The distribution of your Individual Retirement Account (“IRA”) assets upon your death depends on whom you have named as a beneficiary.
For purposes of this blog entry, the discussion below assumes the IRA owner died after reaching age 70 ½.
When a spouse is named beneficiary
Naming one’s spouse as the beneficiary of an IRA provides many options and flexibility for the surviving spouse. A spouse is the only beneficiary who can choose to rollover the decedent’s IRA and treat the IRA as his or her own, which means the spouse can delay taking required minimum distributions (“RMDs”) until he or she reaches age 70 ½. The beneficiary spouse can also choose to establish an inherited IRA, which requires him or her to start taking RMDs in the year following the death of the IRA owner, but the RMDs are calculated according to the surviving spouse’s age/life expectancy. The surviving spouse can always take a lump-sum distribution, although this will cause the entirety of the distribution to be subject to income tax in the year in which such withdrawal occurs.
When a non-spouse is named beneficiary
A non-spouse beneficiary can either take a lump sum distribution or open an inherited IRA using his or her life expectancy, as determined by his or her age in the year following the year of death of the IRA owner. If multiple beneficiaries are named, they must establish separate inherited IRA accounts by December 31 of the year following the year of death of the IRA owner. If the beneficiaries fail to establish separate accounts by that deadline, distributions to all of the beneficiaries will be based on the oldest beneficiary’s life expectancy.
When a charity is named beneficiary
If you are charitably inclined, naming the charity as beneficiary of a retirement account is tax efficient for both the donor and the donee. The charity pays no income taxes upon receipt of the IRA assets, and the IRA will qualify for a full charitable deduction in the IRA owner’s estate.
When a trust is named beneficiary
If the trust qualifies as a “look-through” trust, then the RMDs must be paid to the trust over the life expectancy of the oldest trust beneficiary. A “look-through” trust (1) must be valid under state law, (2) must be irrevocable upon the death of the IRA owner, (3) the individual beneficiaries of the trust must be identifiable and (4) trust documentation must be provided to the IRA custodian no later than October 31 of the year following the year of the IRA owner’s death. If there are several trust beneficiaries of varying ages, then the ability to maximize the deferral potential of the distributions from the IRA could be lost. It is important to note that it may be possible to “split” beneficiary accounts if the trust creates separate “subtrusts” for each trust beneficiary. If the trust is not a “look-through” trust, then the time period to pay out the IRA is within five (5) years following the year of the IRA owner’s death.
When an estate is named beneficiary
Generally speaking, since an “estate” is not an individual, an IRA that names the owner’s estate must be paid out within five (5) years following the year of the IRA owner’s death.
A distributee is your legal heir that will inherit your estate, by law, if you do not have a valid will. A distributee may also be referred to as an “heir-at-law” or “next-of-kin.”
In New York, distributees are defined under EPTL § 4-1.1 to be (1) your spouse and/or children, (2) your parents, (3) your siblings/nieces and nephews/grandnieces and grandnephews, (4) your grandparents/aunts and uncles/first cousins or (5) your first cousins once-removed.
In New York, when you probate a will, you are required to give notice to a decedent’s distributees. Since distributees are the “natural” heirs of a decedent’s estate, this notice gives them an opportunity to dispute the validity of your will, if they believe there was any wrongdoing.
There could be many reasons why you choose to not leave your estate to your distributees —perhaps your closest living relative is someone whom you have never met, maybe you don’t get along with your family or maybe you simply want to contribute your estate to charity upon your death. Whatever the reason, it is important to speak with an estate planning attorney to make sure your wishes are documented and the proper steps are taken now, to avoid time delays and expenses after death.
A Charitable Lead Trust (“CLT”) can be established during your life (“inter vivos”) or after your death (“testamentary”). In both types of CLTs, charitable gifts are made out of the trust for a period of years, then, at the end of that period, assets pass to designated family members or others.
A CLT with terms that provide for annuity payments (a fixed percentage of the fair market value of the property transferred to the trust as of the date of the transfer) is known as a charitable lead annuity trust (“CLAT”). A CLT with terms that provide for a unitrust amount (a fixed percentage of the fair market value of the trust property as that value is re-determined annually during the lead term) is known as a charitable lead unitrust (“CLUT”).
Charitable Lead Trusts established during lifetime
At the time the grantor transfers property to the CLT, the grantor is treated as having made a charitable gift equal to the present value of the stream of the annuity or unitrust payments to be paid to the charity. The present value of this stream is determined by applying a discount rate (equal to 120% of the federal AFR mid-term rate in effect for the month during which the grantor makes the transfer) to the aggregate payments to be made to the charity. The lower the AFR rate, the lower the discount rate, and the higher the present value of the revenue stream to be paid to charity. Additionally, at the time the grantor transfers property to the CLT, the grantor is treated also as having made a noncharitable gift to the remainder beneficiaries. The higher the present value of the revenue stream to be paid to charity, the lower the present value—and therefore the gift tax value—of the property transferred to the remainder beneficiaries.
If you establish an inter vivos CLT during your lifetime, you, as the grantor of the trust, are not entitled to a charitable income tax deduction for funding the trust unless it is treated as a grantor trust and therefore you are responsible for paying all of the CLT’s income taxes during the term of the trust. If the CLT is treated as a non-grantor trust, you are not entitled to a charitable income tax deduction but you are entitled to a gift tax charitable deduction for the value of the charitable lead interest.
Charitable Lead Trusts established at death
A testamentary CLAT, established at death, is typically used as a way of accomplishing not only a charitable giving goal but also the goal of passing assets on to next generation family members at a lower estate tax cost. The Grantor’s estate would be entitled to an estate tax charitable deduction for the value of the charitable lead interest. Since the property is included in the grantor’s estate, it would result in there being a stepped-up basis in the property contributed to the trust, which would eventually pass to the non-charitable beneficiaries. It is possible to establish a sufficiently long charitable lead interest so that the estate tax charitable deduction is equal to the full value of the trust corpus, thereby totally eliminating estate tax with respect to the trust corpus. This is called a “zeroed out” CLAT. In the case of a zeroed out CLAT, the remainder noncharitable beneficiaries receive is the upside of the economic performance of the trust assets over and above the AFR rate on an estate tax free basis. When interest rates are low, the likelihood that the trust assets will outperform the AFR rate and the remainder beneficiaries will receive excess trust property gift tax free at the end of the lead term increases. This is more difficult to accomplish when interest rates are higher.
When Tom Petty died at the age of 66 from an accidental overdose, he had been considered a “success story” in the realm of celebrity estate planning as he had a full estate plan in place at his death.
For example, he apparently had a trust that disposed of his artistic property upon his passing through instructions to the successor trustee (his wife from a second marriage) to form a California limited liability company (“LLC”) to hold and deal with such property. As he had children from a first marriage, his trust apparently further provided that they should “participate equally” in the management of such LLC.
While such provisions seem to be well-meaning, they have apparently been the source of disagreement between Petty’s wife and children and have unsurprisingly resulted in recent litigation. From an estate planning perspective, they also call into question the extent to which family dynamics may have been taken into account in the planning process, especially when it is reported that Petty’s wife and children may have had a strained relationship during his life.
What can be done to avoid a family dynamics issue?
Regardless of a person’s celebrity, it is important that his or her estate plan take into account family dynamics as they may be when he or she is alive and in good health, as well as upon his or her death or in the event of a serious, long-term illness.
In particular, attention should be paid to family dynamics in the case of “blended” families where there is frequently tension between the spouse from a subsequent marriage and children of a first marriage. However, equal attention should be paid to all other types of family situations, such as adult children of the same marriage, as there is frequently tension in these situations too.
It is important to have an honest and open discussion with your estate planning attorney about how family members have traditionally gotten along and how you think they would get along when you are no longer there. It may be helpful also to discuss how family members have handled stress or grief, about how they have traditionally handled finances and whether you think that they are actually up for handling additional responsibilities, such as taking care of you or managing your finances. You should also think about whether it would be better for a few family members to work together or one family member to be in charge.
Finally, you should inform your estate planning attorney of any significant relationship or marital issues between family members, of any mental illness or of any substance abuse issues, so that your estate planning attorney may tailor his or her recommendations to achieve your estate planning goals and hopefully provide your loved ones with a more harmonious structure upon your incapacity or passing.
The rationale behind establishing an IRA may be quite simple; however, the rules for inheriting and distributing IRA benefits upon the IRA owner’s death are anything but. Therefore, understanding the rules governing IRA inheritances, for an IRA owner as well as the named beneficiary, is critical to avoid any unintended consequences, including paying higher taxes or forfeiting asset growth.
The rules governing inherited IRA assets depend upon the beneficiary’s relationship to the original IRA owner and the type of IRA that is inherited.
When the beneficiary of inherited IRA assets is a surviving spouse, the rules are simple—the spouse has the option of rolling the assets over into his or her own IRA within 60 days of taking the distribution from the decedent’s IRA. For income tax purposes, a spousal rollover of IRA benefits is not considered a distribution and therefore has no income tax consequences. On the other hand, when the beneficiary of inherited IRA assets is a non-spouse (i.e., child, grandchild, other relative, friend, etc.), the rules become quite complicated and carry various tax consequences if not followed properly.
Unlike a surviving spouse, a non-spouse beneficiary does not have the option to roll over the IRA benefits into his or her own IRA. Rather, when a non-spouse beneficiary inherits IRA assets, the beneficiary generally has three options from which to choose. Each option carries specialized rules as well as various pros and cons, which should be considered carefully when making a decision regarding distributions:
1. Take an immediate distribution.
A non-spouse beneficiary can choose to have the inherited IRA assets distributed to himself or herself immediately. Once the assets are distributed to the beneficiary, they are treated as the beneficiary’s own, and may be used or invested as the beneficiary chooses. Although taking an immediate distribution allows greater flexibility to the beneficiary, the distribution will be included in the beneficiary’s gross income and subject to ordinary state and federal income taxes. Depending on the value of the IRA assets, the amount of income taxes due on an immediate distribution in full could be significant. Despite the potential income tax consequences, it is important to note that a beneficiary who is under the age of 59½ will not be subject to the 10% penalty for early withdrawal for the distribution of assets. If a beneficiary needs immediate access to the money, taking an immediate distribution of the entire inherited IRA may be most beneficial.
2. Transfer the assets into a non-spouse inherited IRA and take RMDs.
A non-spouse beneficiary has the option of transferring the IRA assets into an inherited IRA, sometimes also known as a beneficiary distribution account. It is important that the beneficiary complete what is known as a “trustee-to-trustee transfer,” where the assets move directly and immediately from the existing IRA account to the new, inherited IRA account. Unlike the spousal IRA rollover, there is no option for a 60-day rollover when a non-spouse beneficiary inherits IRA assets. If the assets are distributed directly to the non-spouse beneficiary, the money will be taxed as ordinary income and cannot later be transferred into an inherited IRA.
An inherited IRA account remains in the name of the decedent, and although a “new” retirement account is created, the beneficiary is not able to make new contributions to the inherited IRA account. Keeping the inherited assets in an IRA account allows the assets to continue to grow on a tax-deferred basis. Thus, if a beneficiary does not have an immediate need for the money, transferring the assets to an inherited IRA may have the greatest long-term growth benefits. Notwithstanding the asset growth advantages, a beneficiary of an inherited IRA is required to withdraw a certain amount of money each year based on his or her age and life expectancy, and also other various factors (including whether there are additional beneficiaries). These required distributions generally begin in the year after the year of death and are more commonly known as “required minimum distributions” (RMDs).
3. Disclaim all or part of the assets.
A non-spouse beneficiary can choose to decline to inherit all or part of the IRA assets by executing a disclaimer. If a disclaimer is executed, the IRA assets will pass to the contingent named beneficiaries or, in the event there are no contingent beneficiaries, pursuant to the IRA provider’s contractual defaults. The decision to disclaim IRA assets is an irrevocable decision by the beneficiary, which must be made within nine months of the original IRA owner’s death and before taking possession of the assets. Before making a decision to disclaim, the beneficiary should consult with tax and estate planning professionals to consider the potential benefits and consequences of such a decision.
Die-hard fans of football, baseball, basketball, hockey and soccer should think about what they want to happen to their season tickets as well as what limitations will be imposed by the team at the death of the season ticket holder. Transfer policies are set up on a team-by-team basis.
Examples of team policies relating to the transfer of season tickets include:
- Season ticket holder has no authority to transfer and the tickets go to a waitlist holder
- Season ticket holder completes a transfer form during his/her life, which designates who gets the tickets
- Season ticket holder can transfer tickets to a surviving spouse or immediate family member only
- Season ticket holder can designate who gets the tickets in his/her will
- Season ticket holder’s heirs, if no designation by will is made, must agree on who gets the tickets
- A transfer fee may be imposed in addition to meeting the limitations of a transfer policy
With such a wide range of transfer rules, season ticket holders should understand the team’s policy on transfer, and should not assume that the tickets will be passed to a younger generation fan.
Determining what you want to happen with your tickets, and what the team will allow to happen, can save a lot of heartache and avoid disputes among loved ones after death.
As estate planners, we ask our clients a lot of questions and answer a lot of questions to help craft an estate plan that meets the needs of the client’s family and situation. We each have our own families and our own situations that need careful thought as well. Here are some of the thoughts that we have considered as we have created our own estate plans.
Entering the work world
As someone who recently entered the “real world,” there are many new responsibilities, including maintaining an apartment, investments, health insurance, bills and taxes. As a single adult with no dependents, an estate plan seemed unnecessary initially. However, part of my new responsibilities include being prepared for the unexpected as well. Taking the time to ensure my loved ones have a clear understanding of my wishes, in the case of an unexpected event, is another responsibility I have now. Health care proxy, power of attorney and will, here I come.
I do not have an estate plan or incapacity documents (i.e., power of attorney and health care proxy), which is not good for an estate planning attorney. I do anticipate putting a formal estate plan into place in the next year or so. For now, all of my financial accounts have transfer-on-death instructions and/or beneficiary designations, which name my parents as the primary beneficiaries and my sibling as the secondary beneficiary. I do not own real estate and do not expect to be purchasing real estate any time soon either.
It’s time for me to review my own plan. My concerns are: Are my health care proxy, durable power of attorney, will and trust up to date? Do they work with the recent changes to state and federal laws? Are the agents, executor and trustee I picked still good choices? Are all my assets titled in the name of my trust so that my estate avoids the expense and delay of probate at my death? Do my life insurance and retirement plan designations still work with my plan?
As I approach my wedding date, I am thinking about updating my transfer-on-death instructions and beneficiary designations to reflect my fiancé as the primary beneficiary and my parents as the secondary beneficiaries. My fiancé and I have discussed but do not plan to sign a prenuptial agreement as neither of us has any substantial assets or expects a substantial inheritance from our parents.
Prior to getting married, my (now) spouse and I were starting our careers as attorneys. We thought, “How can we advise clients all day long that they need an estate plan when we, ourselves, do not have one?” Despite not being married, we executed our powers of attorney, living wills, health care proxies and wills. In going through the process of drafting our own estate planning documents, we realized that we had appointed people who would not have been our default agents by law. Additionally, we realized that it was even more important for individuals who are engaged (and not married) to have these documents in place. Without them, my fiancé would have had no say in my medical or financial affairs.
Starting a family
As we begin to think about starting a family, we know it will be especially important to have proper wills in place that will allow us to appoint guardians of our minor children and provide that their distributions be held in trust, for health and education purposes, rather than given to them outright.
Young and growing family
As a parent of teenagers, I am getting my first glimpses of what my children might be like as adults. This has made me consider whether I want their inheritance to pass outright to them or remain in trust for a long or short period of time. I have also reconsidered which family members to name as guardians because I feel it is now important for them to remain in the Boston area. I have also thought about whom I would name as trustee of assets because I want someone in that role who is wise financially but can also relate to my children as they mature into adulthood.
Parent of an 18-year-old
As my daughter was preparing for college, I thought about how I would no longer be able to do things for her just because I was her mother. No longer would the doctors talk to me without her permission. No longer could I handle her financial matters. It was now time for her to take over these matters herself (even if I wasn’t sure she was 100% ready). What if she was injured and couldn’t make medical decisions for herself? What if she was too far away to take care of a financial transaction at our local bank? She needed a health care proxy and power of attorney before she headed off to college.
Parent of young adult children
My kids have graduated from college and started their careers. I have made sure they have health care proxies, durable powers of attorney and wills, that they are investing in their employer-provided 401(k) and that they understand how to think about their beneficiary designations for their retirement plans and employer-provided life insurance. I also put some money in their IRA accounts every year for which they will thank me when they are my age!
I want my kids to benefit from whatever I can pass to them, not my ex-spouse. Does my plan ensure that my kids are benefitted but that no unforeseen circumstance would result in my hard-earned money passing to my ex-spouse (or an ex-spouse of my child’s down the road)? In addition, are my kids able to handle money? They are good, hardworking and kind but I am not sure they are ready (sorry kids!).
As grandparents, we look at our grandchildren’s young lives and their need for money for education, necessities and buying a home someday. In doing our estate plan, we established a trust for the benefit of our children and grandchildren. The trust gives the trustees the discretion to distribute income and principal to both children and grandchildren with the primary purpose of providing for the education and support of our grandchildren. By having the assets held in a trust, they are protected from the creditors of both our children and grandchildren, including divorcing spouses.
Married with grandkids
It is a lucky parent who does not have to worry about paying a full college tuition for four years for each child. A relatively painless and tax efficient way for a grandparent to help out is by starting to make contributions to a 529 plan for each grandchild as soon as possible after they are born. Now that such plans can be used toward the payment of private school tuitions, they provide additional flexibility if the parents are concerned about having the resources to afford both a private school and a private college.
Families needing special planning
My sibling is in recovery from serious addictions. Although our grandparents wanted to treat my sibling equally, it was important that money not be left outright to my sibling. Our grandparents updated their estate planning documents so that my sibling’s share would be held in trust with our aunt serving as trustee. With this arrangement, my sibling has access to funds, and can use the money for worthy causes in his life, but they are restricted enough that they do not pose the same risk to his sobriety as an outright distribution may have.
There are three ways to own title to real property between two or more individuals—as tenants in common, joint tenants or tenants by the entirety. How you hold title to real property with another individual is important when it comes to your estate plan and knowing what will happen after death.
Tenants in common: Each owner has a separate interest in the property. If the type of ownership is not expressly stated in the deed, and the parties are not husband and wife, this creates ownership by tenants in common. Upon the death of an owner, his or her share passes pursuant to the deceased’s will, or if there is no will, to the deceased’s heirs via intestacy laws.
Joint tenants: A joint tenancy must be specifically declared in a deed. Upon the death of a joint tenant, his or her interest automatically passes to the surviving joint tenant. This tenancy may also be referred to as “joint tenants with right of survivorship.”
Tenants by the entirety: This type of ownership is unique to married persons. Upon the death of a spouse, the property becomes owned in full by the surviving spouse. The deed should state that ownership is by “tenants by the entirety” or between “husband and wife,” although if it is silent and the parties are legally married at the time, the ownership will be automatic. Alternatively, married persons can own property as joint tenants or tenants in common, provided it is expressly stated in the deed.
Unclaimed assets are funds in an individual’s name such as bank accounts, stocks, federal or state income tax refunds, uncashed dividends, insurance premium refunds, etc. that have not been accessed or collected [a year or more after issuance] that will eventually escheat to the state as “Abandoned Property.”
We commonly see the following types of Abandoned Property: uncollected dividends, forgotten bank accounts, uncashed checks and contents of safe deposit boxes.
If unclaimed funds are located in your name, only you, your spouse (or other family member if none) or your estate is entitled to collect the money from your state’s unclaimed funds depository.
There is no central federal source to research unclaimed funds specific to you. However, the National Association of Unclaimed Property Administrators website has helpful information on each state and provides instructions on how to search for unclaimed money in your name and corresponding state.
We recommend you search the Abandoned Property website of each state in which you have resided annually. The collection process is relatively simple and most times can be done online through the National Association of Unclaimed Property Administrators
, Office of the New York State Comptroller Unclaimed Funds
, Massachusetts Unclaimed Property Division
and Illinois State Treasurer’s Unclaimed Property