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IRA’s and Beneficiaries

In a Kiplinger (SMART INSIGHTS FROM PROFESSIONAL ADVISERS) article (August, 2017) titled: Death of ‘Stretch’ IRAs Would Mean Loss of Flexibility for Beneficiaries by Scott M. Dougan, RFC, Investment Adviser, Global Plains Advisory Group, Inc. there were several cogent points made.

If you have a large IRA as part of your estate plan and you intend to leave the funds to a beneficiary, I recommend you read Mr. Dougan’s article about all pending legislation.

For those of you who wish to access the bill, the link is: https://www.congress.gov/bill/114th-congress/senate-bill/3471  S.3471 – Retirement Enhancement and Savings Act of 2016 – 114th Congress (2015-2016)

An excerpt from the bill:

“…Moreover, the shift in recent decades from employer-sponsored defined benefit plans, under which the default form of benefits is an annuity, to defined contributions plans, which generally do not offer annuity benefits, creates the risk of employees outliving their retirement savings. The Committee believes that legislation is necessary to provide new incentives for employers to adopt retirement plans (including ways to reduce the costs associated with having a plan), new incentives for workers to contribute to workplace plans and individual retirement arrangements, and other measures to further retirement income security.”

Note:  There have been 13 related bills, including H.R. 6346 “Retirement Security for American Workers Act – 11/29/16)

All is not without hope however, when it comes to IRA inheritance if the new legislation passes as written/revised.

One option for those with a large IRA (emphasis on the word large) is to establish a testamentary charitable remainder trust.  This type of trust allows for passing on a large IRA to a non-spouse beneficiary. (emphasis on non-spouse).

The basics and validity of setting up such a trust is beyond the scope of this article and depends on: various individual circumstances; the provisions of the IRA itself and all pending/revised legislation.

Note:  A testamentary charitable remainder trust should not be considered without sound legal advice.

Consulting with an estate planning attorney with a tax background would be a good start to finding out if such a trust would be advisable in individual circumstances.

Why is the government so interested in seeking a shorter payout period for inherited IRA’s?  Consider that, according to some estimates, the valuations (2015) of all IRAs exceeded $7 trillion – and that is a lot of tax revenue!

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Trust – A Matter of Privacy

Once upon a time…using a trust to avoid estate taxes is what motivated many people.  Now, each person can pass $5.9 million at their death – virtually estate tax free (some exceptions apply).

(There are many types of trusts and it is beyond the scope of this article to review all of them.  Each trust will have a ‘benefit’ for example-the special needs trust.)

Skip forward to 2017…The big motivator for creating a trust, for many, is now the matter of privacy.  I have written many times that probate proceedings are a matter of public record.  Many do not realize how intrusive “public” actually means.

One acquaintance told me their story- they had dealt with the probate themselves without an attorney and provided the required probate contact information.  Subsequently, they were being ‘hounded’ with mail and telephone calls

Their probate documents were public records as was the will. There are people and companies “trolling” for information by using those records.  Probate proceedings are public and yes, a third-party could attend all of the hearings in open court, get a copy of a will, and gain knowledge about all of the assets that an individual owned at the time of their death.

There are instances where probate ‘court’ is not required, but keep in mind that probate documents are still available as ‘public’.

Companies use contact information derived from the probate documents to make various ‘offers’ – offers that vary…from purchasing the property of the deceased to making loans to the ‘recently bereaved’.  And the companies can be very persistent.

Doubtless, to get those kinds of offers from complete strangers while dealing with the grief and loss of a loved can be stressful.

Avoiding probate to maintain privacy remains a strong motivator for utilizing a trust in estate planning.

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Changing Behaviors

Much is written about the role of estate planning and the “hand from the grave” – Trusts that “rule” after the death of the person establishing the Trust.

First, let’s review some legal terminology for the sake of this article:

The person establishing the Trust is known in legal parlance as Donor, Settlor, Trustor and in some cases also the Trustee.

The Trustee is the individual(s) or institution/entity administering the Trust. The Trustee is responsible for carrying out the terms of the Trust.

(Usually, the Trustor and the Trustee are different entities, but in some cases they can be the same entity.)

The Beneficiary is the person(s) who will receive ‘something’ from the trust (money, land/property, art work, etc.) In short, the Beneficiary ‘benefits’ from the Trust – now or into the future.

Now that we have some simplified legal terminology in place — what happens if a parent or grandparent wants to make a bequest to a child/grandchild, but that child/grandchild is not quite reliable?

The Beneficiary may suffer from conditions such as an addiction to alcohol, gambling, gaming, narcotics, etc. – or they may just be unprincipled  with money or have poor decision- making skills.

ENTER…the Incentive Trust… a trust that may encourage good habits; motivate in some way; prevent ‘misuse’ of inheritance funds; reward ‘good’ behavior (or at least behavior in line with the Trustor);  and assist loved ones to make better decisions for the long term.

But, and there is always a ‘but’…the Incentive Trust is ‘tricky’.

Money can sometimes be the means of destruction, particularly for those with addictive personalities.

But the withholding of funds is equally difficult.

Incentive Trusts, like all trusts, must be structured with great care if the Trustor is to obtain the outcome they anticipate. They should have the labeling – “Use With Care”

Take one simplest example of an Incentive Trust –

A grandparent establishes an Incentive Trust for their grandchild. The grandparent really wants the grandchild (the Beneficiary) to graduate college.  So they state that the grandchild, in order to receive his/her Trust funds, must graduate college. So far…simple.

But…what about grade point average? Which accredited college?  Does an On-line college qualify? Length of time to graduate (4 years or twenty years)? Will the type of degree matter?  Where are the funds to attend college coming from? Will payments for college be made to the Beneficiary or directly to the college?  How much discretion will be given to the Trustee (the person or institution administering the Trust)?  Will there be benchmarks?  How many different colleges can the Beneficiary attend (how often can they change colleges?)  How many courses must Beneficiary take each semester?  Can the Beneficiary marry and have children while attending college?

Well…You get the idea. Simply stating for Trust purposes that the Beneficiary must graduate college….is not nearly enough of a directive.  Such a lack of directive can leave much to the discretion of the Trustee.

Likewise; preventing bad behavior is equally fraught with serious questions.

An example: a child is addicted to drugs; to gambling;  or to alcohol.  The parent wants that child to be provided for (under the terms of a Trust.)

What precise behavioral changes will qualify for the child (the Beneficiary) to receive their funds from an Incentive Trust?

What if the child ‘substitutes’ one addiction for another?

Will child be required to submit to periodic drug testing? Help programs?

What specifically would ‘qualify’ as alcohol abuse or gambling?

How long will the child be required to remain drug free?

At what age, if any, will all Trust funds be given to the Beneficiary? Or should funds be administered as a monthly ‘stipend’?

If the child cannot keep to the terms of the Trust, what happens to the funds in the Trust?

Will the Trust provide for ‘intervention’ or help for the child to cope?

 

Is an Incentive Trust the best trust vehicle for every circumstance? As with many things…the devil is in the details.

A qualified Estate Planning attorney is probably the best ‘investment’ that you can make when establishing a Trust – if you want to achieve the outcome that you anticipate in the future.

Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.”                 –Ayn Rand

Working to Preserve Your Wealth and Protect Your Future…in a Constantly Changing World

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Pets, Probate and Pre Nups

Here is a previous post about Pets and planning for the future.

In most states, money and other assets cannot legally be left to “non humans” in a will. This, of course, is a simplified version of the law, concerning Pet Trusts and pet trust law. I decided to write this brief article after reading about Lauren Bacall. Sadly, the great actress died recently and she left behind her cherished dog, Sophie. Ms. Bacall left funds so that Sophie could be cared for.

Concern for the care of pets when the owner dies is a topic that has become more prevalent in the past decade. According to the HSUS (Humane Society of the United States) there are about 179 million cats and dogs living in family households. Pet trusts are entering the estate planning landscape and I foresee that they will become an increasingly larger part of Estate Planning. One reason for this is that companion animals have become an integral part of family life, and as such, their owners/carers/pet parents want to provide for them.

Here in Colorado, there is Colorado Revised Statute Law 15-11-901 (1994 amended 1995) under Title 15. Probate, Trusts, and Fiduciaries. Within that Colorado statute is “Honorary Trusts; Trust for Pets”

An article by Kim Bressant-Kibwe, Esq. on the ASPCA (Association for the Prevention of Cruelty to Animals) website www.aspca.org titled “Pet Trust Primer” gives a very good synopsis of Pet Trusts.

Pet Trust Law statutes vary from state to state and there are still a few states that do not allow the establishment of pet trusts.

There are often funding limits as well as term limits placed upon the pet trust.  To give an example – the trust may exist until the death of the animal beneficiary or for a maximum of 21 years.

Another point to keep in mind is that in Colorado, all trusts having its principle place of administration in Colorado shall, within 30 days following trustee acceptance of trust, shall register the trust in the Court of Colorado, this includes trusts established for pet.

Another issue surrounding pets is the growing number of pre-nuptial/marital agreements/contracts that include terms for “who gets to keep the pet(s)” if the marriage dissolves. These co-called “pre-pups” help to avoid costly litigation between the two parties and often they even outline the visiting arrangements for the pet(s).

Working to Preserve Your Wealth and Protect Your Future… in a Constantly Changing World.

This post has been brought to you through the Law Office of Barbara Ann Dalvano. This information is provided for educational purposes only and to generate ideas, provoke thought and facilitate conversation. It is not intended to create an attorney-client relationship. Each person’s situation is different and this information should not and cannot be relied upon as legal, tax, accounting or investment advice. Please read the entire disclaimer for more important information.

 

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