Law News and Tips
PLANNING WITH IRAS
Vilbig © 2020
Many of us work all of our lives saving for retirement. Some begin at a young age tucking a little money away in an IRA, a 401(k), a 403(b), or a profit-sharing plan. Some put it off for some time because of day – to – day expenses, but most eventually save something, and when I meet with clients, if they don’t have some sort of a business, the two biggest assets they have is their house in the retirement savings.
But being frugal and saving for the future can create some issues. What do you do with a retirement account if you outlive the account? Many people (particularly guys) just say they’re going to live until they run out of money. Good plan if you know when you’re going to die. The problem is, we don’t know if we are going to get hit by a semi tomorrow or linger in a nursing home for years. We just don’t know, so we need to plan.
The simplest thing to do was to just name your spouse as the beneficiary and your kids as the contingent beneficiaries. If you have a 401(k), a 403(b), or a profit-sharing plan, federal law provides that if you name someone other than your spouse as the primary beneficiary, your spouse must consent to that.
The same rule doesn’t apply to IRAs. Under federal law, you don’t need your spouse’s consent. However, in a recent Missouri case, it was determined that a surviving spouse has rights in marital assets, including IRAs. So Missouri law now protects a surviving spouse’s rights in an IRA.
So assuming you’ve named your spouse as the initial beneficiary, on your death, he or she can roll the retirement account into his or her own name tax-free. If the surviving spouse is younger, that’s a good idea since using the younger spouse’s longer life expectancy means he or she can extend the tax-deferred growth of the account.
On the death of the second of you to die, if you’ve named your children as the contingent beneficiaries, then the assets can be divided among them and rolled over into what is called an “inherited IRA.” It used to be that inherited IRAs would last for the life expectancy of the beneficiary. In the recent SECURE Act, Congress limited the term of inherited IRAs to 10 years. It’s still a good idea to keep the assets in a tax-deferred account, it’s just that there’s a time limit.
But there’s another problem with inherited IRAs. In 2014, in the case of Clark v. Remeker, the US Supreme Court ruled that inherited IRAs are not protected from bankruptcy claims. What this means is that an inherited IRA is not protected from creditors. So if your son or daughter inherits an IRA from you and is later sued and doesn’t have insurance coverage on the matter, all of your hard earned money could go in payment of a judgment. To me, that’s a bad result.
In order to avoid that result, we typically recommend that clients name their spouse as the initial beneficiary of a retirement account, but named a revocable trust as the contingent beneficiary. In 1999, the IRS provided us with “magic language” that permits us to flow an inherited IRA through a trust. By having the assets run through the trust, they are protected from lawsuits.
If you have questions, let’s talk.
AN ESTATE PLANNING CHECKUP
Fred Vilbig © 2020
I recently met with a couple who wanted what I’ll call an estate planning checkup. They said they had a will and just wanted me to check to make sure everything was in order.
When we met, I asked to see their wills. She produced a very simple, generic will. She sheepishly admitted that she had printed it off the Internet a few years ago. In reviewing it, I saw that on her death, everything went to him if he was alive. If he was not alive, it went out right to their kids. Although it had normal (albeit brief) powers authorizing the personal representative to do whatever was necessary to take care of the estate, it did not allow for what is called independent administration.
She was surprised when I explained to her that the will would require the court to oversee and approve everything in the administration of her estate. She apparently thought you avoided probate with a will. A will is only a roadmap through probate. It doesn’t avoid probate. We then discussed ways to avoid probate.
I also talked about the problems with giving property outright to children. If they kept it in their own individual names, the assets could be exposed to the claims of their creditors. If they married and put it in joint names with their spouses, half of it could be taken in divorce. We talked about ways to avoid that.
I then looked at the signature page. She had, in fact, signed the will. There were spaces for the signatures of two witnesses, but they were blank. There wasn’t a notary block at all.
I explained to her that her will was not valid. On the death of the second of them to die, their estate would have to be administered by intestate succession (the will Missouri has written for you). They were not happy to hear that.
In order to have a valid will, there are generally certain requirements that have to be satisfied. There are some exceptions, but that will be for another column. Generally, in order to have a valid will in the state of Missouri, the testator has to be competent. Testamentary competency is very basic: you need to generally know what’s going on; you need to generally know the nature and extent of your estate; and you need to know the objects of your beneficence (that’s a fancy law school word for who your kids are). In addition, the will has to be written. You need to publish or declare that it is your will in front of witnesses. And the witnesses need to sign the will declaring that they found you to be competent and that you signed it in front of them. Although not required for a valid will, we always add a notary block regarding the witnesses’ signatures. Otherwise, on your death, we need to track the witnesses down, drag them to court, and have them prove that those are their signatures on the will.
I understand that people are trying to economize. But I have found generally that homemade wills end up costing a lot of money and causing a lot of problems.
Give me a call. Let’s talk.
A Bad Idea
Fred Vilbig © 2020
I got a call from a client the other day.His mother had died, and he had a lot of questions.
His mother and father had divorced years ago.She had remarried, and she and her new husband had had a loving relationship.Not knowing who might die first and wanting to be fair, they had verbally agreed that everything would pass to the survivor on the death of the first of them to die, and on the death of the second, everything would be split 50/50, with half going to her son and half going to his children.They didn’t put that agreement in writing, and everything was owned jointly.They did both execute wills that included those provisions, but that was it.And therein lies the problem.
When a married couple own property jointly, on the death of the first of them to die, everything passes to the surviving spouse.There is no need to probate anything since there is nothing to probate.If you’re talking about real estate, you do need to file an affidavit of death to clean up the title.With regard to financial assets, you probably need a death certificate to show to the financial institution.But no probate.
And when the assets pass to the surviving spouse, the surviving spouse is free to do whatever they want with them.My client said that his step-father was talking about putting the accounts in joint names with his son.The idea was that he wanted his son to be able to pay his bills.But joint ownership between non-spouses can create problems.In the case of bank accounts (they have special rules that apply to them), his son would be able to use that money to pay his bills.But his son would also be free to drain that account.Or if he got sued and lost, the other party could attach those funds to satisfy his or her judgment.In the case of a brokerage account, both joint owners would need to jointly withdraw funds, so he would be no better off than if the account was still in his name.And then on the death of the step-father, all of the assets would pass outright to the surviving son. There would be no probate, and the will that split things 50/50 would prove to be a useless piece of paper.
The best thing that my client’s mom could have done would have been to enter into a pre- or post-nuptial agreement.She and her husband could have agree to split the assets in writing just like they had verbally agreed to do.
But now, my client was in a sticky situation.Although he had a good relationship with his step-father, his step-father was free to do whatever he wanted to do with the assets.I told him that his step-father could put the assets into a trust, and that would avoid probate, allow for his son to take care of him if he became ill, and incorporate the testamentary disposition play he had agreed to with his wife.If he didn’t want to do a trust, he could keep his will and execute a power-of-attorney allowing his son to pay his bills, but not put everything in joint names.There are ways to salvage the situation to achieve what the spouses had agreed to, but it will take some cooperation.
Fred Vilbig © 2020
Identity theft is a big concern in our virtual, technological society. Nefarious people make millions of dollars by stealing your private information and pretending to be you. We use passwords and encrypted software to try to protect ourselves, but these are smart criminals. They know how to work the system.
In a way, identity theft has been with us probably as long as people have been doing business. People would pretend to be someone else to get something valuable. Several movie plots have revolved around this idea: Catch Me If You Can, Face Off, and American Hustle are just a few. (I have to thank my kids for the movie references since I have never seen any of these movies.)
Internet dating sites are also a victim of this kind of thing where the description of the person you think you are meeting doesn’t match the person you actually meet. He’s not an Olympic athlete unless you include drinking Olympia beer as a sport.
A simpler form of identity theft is a forgery. In a forgery, you are pretending to be someone else by signing their name to a document. It’s less elaborate than internet identity theft. You don’t have to dress up and pretend to be someone else. You just have to sign their name. And if what the banks allow for signatures on checks is any indications, you don't even have to try that hard to copy someone’s signature. It’s as if they’ll take just about anything.
That is why we have notaries. Notaries are people commissioned by the State to verify signatures. They affirm that the person signing a document is, in fact, the person supposedly signing that document. If you go to court and a written document is central to your case, you can’t even get the document admitted into evidence unless there is some proof that the document and the signatures are real. If you don’t have a notarized signature, then the people who signed the documents need to go to court to prove that the signature on the document is actually theirs.
With a notarized signature, you don’t have to prove-up the signatures. If the signature is notarized, it is presumed valid. You would have to bring witnesses to prove otherwise.
Normally to notarize a signature, you have to sign a document in the physical presence of a notary. But these are not normal times. Social distancing has become the norm, and that makes notarizing signatures problematic. We recently had a car window will signing to keep our social distance.
But Governor Parson has recently relaxed that requirement. By Executive Order under the declared State of Emergency, we can now do virtual or remote notarization. For our purposes, we have to be able to see the person sign the document through a web-based program, they have to prove they are who they say they are with a picture ID, and after signing the document, they immediately have to send it to the notary. How long we will be able to do this is uncertain, but it relieves some of the stress on people. A lot of people don’t have even the most basic estate planning documents – a will, a power of attorney, or a medical directive – but they are afraid (and rightfully so) to physically meet with us. Now we have an option.
If you need to do some planning, but you were hesitant to take action during the pandemic, give us a call at (314) 241-3963. We are conducting our interviews by phone or by videoconferencing. Based on that conference, we can prepare documents and send them to you for review. After you have had a chance to review the documents to put them in final form, we can now sign them over the internet. Your safety and the safety of our employees is uppermost in our minds.
Fred Vilbig ©2020
On December 20th, President Trump as part of the 2020 Appropriations Act signed the SECURE Act which changed some of the tax rules governing IRAs.I love the way Congress bundles all of these things into a single bill at the end of the year to make us think they are actually being productive. But that’s another column.
In order to understand the changes, it may be helpful to review how IRAs work generally. During employment and prior to reaching 70 ½, the Tax Code allowed us to exclude from income certain amounts that are deposited in individual retirement accounts (“IRAs”) and other qualified plans. As long as the funds are in one of these qualified plans, they grow tax-deferred. Upon reaching 70 ½ the employee is required to withdraw what is called “required minimum distributions” (“RMDs”) which are amounts calculated to entirely distribute the account assets over the expected life of the employee-beneficiary. These RMDs are generally taxable as ordinary income. If the employee-beneficiary died before the complete distribution of the account, a surviving spouse could roll-over the account to a new IRA on a tax-free basis. If there was no surviving spouse, then the designated non-spouse beneficiaries would “inherit” the IRA, and they were allowed to withdraw RMDs over their life expectancies. But if the employee-beneficiary failed to name a beneficiary at all, then the IRA assets are distributable to the decedent’s estate and have to be taken out within 5 years of his or her death. That’s it in a nutshell.
First, let me assure everyone that IRAs and other qualified plans are still excellent vehicles to save for retirement. Income earned during years when you are subject to higher income tax rates grows tax-deferred and is received and taxed during years with lower income tax rates. But the SECURE Act did change some things. You’ll want to talk to your financial planner or your company plan administrator to see how these changes affect you, but here is a very short summary.
Employees can now make retirement plan contributions after age 70 ½. The required beginning date for RMDs is increased from 70 ½ to 72 years of age. And IRA distributions can be taken without penalty for births and adoptions.
All of these changes are supposed to be revenue-neutral, so the way Congress chose to raise revenues to pay for these changes is to require inherited IRAs to be paid out over 10 years instead of the life expectancy of the designated beneficiary.
It is this last change that has the most impact on estate planning. In 1999, the IRS gave us language to allow us to flow IRA distributions through trusts, and all of our trusts include that language. Flowing the distributions through trust is important because inherited IRAs are not protected from creditors, and using a trust can give some asset protection. It used to be for life, but now it will only be for 10 years. I don’t know what we can do to plan around that from an estate planning perspective. It is what it is.
In any event, if you have any questions regarding what these changes (and there are other ones in the law that I am not discussing), please contact your financial advisor or your company plan administrator.I’m sure you’re going to be hearing a lot about these things. But continue to save for retirement.
;Vilbig © 2019
I recently heard from a client about an estate planning mess that could have been avoided. Although this particular story is hearsay, I know from experience that these kinds of things regularly happen.
Bill (these are not their real names) had been married to Julie for years. Together they raised three wonderful children. After the kids were grown, Julie got sick and died, leaving Bill a widower at a young age (relatively speaking).
After Julie’s death, Bill lived alone for several years, but that can be tough. Older singles get isolated. Most of their friends are married, so they can feel like the odd man out socially. So Bill became lonely.
After some time, Bill met Debra. Debra was a lovely lady. Her husband had also died after they had raised two children. Bill and Debra grew to love one another, and they decided to marry. The kids were actually happy to see their parents so happy.
Bill and Debra had a happy life together. They trusted each other completely. They bought a house together; they invested their money together; they had a joint bank account, and they named each other as their beneficiaries on their IRAs.
As time when on, Bill noticed that Debra was forgetting things. It was almost unnoticeable at first, but it grew progressively worse. Debra was finally diagnosed with dementia. Bill took care of her as best he could, but he himself was aging. The stress and strain proved too much, and Bill died. Since Bill and Debra had not done any planning, Debra’s kids had her declared incompetent and opened up a conservatorship to manage her money and pay her bills. Debra did not survive Bill long, and she soon passed away. That’s when Bill’s kids had an unpleasant surprise.
On Bill’s death, everything passed over to Debra, including Bill’s IRA. It wasn’t a malicious thing, but it just happened. So when Debra died, everything went to her children. Nothing was left for Bill’s kids. Debra’s kids could have shared, but they were disinclined. Bill’s kids were very upset, but there wasn’t anything that could be done.
This is just one of many examples of an unfortunate result from lack of good planning. I recently met a young couple with a large family. Although they had thought about it, they had never gotten around to planning their estate. Now they were facing a medical emergency, so that need was immediate.
Although you can’t wrap it up in a nice box and put a pretty bow on it (or maybe you can), I would like to suggest a Christmas present for your family: a well thought out estate plan. It’s not a cool present, but it may be one of the more important things you can give them. Just a thought. Give me a call if you want to talk.
And at the risk of offending some, Merry Christmas and a blessed new year.
Fred Vilbig © 2019
It’s November again. How did that happen? Wasn’t Christmas just last month? It seems that up to a point, the older you get, the faster time goes. I think that’s because when you’re young, one day represents such a large portion of your life. When you get older, each day is just a miniscule fraction of your life, so they seem to fly by fast. It’s all relative. That is, up to a point. You have to stay active. Once you stop doing things, then time seems to really drag, but that’s a whole other story.
As I was saying, it’s November again, and the holidays are just around the corner. As I’ve mentioned before, Thanksgiving is my wife’s favorite holiday. Christmas has the frenzy of shopping, Easter has eggs, and the Fourth of July has fireworks with a possible trip to the ER. But Thanksgiving is about cooking a really good meal (something my wife enjoys and is really good at) and sitting around the table with family.
When we get the family together for meals, my wife and I tend to listen a lot. The kids talk all about things that they did when they were young, and we knowingly bob our heads as if we knew all about them all along. After they’re gone, we compare notes and have to admit to one another that we had no idea they did those things. How did they ever survive? But here they are, and we are actually grateful. Things aren’t perfect, but we’re still grateful.
But there is also a nostalgic, maybe even a sad, element to the holidays. I’m always reminded of the holidays when we were kids. We’d always end up at my grandparents’ house with my cousins. We actually spent a lot of time with her cousins. I thought everyone did, but I have since learned differently. We lived in Texas, so we played football in the backyard in shorts. Great fun. I’m really grateful for the time we had as a family when we were young.
But it also makes me sad. My grandparents, aunts and uncles, and even my parents have all passed away. My kids often do things, and I think how much my parents would’ve enjoyed sharing that with them.And we are not getting any younger either. For those of us who are baby boomers (I was apparently at the tail end), we have to admit that we have more aches and pains than we’ve ever had before. A sure sign of aging.
And with aging, we need to plan. It’s the prudent thing to do. We don’t want our kids’ memories of us to be clouded by the confusion and uncertainty of having to take care of us without any planning on our part.
This is strange territory for many people, but I’ve tried to make it easier to understand through my book, You Can’t Take It With You. To learn more about the topic, either go online or contact me to order a book. And then I’d love to sit and talk with you about planning to make it easier for your kids.
Fred Vilbig © 2019
A REAL ESTATE DILEMMA
Some time ago a client with a real estate dilemma called. He had a big tract of land, and now someone wanted to buy it – for a lot of money – for duck hunting. What?
The problem, though, was that his father had given it to him; and his father had given it to him; and his father had…. Well you get the idea. And if he sold it now, he was going to get hit with a million-dollar tax liability – literally. Here’s why, in fairly simple terms.
When you sell something you’ve owned for over a year, you have to pay a 20% tax on your capital gains. Your capital gain is the difference between (i) what you sell your property for and (ii) what is called your “basis.” Your basis is (a) what you paid for the asset (less any depreciation or amortization – never mind about that for now); (b) the date of death value if you inherited the property; or (c) the donor’s basis if it was a gift.
In our situation, all of my client’s ancestors had given the property to children, so his basis was the original 1905 purchase price for the land. Land was cheap back then, so he had a huge capital gain. So what to do?
In meeting with my client, I discovered that he really didn’t need the principal from the sale; he was just looking for retirement income. He didn’t have any children, so he wasn’t concerned about leaving an inheritance to anyone. He was a fairly religious person and was actively involved in his church. So I recommended a charitable remainder unitrust. A what?
A charitable remainder unitrust (a “CRUT”) is an irrevocable trust that is tax-exempt. If a CRUT sells an asset, there is no tax on the sale. With a CRUT, the donor can reserve a kind of an “income” interest over his or her lifetime or for a period of years not to exceed 20. The “income” interest is a fixed percentage of the annually recalculated fair market value of the trust principal. The percentage (called a “unitrust percentage”) must be at least 5% and is capped out based on a math formula. During the donor’s lifetime, he or she receives payments from the unitrust (which are taxable). The principal, though, continues to grow on a tax-free basis like an IRA. On the donor’s death, the principal goes to the designated charity. Pretty nifty under the right circumstances.
The CRUT was just the right vehicle for my client. He was able to transfer the land into a unitrust while retaining the “income” right for his lifetime. Yes, he was taxed on the income, but the principal grew tax-free. When he dies, his church is going to receive a significant gift. Because of that, on creating the CRUT, my client was entitled to a charitable contribution deduction. It isn’t a deduction for 100% of the value of the donated asset. Rather, it is a deduction for what is called the present value of the lifetime stream-of-income. Warning: calculating all of these things can result in headaches. You’ll want to talk to an attorney or an accountant knowledgeable in this area.
I think this was a good outcome. The client was happy. The church was happy. The only losers in this scenario were the ducks. Call if you have any questions.
AT THE END
Fred Vilbig © 2019
End-of-life decisions are tough. Although not always, they tend to be final. Even when we make the right decision objectively, we always second-guess. I’ve had to make those decisions for clients who had no close family members, and even that is tough. But when it is a close family member, it can be heart-wrenching.
I was recently reminded of that with my mother-in-law. She lives in an assisted living facility, and she has dementia. My wife (she’s not going to be happy with me for mentioning her in one of my columns) goes by almost every day to see her and to visit with almost all the other residents. They all light up when she comes in the room.
Some time ago my wife noticed that her mom was getting more and more tired. She would go to bed around six and sleep late. That was unusual for a girl who was raised on a farm, rising early each morning to milk the cows. We knew something was up.
One Friday evening we were heading out of town when her cell phone rang. It was the facility. They had called an ambulance. They said grandma had been exhibiting stroke like symptoms. We met her at the hospital. After examining her (and she was as mad as could be – “Leave me alone!”), the doctor told us that she was having an arrhythmia, one chamber of her heart wasn’t coordinating with another. The solution was a pacemaker. Without it, she would (in a sense) slowly drift off to sleep and eventually die. With it, she would live for several more years.
My wife faced a dilemma. Grandma’s friends have all pretty much passed away. If any are still alive we don’t know it. Grandpa died a few years ago. As I mentioned, my wife visits her almost every day, and we take her to church and out for brunch every Sunday, but grandma is terribly lonely. The doctors were pushing hard to implant the pacemaker.
My wife’s dilemma was this: does she pass on the pacemaker so her mother could die peacefully and join her beloved husband and friends in Heaven; or does she approve the pacemaker and consign her mother to at least a few more lonely years. That is a tough dilemma. In the end, after consulting with her siblings, she approved the pacemaker. But whenever grandma asks for grandpa (she forgets), I know it breaks her heart.
However, it needs to be noted that the only reason that my wife could make these kinds of decisions was that her mother had designated her as her surrogate for health care decisions using a health care durable power of attorney (a “DPOA”). Without taking the time to execute a healthcare DPOA, all of those decisions would’ve been left up to the hospital. I guess it’s normal, but it seemed as if since the doctors could fix the problem, for them at least, there wasn’t even a question. In Missouri, it is presumed that a person wants all of the life extending procedures and machines unless there is clear evidence to the contrary.
So if you want to retain some control over these kinds of decisions, you absolutely need to have a health care power of attorney authorizing a trusted loved one or friend to make these decisions when you are no longer able. In addition, a living will gives guidance to your family and friends regarding these final wishes and this can be very comforting.
Please feel free to call me if you want to set up an appointment to discuss this further. It’s the right and responsible thing to do.
Fred L. Vilbig © 2019
Many years ago the firm I was with was approached by a Chicago law firm about merging. I admit the managing partner of the firm (I’ll call him Joe) at a wedding in my wife’s hometown. He seemed nice enough, but pretty intense.
The next week he called me. We started the process of investigating a possible merger. This is called “due diligence.” There were meetings between the partners, financial records review, and overall philosophies to consider and compare. It takes a lot of time and effort to think through something like that. You don’t want to make a mistake since undoing a merger is even worse than doing one.
We were almost done with all of that due diligence at the beginning of summer. Joe told us that we would need to take a short pause because his partners were making him take a vacation. Evidently, he hadn’t taken a vacation in years, and his partners were concerned about the amount of stress in his life. He and his family were going to Florida. He said he’d be in touch when he got back.
I was expecting a call after about two weeks. Nothing. Three weeks went by, and there was still nothing. Soon a month had passed, and still nothing. Finally, I called to see what was going on. I got his secretary, and in a very somber tone, she said that she would have someone call me back.
A day or so later I got a call from one of Joe’s partners. He told me that while sitting on the beach on vacation, Joe had suffered a massive heart attack and had died. We were stunned, to say the least. Evidently, the stress of taking a vacation had been too much for him and his heart.
Vacation season is one of those times of the year when people need to think about estate planning. If parents with small children are traveling alone, they need to make sure that everything is in order. When kids go on vacations alone or study abroad for the summer, they at least need to have a power of attorney - to handle financial matters when they are out of town or unconscious - and a medical directive - so someone can make medical decisions when they can't.
There is an old saying - "An ounce of precaution is worth a pound of cure." So a little planning can go a long way. Give me a call.