Category Archives: IRA

What is a stretch IRA?

By Robin Crouch

The term “stretch” does not represent a type of IRA, it refers to a financial strategy that allows people to stretch out the benefits from an IRA as well as receive income tax advantages. By using this strategy, an IRA can be passed down from generation to generation while beneficiaries enjoy the income as well as tax deferred growth for as long as possible.

Stretched IRA Chart

Not all IRA custodial agreements allow the stretch strategy, you should check with your IRA custodian or financial institution to determine if beneficiaries will be allowed to take distributions over a life-expectancy period.  Most IRA providers would rather make such allowances than have their customer transfer his or her IRA to another financial institution.

Please note, the average inheritance, when received by a beneficiary, is completely consumed within one year.  The reasons are numerous but here are a few:  Beneficiary wants to spend it; Creditors, Predators, and Divorce; Not understanding the rules and choices. . . when the money is gone, it's gone.  With an IRA, not only would the money be gone, but there will be a huge tax bill to pay.

The good new is that the choice can be yours to make.  If you wish to remove some of the roadblocks and ensure that your beneficiaries take the stretch and provide them with asset protection to avoid losing what you have worked a lifetime to earn, please ask about our Heritage Trust.

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DISCLAIMER – Every case is different because every case is different. This blog does not give legal advice. This blog does not create an attorney client relationship. You are not permitted to rely on anything in this blog for any reason. This blog is an entirely personal endeavor. Every person's situation is different and requires an attorney to review the situation personally with you.
No attorney-client relationship is created by this site.
The use of the Internet, this blog or email for communication with this firm or any individual member of this firm does not establish an attorney-client relationship. Before we represent any client, the client and the attorney will sign a written retainer agreement. If you do not have a written, signed retainer agreement with us, we are not representing you and will not be taking any action on your behalf.

Don’t let Retirement Benefits go down the drain!

By Robin Crouch

Screen Shot 2014-01-28 at 8.44.10 AMIf there is no beneficiary named on your retirement account, who inherits and how is the the required distribution calculated?

Unfortunately, there are cases where Dad died, Mom was the named beneficiary, but she predeceased him. OR, Mom inherited the IRA and died before naming her own beneficiary.

Each IRA has it's own rules and each IRA custodian has their own agreement with language that will indicate who inherits the IRA when there are no named beneficiaries. Most agreements default to the estate of the deceased IRA owner.

A designated beneficiary is a living, breathing person who can stretch distributions over their own life expectancy and pay the income tax accordingly. Traditional IRAs are typically funded with pretax dollars. Distributions out of the account after age 59½ are taxed as ordinary income at each individual's tax rate.

“The Estate of” does not have a life expectancy and has a limited ability to stretch distributions. If the IRA owner died before April 1 of the year after he turned 70½, the IRA must be emptied in five years. If he died after the required beginning date, you may have the option to stretch distributions over his remaining life expectancy.

Most IRA custodians will only make payments to the estate and not to the beneficiaries of the estate so stretching the distribution may not be an option. Instead, the custodian will pay the entire IRA balance to the estate. Not only is this is a taxable distribution and cannot be undone, the probate attorney and the executor's fees are based on the assets of the estate.

So, don't let your retirement funds go down the drain. It is very important that you seek professional advice to understand how your tax-qualified account works after you pass away and that your beneficiaries are named correctly to avoid the pitfalls of paying unnecessary taxes and probate fees.

Contact Us Today For A Free Consultation

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DISCLAIMER – Every case is different because every case is different. This blog does not give legal advice. This blog does not create an attorney client relationship. You are not permitted to rely on anything in this blog for any reason. This blog is an entirely personal endeavor. Every person's situation is different and requires an attorney to review the situation personally with you.
No attorney-client relationship is created by this site.
The use of the Internet, this blog or email for communication with this firm or any individual member of this firm does not establish an attorney-client relationship. Before we represent any client, the client and the attorney will sign a written retainer agreement. If you do not have a written, signed retainer agreement with us, we are not representing you and will not be taking any action on your behalf.

A Bird in the Hand is Worth Two In the Bush

By Julian Guilfoyle

Screen Shot 2013-04-24 at 9.49.34 AMThe belief that it is better to have a lesser certain benefit than the possibility of a greater one that may come to nothing is a decision increasing contemplated by today’s retiree. George Yacik outlines this decision that can have severe repercussions in the February issue of Financial Planning. In an article titled “Weighing a Pension Buyout”, Mr. Yacik discusses the complex decisions these retirees face when deciding between a lump sum disbursement versus a promised income stream for life.

Retirement in 1985 was a simpler endeavor than it is today. Yacik writes that back then, “some 89 of the Fortune 100 companies offered a traditional defined benefit (pension) to newly hired salaried employees.” Towers Watson, a human resources consulting firm, has found that these figures have “completely flipped. In the Fortune 100 of today, 89 companies now offer only account-based retirement plans (for example, a 401(k)) to new salaried hires.” The purpose of this shift was to save money as these companies and their defined benefit plans began to feel the strain of the baby boomers reaching retirement age. The shift in retirement benefits affects not only workers entering employment, it has expanded to current retirees already receiving their pension benefits. Yacik cites a recent study completed by Aon Hewitt. They found that some “35% of the more than 500 large American companies said they were likely or somewhat likely to offer a lump-sum payout to their retirees and employees in order to put a cap on their pension liabilities.” Even if one is already in retirement, they may be forced to revisit this crucial decision.

While it has made retirement a more treacherous undertaking, there are some benefits to the worker. First, the retiree doesn’t lose a substantial amount of money should they pass away before their life expectancy. For example, lets take a 65 year-old male with $250,000 in retirement benefits. If a pension option based solely on his life expectancy is elected, the retiree should receive around $1400 per month for the rest of their life. Should the retiree pass away at 70, he would lose $166,000 plus the interest this money could have generated during that period. If the retiree had elected a lump sum option of $250,000 (and withdrew $1400 per month), the $166,000 plus accrued interest would pass to the spouse as an IRA or to the children. This obviously works the other way as well. If the retiree lived past his life expectancy or if the lump sum saw a decline due to market losses, the retiree may outlive the lump sum disbursement.

The second benefit to retirees is that they control their own destinies. If the lump sum is rolled into an IRA the retiree has unlimited investment opportunities. The IRA can be transferred into whatever type of investments they desire. Depending on the size of the IRA and the investor’s goals, the IRA can also be split. A portion could be set aside to generate an income stream, another to provide for long-term care insurance, and the remainder to achieve long-term market growth. If the pension option is elected, the retiree is restricted to the pension fund manager’s investment ability. It is also subject to revisions made to retirement benefits by their previous employer, collective bargaining agreements, or bankruptcy proceedings.

Though the lump-sum option is becoming increasingly attractive to retirees, it is imperative that the transfer to an IRA is handled appropriately. If the retirement is not transferred correctly, the entire lump sum could be taxed as income, all in one year. This is one of the many reasons you should be working with both legal and financial advisors to guarantee a smooth transition from employment to retirement. If you are approaching retirement or if your former employer is considering modifying your existing pension, please feel free to call our office at 800-798-5297 to schedule a free consultation and discuss the options that are available to you.

http://www.financial-planning.com/fp_issues/43_2/Weighing-a-Pension-Payout-2682991-1.html?pg=3

 
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Contact us for a free consultation.

DISCLAIMER – Every case is different because every case is different. This blog does not give legal advice. This blog does not create an attorney client relationship. You are not permitted to rely on anything in this blog for any reason. This blog is an entirely personal endeavor. Every person’s situation is different and requires an attorney to review the situation personally with you.
No attorney-client relationship is created by this site.

The use of the Internet, this blog or email for communication with this firm or any individual member of this firm does not establish an attorney-client relationship. Before we represent any client, the client and the attorney will sign a written retainer agreement.
If you do not have a written, signed retainer agreement with us, we are not representing you and will not be taking any action on your behalf.

 

Beware the IRA Beneficiary Pitfalls

 

By Attorney Ted Brown

A Tax-qualified retirement account, such as a traditional IRA, 401(K), 403(b) or other tax-deferred account can pose a unique challenge when planning for your estate. This is because any withdrawals from the account are taxed as ordinary income.

Of course, this tax-deferred treatment is the great benefit of these accounts. While the account-owner is working, money saved for retirement and the gains on such investments grow tax-free. After retirement, presumably when the owner is in a lower tax bracket, withdrawals are taxed at a lower rate.

However, when the account owner-passes away, the burden to pay income tax on the account passes on the the beneficiaries of the account. Since income tax was never paid on the balance of the account during the owners life, withdrawals taken by the beneficiaries will be taxed as ordinary income for each beneficiary.

This can create a problem for the financially imprudent beneficiary who elects to withdraw their inheritance as a lump sum. For even a modest account, this can kick the beneficiary into a higher tax bracket in the year of the withdrawal and result in far more value being lost to taxes than if the account was distributed annually over the beneficiary's lifetime.

What is worse, if the account owner chooses to leave a portion of the account to a charity, organization or simple trust, it can result in all of the beneficiaries being forced to take distributions over a shorter time period and paying more in taxes.

Therefore, it is very important that you seek professional advice to understand how your tax-qualified account works after you pass away and that your beneficiaries are named correctly to avoid the tax pitfalls.  

DISCLAIMER – Every case is different because every case is different. This blog does not give legal advice. This blog does not create an attorney client relationship. You are not permitted to rely on anything in this blog for any reason. This blog is an entirely personal endeavor. Every person’s situation is different and requires an attorney to review the situation personally with you.
No attorney-client relationship is created by this site.

The use of the Internet, this blog or email for communication with this firm or any individual member of this firm does not establish an attorney-client relationship. Before we represent any client, the client and the attorney will sign a written retainer agreement.
If you do not have a written, signed retainer agreement with us, we are not representing you and will not be taking any action on your behalf.

 

Leave Your Children Your IRAs, in a Smarter Way

 

By Attorney Dan Vu

IRAs are commonly left directly to a spouse and then to the couple's children. After both parents have passed away, the IRA custodian gives the children a choice to take their inheritance in a lump sum check or to receive minimum payments for the rest of their lives. Not surprisingly, the majority choose a lump sum check to buy a new boat or otherwise spend it right now. The problem is that this lump sum is add as ordinary income in the year that they take the distribution. With a larger IRA, that means the beneficiary will likely pay income taxes at a higher rate and thereby lose a lot of their inheritance. Remember the highest marginal tax rate has just jumped to 39.6%. But, there is a better way. They can take the minimum payments over their life; this is called “stretching” an inherited IRA.

We now live in a pensionless era, a time when most company pensions have vanished and you must provide for your own retirement. A stretched inherited IRA becomes your child's pension. For children who like to buy things on credit and fail to put enough money aside for their retirement, you can leave them a “pension.” Now how do you make sure they choose the pension option? What prevents them from choosing to pay all the taxes at once in order to buy a new fancy car? We recommend that clients set up a special trust that our firm has developed for their children to solve this issue. The IRA's beneficiary, after the spouse passes away, is the special trust for their children. The trust terms require that the beneficiary choose the pension option. Of course if they need the more of IRA for emergencies, that can be allowed to tap into the IRA money, but otherwise they will receive the inherited IRA a a pension that stretches over their lifetime.

Another advantaged of the special trust is that it can be set up to be protected from a child's future divorce and/or creditors. Ohio law explicitly provides for a trust to be set up by the parents so that the inheritance can be divorce- and creditor-proof. In this way you can ensure that if something happens to your children then the inherited IRA stays in the family for the benefit of your grandchildren. This also applies to other qualified accounts as well, like most 401(k), 403(b), and Roth IRA accounts. These accounts should also be left to your children in the same smarter way.

If you would like to discuss your beneficiary options for your IRA, contact us.

DISCLAIMER – Every case is different because every case is different. This blog does not give legal advice. This blog does not create an attorney client relationship. You are not permitted to rely on anything in this blog for any reason. This blog is an entirely personal endeavor. Every person’s situation is different and requires an attorney to review the situation personally with you.
No attorney-client relationship is created by this site.

The use of the Internet, this blog or email for communication with this firm or any individual member of this firm does not establish an attorney-client relationship. Before we represent any client, the client and the attorney will sign a written retainer agreement.
If you do not have a written, signed retainer agreement with us, we are not representing you and will not be taking any action on your behalf.

 

New Obama Budget Proposal Could Exempt Some Seniors From Taking RMDs

 

By Julian Guilfoyle

 

Ed Slott, author of The Retirement Savings Time Bomb…..And How to Defuse It, recently posted a video outlining a new proposal in the President’s budget that would exempt some seniors from taking their required minimum distributions (RMDs).  Most seniors are at least somewhat familiar with RMDs, the IRS rule requiring that distributions from IRAs and most other qualified plans begin at age 70 & ½.  If a senior fails to satisfy their RMD in a given year, the penalties are severe.  The RMD amount that was not withdrawn will have a fifty percent excise tax levied on it.  This especially becomes a concern when seniors experience illnesses or incapacity and cannot make these withdrawals.  

 

In President Obama’s budget proposal, Ed estimates around fifty percent of seniors would be exempt from taking RMDs.  This exemption would cover any senior over the age of 70 & ½ who has an aggregate balance of less than $75,000 in their retirement funds.  Although Roth IRAs do not have an RMD requirement, if this provision becomes law, they would be included in the aggregate balance calculation to prevent people from shifting their retirements to Roth IRAs.  Regardless of whether or not President Obama’s budget passes, treatment of qualified retirement plans is being discussed at various levels.  To watch Ed’s video click on the link below.

 

http://www.theslottreport.com/2012/02/ed-slott-video-president-obamas-budget.html

What’s Going to Happen to Your IRA If you Have a Stroke or Accident and Go to a Nursing Home

Pretty strong image…Pretty big problem.  I guess you get the idea and you know I am right.

By: Thom L. Cooper

Certified Elder Law Attorney

Part 1:  Definition of theProblem:  IRA vs Catastrophic Illness:

roi_return_on_investment_analysisWe all stick our heads in the sand.  Who wants to think about this?  No one… but we must.  This is one of the biggest problems we are now facing in working with our clients in the area of elder law.

When I first started my elder law practice the wealth pattern of WWII vet era seniors was a home, savings, investments and a significant defined benefit pension every month from their employer and… no IRAs or qualified plans .  This wealth pattern has now changed as we move to our current retirees.   Now most of retirees still have a home, but instead of savings and a substantial pension,  they now have a significant IRA with a minimal pension and modest investments and savings … especially when compared to the size of their IRAs and qualified plans.

This is a very significant change from a planning perspective.  While homes and non IRA type investments can usually be placed in trusts to protect them from being ravaged by a catastrophic illness, the IRAs and qualified plans can not be placed in trusts without devastating tax consequences.  In addition, as everyone knows,  any time you take funds from a qualified plan you pay significant tax.  Finally most seniors feel that there IRAs are their “fall back money” to keep them from grocery shopping in the cat food aisle.

We believe the solution is the protection of the IRA by leveraged collateral funds with associated protected trusts.

What in the world does that mean?  I will begin to explain in our next blog “Part 2 The IRA Protector Trusts:   A Solution for the Problem of  IRA vs Catastrophic Illness”

Enjoy your IRA so Ohio doesn’t!

A family recently visited our office to find out how to pay for home health care.

George and Sarah* have been married for 55 years. Sarah suffers severe rheumatoid arthritis that is so severe she must use a walker. To make matters worse, she recently fell and broke two ribs. George is doing his best to keep Sarah at home, but at age 79, Sarah’s care is beginning to take its toll on him. George is trying to find home health care aides to assist him with her care. He does not want to put Sarah, the love of his life, in a nursing home.

At wits end, George visited a local County Agency to inquire about benefits for Sarah. They informed George that although Sarah qualified for care medically, he had too much money to qualify. The county suggested that George spend down his retirement account to $20,000 and buy a new car to replace his 5-year-old car and he should qualify.

George asked what we could do to help. He told us that it would be very difficult to maintain his quality of life if he only had $20,000, and perhaps the thought of a new car would be appealing if he were sixteen years old, but his Buick only had 37,000 miles on it – he liked it just fine.

We began with a review of their assets using the same criteria the County used. They have a nice home, the 5-year-old Buick Century, a few CDs, and a large retirement account from George’s former employer.

In reviewing George’s dilemma, we determined that if we would create income, or a pension, with his retirement account – one he could not outlive – he would qualify for benefits and keep his Buick. We knew that if George turned his lump sum IRA into a guaranteed income stream, the State of Ohio would look at this as income, not as an asset; this income would be George’s and therefore not counted in determining Sarah’s eligibility for benefits.

We converted George’s IRA to income so that he could maintain his lifestyle while qualifying Sarah qualified for Home Health Care benefits the following month. We are happy to report that George is able to keep Sarah at home, right where they want her to be.

*(not their real names)



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