IRA Beneficiary

Arranging a Louisiana Estate for Asset Protection and Easy Inheritance

This post describes how Irrevocable Grantor Trusts are used to protect assets while parents are alive, and then to provide for an easy transition or inheritance to the children or other heirs.

As folks age, they often worry that they will run out of money before they die due to their longevity and all of the threats that seniors face these days.

Many seniors create trusts to help protect what they've worked for. They often keep some assets in their name, and they transfer other assets to a trust that they create.
 
Because their assets are titled in the right kind of trust, with the right kind of asset protection provisions, they are less likely to lose these assets from some kind of life-changing event.

These asset trusts are often irrevocable, but sometimes certain aspects of the trust are amendable. These trusts typically allow for trust assets to be sold and re-invested. These trusts usually have some provision for distributions of principal. Many of these trusts and estates are arranged so that probate is avoided at the death of the Settlors/Grantors/Trustors.

Check with the right estate planning attorney in your jurisdiction to make sure you establish an estate planning legal program that is right for you and your family. Don't try to do this yourself. Too much is at stake.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: (225) 329-2450

How To Leave a Bequest To Charity

Not everyone wants to leave part of their estate to charity. But some do. And for those who do, there can be a right way and a wrong way to leave assets to charity. The following are two things to consider when leaving assets from your estate to charity.

(1) Designate the Right Organization. There a many charities out there. Some people want to leave part of their estate for cancer research, heart research, or to an organization that helps pets. But each of these causes has numerous organizations. And some of the larger organizations have local, state, and national organizations. Make sure you research your potential charitable bequest and leave it to the right organization.

(2) Restrict Your Bequest? Some people are not aware that they can restrict their charitable organization for a specific purpose. For example, a university alumni who studied engineering may want to restrict his bequest to the university to support scholarship for students pursuing an engineering degree. You do not have to leave your bequest to the general fund of the church, school, or other charitable organization. Know that you can restrict what your bequest will be used for, so long as it is in furtherance of the organization's charitable purpose.

Most serious discussions regarding leaving part of an estate to charity involves making tax-smart decisions. For example, someone with an IRA along with other assets may choose to name a charity as the beneficiary of the traditional IRA since income tax has not been paid on these funds, and if these funds are left to a charity, then no income will need to be paid on the distribution to charity. So some people leave their charitable bequests from their IRA or other pre-tax retirement account.

This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship.

Gaining Access To Funds Payable To An Estate

I've been working with a family in order to gain access to funds that were payable to "Estate of Dad."

Dad died leaving a last will and testament. He named his two children as the co-executors and the equal heirs. Dad only left two assets in his name, a retirement account and a bank account. There were no designated beneficiaries named on the retirement account, and the bank froze the bank account that was in Dad's name only. The family could not gain access to any of these funds.

The steps one must go through to get access to these funds are as follows:

(1) Co-Executors Confirmed. We will prepare the necessary court pleadings to get the two children confirmed as the Independent Co-Executors. This paperwork, along with the signed original of Dad's last will gets filed at the parish courthouse. The pleadings make their way to a judge's office, and, if approved, the judge signs the court order confirming the children as the Independent Co-Executors. Then, the clerk of court will issue "Letters of Independent Co-Executorship,"

(2) Open Estate Account. The children must use these "Letters of Independent Co-Executorship" to open an estate account at a financial institution. The institution holding the retirement account funds, and the bank where the frozen account is held, will issue checks payable to "Estate of Dad." The co-executors will then deposit these checks into the Estate account.

So, in this matter, the simplest way to get access to Estate funds was to open the Succession, get the Executors confirmed, open an estate account, and then deposit estate funds in the estate account.

Sure , there is more to a Succession, such as preparing and filing the Detailed Descriptive List of Assets and Liabilities, and Petitioning for the Judgment of Possession, but it's these first steps that allows families access to funds payable to an Estate.

Churches and Charities Use Estate Planning To Help More People

Next week I'll be delivering a check for more than $100,000 to a church. I just completed the probate of someone who left a percentage of the estate to the church. I know that the church is going to help many people with this bequest.

It reminds me of how, over the years, a number of churches and charities have asked me to speak to groups of members about how  the tax law is set up to give people a big tax break when they leave a portion of their estate to their church or favorite charities.

Churches and charities don't do enough of this education. I find that, when a church or charity educates its members and asks the right way, that people want to help. People would like to see their dollars help their local community more than sending those dollars off to Washington, D.C.

If you are a church or charity leader, make a commitment to education your base about the benefits of making a church or charity part of an overall estate planning program. If you exist in South Louisiana, give me a call and let's have a talk - in the right circumstances I provide that education to groups for free. But you don't have to use me - just start. You'll be helping your organization and your community.

Paul Rabalais
www.RabalaisEstatePlanning.com
Phone: 866-491-3884
Email: paul@RabalaisEstatePlanning.com

Tax Consequences When Living Trust Settlor Dies

Because our government likes to tax people, there are a number of different taxes that come into play when the Settlor of a Revocable Living Trust dies. In general, the "tax at death" landscape has changed from avoiding estate tax, to avoiding capital gains tax and income tax. The following are the types of tax that might affect you if you are a Settlor, heir, beneficiary, legatee, trustee, executor, Agent, or Grantor, Trustor, or other participant in someone's transfer of wealth.

(1) Federal Estate Tax. For most people, you ain't gotta worry about it. If you have less than $11.2 million in assets when you die, you don't even have to file a federal estate tax return. Married? Exempt $22.4 million from the 40% estate tax. Yes, like everyone says, you can call me when you win the Powerball.

(2) Louisiana Inheritance Tax. It went long gone back in 2004. Doesn't exist any more.

(3) Capital Gains Tax. Definitely in play. When someone dies, assets that they own in their name, or assets in their revocable living trust, get a step-up in basis at death. This can permit the Successor Trustee or the beneficiaries to sell appreciated assets and pay little or no tax. Example: Dad bought a share of stock for $10. Before his death, the share is worth $50. If Dad sells it before he dies, he pays capital gains tax on the $40 of capital gain. But if Dad does not sell the share, and he dies, then the heirs or beneficiaries inherit the stock at the "stepped-up" $50 (fair market value on the date Dad died). Note that in community property states like Louisiana, ALL of the community property gets a step up when the first spouse dies. It makes a lot of sense, when a married person dies, to document the value of the assets so that tax can be calculated later when the asset is sold. Remember: no capital gains tax unless an asset is SOLD.

(4) Income Tax. There are all kinds of income tax ramifications to inheriting. Depends on what you inherit and many other factors. However, in general, a distribution of trust principal to a principal beneficiary after a Settlor dies is free of income tax to the recipient. However, income tax consequences exist if you are the beneficiary of a Traditional IRA, 401(k), or other pre-tax retirement account. You may also be required to pay income tax on the "gain" portion of a tax-deferred annuity when you receive it. There are also income tax consequences to inheriting appreciated savings bonds. Note that if you are the beneficiary of a Traditional IRA, and you are not the account owner's spouse, you will likely inherit it as an Inherited IRA and you cannot wait until 70.5 to start taking required distributions.

Many of the decisions you make when establishing your estate planning program, and many of the decisions your Trustee, heirs, or beneficiaries make after you death, can have a significant impact on how much tax the government takes from your estate.

Paul Rabalais
Louisiana Estate Planning Attorney
www.RabalaisEstatePlanning.com
Phone: 866-491-3884

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What Assets DON'T Go Into the Louisiana "Avoid Probate" Living Trust?

When someone asks me to set up an estate legal program to avoid probate, they often ask me something like, "Do ALL of my assets need to be in my trust to avoid probate?"

It depends on what kinds of assets that you own, but most people do not need to transfer all of their assets to their trust. Some assets that you own, by their nature, avoid probate.

IRAs and other retirement accounts, avoid probate. When you die, your IRA is payable to your designated beneficiary, outside of probate. In fact, IRA rules do not allow you to transfer your IRA to a trust during your lifetime. This applies to both traditional and Roth IRAs - they avoid probate.

When avoiding probate is the primary goal, ownership of life insurance does not need to be transferred to your living trust. When you die as the insured, your life insurance death proceeds will be payable to the beneficiary that you designated.

Annuities are another example of an asset that avoids probate, just like life insurance.

Note that it might make sense to name a trust as the beneficiary of these non-probate assets, but check with your estate planning attorney to determine the appropriate way to designate beneficiaries on your non-probate assets.

What Estate Related Matters Need To Be Addressed When Wealthier Parent Dies?

I was working with an older, wealthier client yesterday and the husband asked if we could prepare a list of what their survivors would need to address after they pass away. 

Every circumstance is unique but in this matter, the following are a few of the things that will need to be addressed when wealthier Louisiana parents pass away.

If the husband left assets to others through his last will and testament, a Louisiana Succession will be necessary. There may also need to be an Ancillary Probate in other states if he owned real estate in a state outside of Louisiana. If he and his wife had created a Living Trust, then no Succession will be necessary if assets are titled in the name of his trust when he dies.

He will likely have left assets either in ownership, or in usufruct, or in trust, for his wife and kids. Assets will need to be retitled into the proper form (such as into a Usufruct account or in trust). 

There may be a federal estate tax return that must be filed (even if no federal estate tax is due after the first death) within 9 months from the date of death. Both the terms of his estate legal documents, and the moves his family make are likely to have income tax and capital gains tax consequences. Good help here can save a ton.

After the surviving spouse dies, it is likely that one or more of the adult children are named as executors or trustees. If the surviving spouse left assets to the kids through her last will and testament, another Succession (and Ancillary Probates in other states) must happen. If the surviving spouse had assets titled in the name of her trust, the successor trustee (typically one or more of the kids) can disburse assets from the trust to the beneficiaries immediately, skipping the court-supervised Succession.

Estate tax returns may need to be filed, and estate tax may need to be paid. The children should get good help making sure that they inherit IRAs and other assets the right way so that taxes are minimized or avoided on the distribution or subsequent sale of inherited assets.

Don't make the mistake of asking for help after you've made a mistake that you can't undo. If you need help, call our office at 866-491-3884.

Lafayette,Louisiana Family Benefits From Dad's Estate and Medicaid Planning

I've been working with a Lafayette area family lately. Dad has his home, his life savings, and a couple of other pieces of property, and he wants to make sure his kids get it when he dies. His biggest threats to his children, as he sees it, are:

  1. Losing the assets due to a long-term care nursing home stay;
  2. Taxes; and
  3. Probate

A large part of his life savings is tucked away in his Individual Retirement Account (IRA). He also has investments held in an account that is not an IRA, and he has some money in bank accounts.

He realized that his IRA is threatened. He knows that any distributions from the IRA during his lifetime or after he dies will be subject to income tax to the recipient of the distribution. He was questioning whether taking required minimum distributions each year was the smartest way to handle his IRA. Here's what he said:

"If I just keep taking my required distributions, then I will pay tax on those distributions and the remainder of my IRA will continue to grow tax-deferred. All of the future growth will be ordinary income to whoever receives a distribution and those distributions in the future could be taxes at a rate as high as 40%, particularly if they go to my kids. Plus, if I go to a nursing home, I will be forced to take large distributions, pay the income tax, and then spend the remaining amounts on my nursing home expenses."

Then he asked:

"Wouldn't it be better if I took larger distributions that the required distributions, pay the tax, and then place the after-tax proceeds in a special trust account where it will be protected from my future nursing home expenses? Oh, and since the trust is a Grantor Trust, any future appreciation of my investments after I take it out of the IRA will passtax-free to my kids due to the step-up in basis that they will enjoy when they sell the assets after my death?"

His analyses appears to make a lot of sense. Most people are encouraged to keep every penny that they can inside their IRA. I'm not saying that's wrong every time, but as long as the investments grow inside the IRA, then a big chunk of each distribution will go the IRS. If the IRA goes ahead and takes distributions faster than required, and pays the tax on those distributions, then future appreciation would escape taxation due to the step-up in basis. Plus, if the IRA owner takes distributions and places those funds into the right kind of trust, then there is the added benefit of being protected from future nursing home costs.

Anyone who has an IRA and is concerned about future taxes and about losing the IRA to nursing home expenses, should have a conversation with an estate planning attorney who understands not only the estate tax, but the income tax and capital gains tax consequences of taking minimum distributions versus taking distributions larger than the minimum required amount.

Give us a call at 866-491-3884 to start a conversation about how to protect your IRA from the government. Don't wait another day. Every day that you wait could be costing you and your family!!!

Baton Rouge, Louisiana Family Opens Succession Estate Account to Collect Estate Funds

We've been working on a Louisiana Succession for the last several weeks. Dad passed away having left a last will and testament naming Son as executor, and leaving all of the assets to his four children.

The children were confused about the steps that needed to be taken because they had gone to several of Dad's banks. Some banks would not give the children any information. Some banks told the children they needed "a letter from the attorney." And some banks started processing the accounts instantly so they could be transferred to the children. There was also a home and some stock involved. They came to me to sort it all out. After about two hours of talking, digging, and a few phone calls to a few banks, I revealed the following steps that needed to be completed to get Dad's estate (or probate or Succession - whatever you want to call it) settled.

Here are the steps we are going through.

  1. Son Confirmed as Independent Executor. We prepared all of the court petitions and filings to enable a judge to sign the appropriate court orders confirming that the Son was the executor. Since the Will authorized the Son to act as an "independent executor," the court will issue court documents called "Letters of Independent Executorship." Even though the probate is still necessary, being confirmed as an "independent" executor is better than being an executor, because an independent executor can take more actions (such as paying debts or selling a vehicle) without having to ask a judge for permission every time the executor needs to do something.
  2. Open Estate Account. Once the initial court orders are issued, Son can go to the financial institution of his choosing and open an estate account. Then, Son can go to the various banks and other financial institutions and collect the funds from the frozen accounts, and deposit those funds directly into the estate account.
  3. Detailed Descriptive List. The family will get us the necessary information so that we can prepare the formal accountings including the Detailed Descriptive List of Assets and Liabilities. A judge won't allow assets to be transferred to the heirs until all of the Assets and Debts and Expenses are itemized the right way in this Detailed Descriptive List.
  4. Judgment of Possession. One of the last things that will happen in a Louisiana Succession is that the judge will sign the Judgment of Possession that we prepare and that all of the heirs sign off on. This judgment orders the executor and banks and other third parties to transfer remaining assets to the four children. The home will be listed as an asset of the Succession which must be transferred to the four children. This judgment will be recorded in the real estate records of the parish where the property is located - formally retitling the property into the names of the four children - so they can sell it when they are ready.
  5. IRAs. An IRA is one of those accounts where a beneficiary can be designated. Since Dad named the four children as the designated beneficiaries, the four children can work with the financial institution to have Dad's IRA transferred to the four Inherited IRAs. The children can elect to take taxable distributions over their lifetime of they wish, deferring the income tax while the investments continue to grow.
  6. Tax. The family was relieved that no federal estate tax was due since Dad's estate was well under the $5.45 million estate tax exemption. The only tax consequence is that the children will include in their taxable income the distributions that they get from what previously was Dad's IRA.

Completing a Louisiana Succession can be tricky. Getting the wrong advice or working with the wrong people can add months or years to an already difficult process. Check us out if you have a loved one who has passed away, and you and all of the other heirs want to streamline the estate settlement process.

Interesting Louisiana Estate Planning Factoid About Leaving an IRA to Grandchildren

I met with a very nice couple last week that wanted to leave their investments to a trust for their grandchildren. One of the issues that we had to deal with was that the bulk of their investments were held in their IRA account.

I spent some time educating them about what their grandchildren would be facing from an income tax standpoint. The couple expressed that they did not want the grandchildren to get any of it until they were well into their adulthood.

I explained that since they were leaving an IRA to their grandchildren - even though it is going to a trust for the grandchildren, the grandchildren will be required to take distributions starting the year after the surviving spouse dies. I explained that the best we could do would be to set things up so that after the couple died, the grandchildren would be forced to follow the rules of an "Inherited IRA" and they would be required to take immediate distributions based on their life expectancy.

Nonetheless, we are still able to accomplish their objectives of providing an income to their grandchildren for many years, and then have the remainder turned over to the grandchildren when the grandchildren are nearing retirement age.

Anytime you name someone other than your spouse as the beneficiary of your IRA, be aware of the Inherited IRA rules that they will have to follow regarding their schedule for required minimum distributions. Their schedule will likely be very different than your schedule or your spouse's required minimum distribution schedule.

How To Avoid Income Tax on IRA Distributions After You Die

Let's face it. many people HATE paying tax. And many people hate paying income tax when distributions are made from their IRA.

I was working with a gentleman from Covington, Louisiana today on his estate plan. He owned property in St. Tammany Parish and in Tangipahoa Parish. He had never been married and he never had children.

He wanted to leave some things and some money to a family member of his, but he liked the idea of setting up some scholarship funds. So, after quite a bit of discussion, he decided to name his college as the beneficiary of part of his IRA when he died. But he did not want the funds from his IRA to go into the general funds of the college. So, we are restricting the IRA so that it can only be used in a certain curriculum of the university. Now, he knows that students in his prior field will benefit from scholarships that he establishes.

He also knows that none of his IRA will go the federal government or the State of Louisiana (or any other state for that matter). By naming his college as the beneficiary of his IRA, even if the money can be used for certain restricted purposes, the distributions after his death to the college will go income-tax free.

If you are leaving some assets to individuals when you die, and other assets to charities or educational institutions, you may want to consider leaving all or part of your IRA to the charities. Charities don't pay income tax when they are the beneficiary of an IRA. Leave your non-IRA assets to individuals - there will be no income tax consequence to those individuals.

If you live in Louisiana and you want to set up an estate legal program that makes sure that you leave assets where you intent them to go, and it is all set up in a tax-efficient or tax avoidance manner, give us a call at 866-491-3884 to talk to one of our estate planning attorneys.

Should You Name a Trust as a Beneficiary of an IRA?

Had some discussions today with a Baton Rouge family today who that was trying to make the most of their father's IRA. The family wanted to make sure that after the father died, the IRA would benefit one of the children, and then after that child died, the family wanted the IRA to be shared among the other children.

The family kept asking: "Should we name the child as the beneficiary, or should we name a trust (for the benefit of the child) as the beneficiary.

One of the children was married to an accountant. His suggestion (whether it has merit or not is debatable) was, "Don't name a trust as the beneficiary of an IRA because I hate trusts."

One of the children stated, "Dad wants it left to a trust for the benefit of a child so that Dad has assurance that when the child dies, the remaining IRA would go to the child's siblings."

What should they do?

We talked about some of the advantages of naming the child as the beneficiary of the IRA. Those reasons include:

  • Naming a child as a beneficiary, instead of a trust, is simple;
  • There are tax deferral advantages to naming an individual as a beneficiary. Not every trust qualifies for "see-through" treatment, thus expediting required distributions;
  • As long as the beneficiary does not squander the money, the beneficiary can then name beneficiaries to inherit the "inherited IRA" when the first beneficiary dies.
  • Many attorneys, CPAs, financial advisors, trustees, and beneficiaries don't understand the complexities of naming a trust as a beneficiary - thus complicating the estate settlement of the IRA owner.
  • If a spouse is a beneficiary of the trust, the spouse will not be able to defer tax as long as if the spouse was named as the individual beneficiary.

Some of the reasons to name a trust as a beneficiary of an IRA include:

  • The IRA owner is ensured that when the first trust beneficiary dies, the remainder of the IRA will pass for the benefit of the people that the IRA owner hopes to get the IRA;
  • A trust prevents the first beneficiary from squandering the IRA, because another party will serve as the trustee;
  • If the trust is established properly, the trustee can use the age of the beneficiary for purposes of required minimum distributions.

The decision regarding whether to name individuals versus a trust as the beneficiary of an IRA can be a complex, but important decision. The wrong decision can have adverse income tax effects, or it can cause the IRA to be squandered by the wrong people for the wrong reasons.