SC Educational Radio Interview

This morning I was interviewed by Mike Switzer on The South Carolina Business Review broadcast on the SC Educational Radio Network. We spoke about per stirpes designations for beneficiaries, beneficiary designation forms, the need for durable power of attorney, and transfer on death and pay on death accounts.

I have received calls looking for more information on these topics so I am posting links to the articles that have discussed those topics on this blog. Hope this makes it easier to find.

Per Stirpes
Beneficiary Designation Forms
Durable Power of Attorney
Transfer on Death, Pay on Death

Naming A Trust As An IRA Beneficiary

Sometimes there are good reasons to name a trust rather than an individual as a beneficiary of your IRA. Maybe you have a child who you fear will spend the money they inherit wastefully, or maybe you have a special needs heir and a direct inheritance would affect their qualifications for aid, maybe there is a second spouse you wish to provide for but children from a first marriage you want to protect also.

All of these goals can be achieved and the "stretch out" provisions of IRA rules preserved if you do some careful planning.

IRS rules only allow individuals to inherit IRAs without triggering immediate taxation. However if you structure a trust as a "see through" trust you can exert some control without losing the tax benefits of a "stretch IRA". To qualify as "see through" the trust must:

• The trust must be valid under state law;
• The trust must be irrevocable or become irrevocable at the death of the grantor;
• The trust beneficiaries must be identifiable individuals
  
• Documentation must be provided to the custodian of the IRA by Oct. 31 of the year after the owner dies
  

The trust must pay out the IRA's required minimum distributions to the beneficiaries or be subject to taxes at the trust level which reach the maximum tax rate (35%) with only $10,000 of income. The trust must base the RMD on the age of the oldest beneficiary so if there is a large difference in the ages of your desired beneficiaries you may want to consider splitting the IRA to allow a lower RMD for younger beneficiaries.

Having a trust as the beneficiary of your IRA can provide many benefits, but the price of making a mistake is high, so be sure to consult with a qualified legal and tax advisor before choosing this option.

technorati tags:Finance, IRA Beneficiary, estate planning

Pension Protection Act

The Pension Protection Act of 2006 was recently signed into law by President Bush. The act contains numerous provisions that benefit individuals including:

• Made permanent the increased IRA contribution limits that were set to expire in 2010 and provides for indexing contributions to inflation after 2008.
• Made permanent the tax free withdrawal status for qualified distributions from 529 college savings plans that were scheduled to expire in 2010.
• Allows non-spouse beneficiaries of qualifies plan assets to rollover the proceeds to their own IRA.
• Allows for automatic enrollment in 401k plans, requiring workers to opt out rather than opt in.
• Allows employers to pay advisors to counsel participants in qualified plans without becoming liable for the advise given to participants as long as the company performs due diligence when hiring advisors and the advisor is a fiduciary accepting person liability for the advise provided.
• Allows members of the military called to active duty to take penalty free distributions from IRA, 401k, and similar qualified plans.
• Permanently allow for Roth 401k and 403b plans.
• Made permanent the Savers Credit under which low and moderate income tax payers can receive a non refundable credit for contributions to retirement savings plans and IRAs based on income and filing status.

For more information look here and here.

technorati tags:finance, Pension Protection Act of 2006, financial planning,

The Estate Plan For Your IRA

Assets can transfer to your heirs in one of two ways when you die. They can transfer by will, which includes probate court and public filing of related documents, or they can transfer by contract.

The advantages of having your assets transfer by contract include:

• Privacy - The details of a contract are private and not subject to the public scrutiny of your will and the probate system.
• Speed - Contractual agreements transfer outside of the probate process and so are not subject to the delays that often arise during probate.
• Expense - By transferring assets outside of the probate process you and your heirs could save significant money in probate fees (these fees vary from state to state).
  

Examples of assets that transfer by contract include accounts or assets titled Joint Tenants with Right of Survivorship, Transfer on Death and Pay on Death accounts, Life Insurance and Annuity contracts, Trusts, and your IRA and 401k accounts if you complete the beneficiary forms correctly.

When you first establish an IRA or 401k, an annuity or life insurance contract, you are provided a form to name beneficiaries. If you fail to complete these forms the assets will usually pass back into your estate and become part of the probate process. By naming a beneficiary or beneficiaries you can let these assets transfer by contract. You should also name contingent beneficiaries and choose whether you want the assets to transfer per stirpes or per capita. By filling out these beneficiary forms you are insuring that your wishes are honored after your death.

Many people name only a spouse as a beneficiary. If the couple have children or grand children they wish to provide for they should consider making them contingent beneficiaries to preserve the tax benefits of an IRA (however if the children or grandchildren are minors be sure a guardian has been named or the funds will be encumbered until the courts name a guardian).

Currently only surviving spouses can transfer assets from their deceased spouse's 401k to their own IRA, but the recently enacted Pension Protection Act of 2006 will extend that privilege to any beneficiary after 2007.

The bottom line is beneficiary forms are an integral and important part of your estate plan. Choosing the right way to transfer these assets can save time and money, but can also be confusing. If you are unsure how to proceed choose a professional to help you, but don't delay.

technorati tags:Finance, estate planning, IRA