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A Quick Review - and Naming the Beneficiary of your IRA
It has been a while since this column addressed the basics of an estate plan. I believe the essential elements of an estate plan are:
1. Making sure your assets are distributed according to your wishes;
2. Making administration of your estate as easy as possible, which usually includes avoiding probate and minimizing estate taxes;
3. Setting up mechanisms to allow another person to step in and manage your assets for your benefit, and make health care decisions for you, if you are disabled.
4. Providing for minor and disabled family members.
It is still a common belief that the Will is the cornerstone of an estate plan. When naming a guardian for minor children is not an issue, the Will is a "just in case" document. It is included in the plan, but it should not be used to transfer title to assets after a death. If it is being used in this way, then the goal of avoiding probate has been missed.
Remember, a Will is a set of instructions for the probate judge. It also waives costly surety on the executor's bond, a valuable savings. However, if a client so desires, in most cases probate can be avoided. This means a substantial savings in time and money.
Each asset owned by the client must be considered to see if it is a "probate asset." If title is held in such a way that an asset will transfer automatically at death, then it is not a probate asset. We all own some probate assets and some non-probate assets.
* A house in joint tenancy is not a probate asset - at the first death. If nothing is done, it will be a probate asset at the second death when there is only one owner.
* A life insurance policy naming a beneficiary is not a probate asset, because the beneficiary designation makes the asset transfer automatically.
* A checking account or CD with a P.O.D. designation ("pay on death") is not a probate asset because the P.O.D. designation makes the asset transfer automatically.
* Assets held in the name of a trust are not probate assets. Trusts do not die. When their grantor dies, the successor trustee can follow the instructions in the trust for distribution of the assets without the intervention of any court.
* Any financial account, or stock in a family business, or any other asset owned by the decedent in his name alone, is a probate asset.
A Will that names persons or organizations to whom you would like your assets given after your death is a valuable instruction for the probate judge, but unless the combined value of the probate assets is less than $100,000.00, a probate lawsuit will be necessary to actually collect and distribute those assets.
In estate planning, we use strategies to avoid probate on each asset. Many assets can have a beneficiary, but the house could not. A trust could be set up to hold title to the house, but that can be expensive. Within the last few years, Illinois has allowed the use of a Transfer on Death Instrument, which, in effect, names a beneficiary on your house. It is a simple and inexpensive document, and it makes the house a non-probate asset.
Naming the Beneficiary on your IRA. The IRA account is often the largest asset in an estate. Naming the beneficiary is critical, and deserves some additional attention. When a person inherits an IRA, he can defer the receipt of the funds in the account if he successfully keeps the account as an IRA. This allows deferral of payment of tax on the funds, perhaps for many years. When naming your beneficiary, consider the following:
If the beneficiary of an IRA is the spouse, he or she can create a "Rollover IRA" which has all the benefits of that person's own IRA account. This is the best result.
If the IRA beneficiary is one or more individuals, who are not the spouse, each can create an "Inherited IRA" account, which enjoy some deferral of receipt of the funds.
Naming a charity in a group of IRA beneficiaries unfortunately can prevent the individual beneficiaries from having the opportunity to set up Inherited IRAs. If you desire to benefit a charity with IRA assets, consider splitting the account during your life into two IRAs and leaving one entire IRA to that charity.
Naming a trust as beneficiary of your IRA usually is not recommended because complicated rules dictate whether the trust beneficiaries can set up inherited IRAs or whether they must receive a short-term payout of the funds. However, in your family situation there may be important non-tax reasons to name your trust as IRA beneficiary, including disabled or financially immature beneficiaries. This may supersede the tax reasons. Families with small children often name the spouse as primary beneficiary and name the trust as contingent beneficiary. When the children reach financial maturity, that beneficiary designation can be changed to the children, outright. If your trust might be beneficiary of your IRA, make sure it is a "qualified trust" per IRS rules.
Worst results: naming no beneficiary or "my estate". Then the IRA is a probate asset.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
A Quick Review - and Naming the Beneficiary of your IRA
It has been a while since this column addressed the basics of an estate plan. I believe the essential elements of an estate plan are:
1. Making sure your assets are distributed according to your wishes;
2. Making administration of your estate as easy as possible, which usually includes avoiding probate and minimizing estate taxes;
3. Setting up mechanisms to allow another person to step in and manage your assets for your benefit, and make health care decisions for you, if you are disabled.
4. Providing for minor and disabled family members.
It is still a common belief that the Will is the cornerstone of an estate plan. When naming a guardian for minor children is not an issue, the Will is a "just in case" document. It is included in the plan, but it should not be used to transfer title to assets after a death. If it is being used in this way, then the goal of avoiding probate has been missed.
Remember, a Will is a set of instructions for the probate judge. It also waives costly surety on the executor's bond, a valuable savings. However, if a client so desires, in most cases probate can be avoided. This means a substantial savings in time and money.
Each asset owned by the client must be considered to see if it is a "probate asset." If title is held in such a way that an asset will transfer automatically at death, then it is not a probate asset. We all own some probate assets and some non-probate assets.
* A house in joint tenancy is not a probate asset - at the first death. If nothing is done, it will be a probate asset at the second death when there is only one owner.
* A life insurance policy naming a beneficiary is not a probate asset, because the beneficiary designation makes the asset transfer automatically.
* A checking account or CD with a P.O.D. designation ("pay on death") is not a probate asset because the P.O.D. designation makes the asset transfer automatically.
* Assets held in the name of a trust are not probate assets. Trusts do not die. When their grantor dies, the successor trustee can follow the instructions in the trust for distribution of the assets without the intervention of any court.
* Any financial account, or stock in a family business, or any other asset owned by the decedent in his name alone, is a probate asset.
A Will that names persons or organizations to whom you would like your assets given after your death is a valuable instruction for the probate judge, but unless the combined value of the probate assets is less than $100,000.00, a probate lawsuit will be necessary to actually collect and distribute those assets.
In estate planning, we use strategies to avoid probate on each asset. Many assets can have a beneficiary, but the house could not. A trust could be set up to hold title to the house, but that can be expensive. Within the last few years, Illinois has allowed the use of a Transfer on Death Instrument, which, in effect, names a beneficiary on your house. It is a simple and inexpensive document, and it makes the house a non-probate asset.
Naming the Beneficiary on your IRA. The IRA account is often the largest asset in an estate. Naming the beneficiary is critical, and deserves some additional attention. When a person inherits an IRA, he can defer the receipt of the funds in the account if he successfully keeps the account as an IRA. This allows deferral of payment of tax on the funds, perhaps for many years. When naming your beneficiary, consider the following:
If the beneficiary of an IRA is the spouse, he or she can create a "Rollover IRA" which has all the benefits of that person's own IRA account. This is the best result.
If the IRA beneficiary is one or more individuals, who are not the spouse, each can create an "Inherited IRA" account, which enjoy some deferral of receipt of the funds.
Naming a charity in a group of IRA beneficiaries unfortunately can prevent the individual beneficiaries from having the opportunity to set up Inherited IRAs. If you desire to benefit a charity with IRA assets, consider splitting the account during your life into two IRAs and leaving one entire IRA to that charity.
Naming a trust as beneficiary of your IRA usually is not recommended because complicated rules dictate whether the trust beneficiaries can set up inherited IRAs or whether they must receive a short-term payout of the funds. However, in your family situation there may be important non-tax reasons to name your trust as IRA beneficiary, including disabled or financially immature beneficiaries. This may supersede the tax reasons. Families with small children often name the spouse as primary beneficiary and name the trust as contingent beneficiary. When the children reach financial maturity, that beneficiary designation can be changed to the children, outright. If your trust might be beneficiary of your IRA, make sure it is a "qualified trust" per IRS rules.
Worst results: naming no beneficiary or "my estate". Then the IRA is a probate asset.
Note: This column provides general information related to the law designed to help readers understand their own legal needs. This column does not provide legal advice. Please consult a lawyer if you want legal advice. No attorney-client or confidential relationship exists or will be formed between the reader and the author of this column.
