opt Out of Inheriting an IRA” from Think Advisor.

Paying taxes on the distributions could put a beneficiary into a higher tax bracket. In some situations, beneficiaries may want to execute a Qualified Disclaimer and avoid inheriting both the account and the tax consequences associated with the inheritance.  Sometimes clients would rather pass wealth to another person or later generation, and income producing assets such as IRAs are attractive options for that.

Individuals who use a Qualified Disclaimer are treated as if they never received the property at all. Of course, you don’t enjoy the benefits of the inheritance but don’t receive the tax bill.  See here for more on how disclaimers work.  https://galligan-law.com/can-you-refuse-an-inheritance-disclaimer/

Suppose the decedent’s estate is large enough to trigger the federal estate tax. In that case, generation-skipping transfer tax issues may come into play, depending on whether there are any contingent beneficiaries.

An experienced estate planning attorney is needed to ensure that the disclaimer satisfies all requirements and is treated as a Qualified Disclaimer. It must be in writing, and it must be irrevocable. It also needs to align with any state law requirements.

The person who wishes to disclaim the IRA must provide the IRA custodian or the plan administrator with written notice within nine months after the latter of two events: the original account owner’s death or the date the disclaiming party turns 21 years old. The disclaiming person must also execute the disclaimer before receiving the inherited IRA or any of the benefits associated with the property.

Once the disclaimer is made, the inherited IRA must pass to the remaining beneficiaries without the disclaiming party’s involvement.

This is very important, but the disclaiming party cannot decide who will receive their interests, such as directing the inherited IRA to go to their child. Instead, the asset goes to the next beneficiary as if the disclaimer passed away before the account holder.  If the disclaiming party’s child is already named as a beneficiary, their interest will be received as intended by that child.

The person inheriting the account must execute the disclaimer before receiving any benefits from the account. Even electing to take distributions will prevent the disclaimer from being effective, even if the person has not received any funds.

In some cases, you may be able to disclaim a portion of the inherited IRA. However, these are specific cases requiring the experience of an estate planning attorney.

Reference: Think Advisor (Feb. 8, 2024) “How to Opt Out of Inheriting an IRA”

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3 Key Reasons to Use a Trust

Estate planning is plumbing: sophisticated, legal plumbing to move your assets from you to whomever you wish.  An estate planning attorney designs the plumbing based upon your concerns, whether they be incapacity planning, taxes, creditors or other issues.

The two main tools estate planning attorneys use to build these pipes are wills and trusts.  Planners often use trusts as part of the estate plan design because they are versatile.  They solve more problems than a will.  There are many reasons to consider using a trust as opposed to only a will, and here are three key reasons to use a trust:

Understanding Wills vs. Trusts

A will is simple in purpose.  It outlines who gets what and who speaks for you after you are gone.  It requires the probate process to approve it and appoint the person you named to act for you, but otherwise is a straightforward document.

The trust, however, does more.  The trust provides who gets what and who speaks for your stuff after you are gone, without court involvement.  But, it does this through holding your assets or receiving them at death, managing and distributing them according to your instructions, both during your lifetime and after. Unlike a will, a trust offers a private, probate-free path tailored to personal circumstances.

See this article for more:  https://galligan-law.com/will-vs-living-trust-a-quick-and-simple-reference-guide/

You Have a Blended Family

Blended families are like tapestries – intricate, colorful and diverse. However, this beauty can result in complexity when it comes to estate planning. With children, stepchildren and multiple parents involved, a will’s one-size-fits-all approach may unravel the fabric you’ve so carefully woven.

A trust, however, can be the tailor to your tapestry. It allows you to:

  1. Specify exact allocations: Deciding who gets what, when and how.
  2. Protect your children’s inheritance: Ensuring that your children, not just your spouse’s, benefit from your estate.
  3. Avoid unintended consequences: Preventing your assets from unintentionally passing to a new spouse’s children in the event of remarriage.

You Own Property in Multiple States

The second of reason to use a trust is owning property in multiple states.  This is one of the hallmark reasons to use a trust and virtually always leads to using a trust.  Probate in Texas isn’t that bad.  But, if you own property in multiple states, you won’t just probate in Texas, you may have to probate in every state where you own land.  That is far more work for your loved ones, and you will have to anticipate the law of several states, not just Texas.

The trust can own the property in all of those states and by virtue of its ownership, the land can avoid probate.  It allows for:

  1. Centralized management: One entity handling all properties, irrespective of location.
  2. Smoother transition: Bypassing multiple state probate processes.
  3. Cost and time efficiency: Reducing legal fees and administrative delays.

You Value Privacy and Want to Avoid Probate

The last of the 3 key reasons to use a trust is privacy.  Probate, by its nature, is public.  Probate is Latin for “prove it,” so the process involves publicly displaying the will for the world to see.  Parts of it can be private in certain circumstances, but is designed to be public.

A trust, conversely, is the private screening of your final act. It shields your estate from the public eye and sidesteps the time-consuming, often costly, probate process. With a trust you’re not just planning; you’re protecting.  Trusts, short of a dispute, aren’t even filed so the process can remain very private.

Additional Considerations

When it comes to estate planning, one size does not fit all. The decision between a will and a trust should be weighed with:

  • Incapacity planning:  This is reason 3.5.  Trusts allow a trustee to manage property which gives greater control over assets while a loved one is incapacitated.
  • Tax implications: Understanding how each option affects your estate tax-wise.
  • Personalized solutions: Every estate is unique, as is every state, and so should be its plan.
  • Long-Term care planning:  Probate avoidance is a key factor for Medicaid planning

In the tapestry of estate planning, trusts emerge as a nuanced, flexible thread, weaving through the complexities of blended families, multi-state properties and privacy concerns. If these signs resonate with your situation, it might be time to consider a trust.

Remember, the best estate plan is one tailored to your unique story. We encourage you to seek professional estate guidance to navigate these waters.

 

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Estate Planning Mistakes

Making mistakes in your estate planning can torpedo your efforts to protect your family after you die, warns a recent article from Kiplinger, “Common Estate Planning Mistakes.” Everyone benefits from a professionally-made comprehensive estate plan, a process for preparing your legal and financial affairs so assets and possessions are passed on after your death to the people or charities you want.

Not having an estate plan can create trouble for those you love. The biggest estate planning mistake of all is not having an estate plan. After that, there are several others.

Procrastination. Suppose you unexpectedly become incapacitated and don’t have an estate plan. In that case, your family will be left guessing what you would want your medical care to be. They may have to go to court to apply for guardianship so they can pay your bills and keep your household running. Everyone should have documents like a Medical Power of Attorney, a Statutory Durable Power of Attorney (for handing financial matters), a HIPAA Release Form and a Directive to Physicians (Living Will) in place so that you can be taken care of in accordance with your wishes during your incapacity.

Trying to make an estate plan on your own. Unless you’re an experienced estate planning attorney, there’s a lot you could leave out if you attempt a DIY estate plan. If there are serious enough errors, a court could declare your will invalid and it’s as if you never had a will in the first place. The laws of Texas (or the state in which you live) will be used to distribute your assets. It may not be what you had in mind.

Keeping estate planning documents in a safe or safe deposit box. Documents need to be where someone can get them in an emergency or after your passing. Safety deposit boxes often require a court order to be opened on the death of the owner. Make sure that a person you trust (preferably the one you named in your estate planning documents to handle things for you in the event of death or incapacity) knows where these documents are located.

Missing key documents.  Make sure your estate plan includes these documents:

  • Living Trust or Will —This document outlines your final wishes and instructions for distributing your assets and how you want your affairs managed after you die. If you decide on a living trust, you will also need a “pourover will” to transfer assets to your trust at death if you did not take care of this during your lifetime. The Living Trust or Will also names a trustee or an executor to oversee the instructions you leave in the in the document.
  • Beneficiary designations—Any account allowing for beneficiaries, including IRAs, pension plans, investment accounts and insurance policies, will pass directly to named beneficiaries. Be sure that these are up to date.
  • Medical Power of Attorney —Allows another person to make medical decisions for you if you become incapacitated.
  • Funeral instructions—Do you want a traditional burial? Cremation? Leave written instructions for your family outlining your wishes for a funeral or memorial service.

Not Providing for Digital assets. These include websites, cloud storage, social media accounts and cryptocurrency, to name a few. By assigning a digital fiduciary and sharing key information, you help heirs locate assets and avoid identity theft.

Failing to update your plan. Life happens and things change. Someone you’ve named to handle your affairs after you’re gone may be deceased or too sick for the job. Your estate plan needs to reflect these changes in your life and in your family. What you wanted ten years ago may not be what you need now.

Appointing the wrong person as executor or trustee. Don’t feel obligated to name someone as executor or trustee because you don’t want to hurt their feelings. It’s much more important to name an organized person who can get along with the beneficiaries, communicate with them, and keep them informed. It’s also important to name successors in case the first person you name is unable to take on this role. For your peace of mind (and theirs), you should talk with this person before appointing them to this critical role to make sure they are willing to take it on.

Reference: Kiplinger (Dec. 30, 2023) “Common Estate Planning Mistakes”

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