Law News and Tips
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 are 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 trusts 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.
A CHRISTMAS GIFT?
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 with 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.
Fred L. Vilbig © 2019
If you have young children, you probably don’t want them to have a lot of money dropped in their laps all at once. If they’re under 18, that means a court-supervised conservatorship. The court would have to approve investments and distributions. Courts typically will only allow insured investments that don’t keep up with inflation, such as money market funds. And all of the trust distributions must be approved by the court or the conservator can be personally liable. And you’ll have to hire an attorney to do anything.
Even if your children are over 18, they may not be ready to handle large sums (and $10,000 can be huge to some people). The frontal lobe of the brain is the part of the brain that asks, “is this a good idea?” before you jump off a cliff or do something else thoughtlessly. In general, that part of the brain doesn’t fully form until you reach 25 years of age or so. That’s why teenagers and young adults make so many bad decisions.
Another problem with a large inheritance is that he can actually ruin a child. If they receive a sizable sum outright to early, it can ruin their work ethic. I have seen that happen all too often.
And then there is the child with special needs. If one of your children is receiving (or is likely to receive in the future) some governmental benefits, any inheritance can disqualify the beneficiary until all that money is gone.
In all of these cases, distributions in trust for the benefit of the child makes perfect sense. Some clients worry that setting up a trust requires a trust company of some sort. However, an individual family member can serve as the trustee. Even when the kids reach an age where you think they’ll be responsible, you might want to leave the assets in trust, but let your child be his or her own trustee. As long as they are not the ones who created the trust, the trust assets will be protected if there’s a divorce or in the case of a lawsuit.
And in the case of a child with special needs, in order not to cause them to lose their governmental benefits, restrictions need to be put onto the use of those assets to just supplement, but not replace, any government benefits. Under those circumstances, a properly drafted special needs trust is critical.
In all of these cases, creating a trust for the benefit of a child makes perfect sense. If you want to learn more about trusts, feel free to order my book by clicking here or on Amazon. If you want to set up an appointment to see if a trust is right for your children, please call my office at (314) 241-3963. I look forward to hearing from you.
Fred L. Vilbig © 2019
529 Plans are sometimes referred to as “education IRAs.” And that’s a good way to look at them. Parents and grandparents can put money into a plan for the benefit of a child or grandchild, and the money grows tax-free. Even when the beneficiary takes the money out of the Plan, as long as he or she uses the money for education, all of the growth avoids taxes. If they use it for something else, then the growth is taxable as ordinary income.
Before saying more, I need to make a disclosure. I don’t set up 529 Plans for clients. I had to ask a financial planning friend of mine, John Fischer, about the rules to set them up. And wouldn’t you know it? The rules vary from company to company and from state to state. I don’t want to get too complicated on this part, but here goes.
When you are funding a 529 Plan, you are actually making a gift to the beneficiary. In 2019, gifts of up to $15,000 ($30,000 in the case of a married couple who splits the gift) are exempt from the federal gift tax. If you put more than that into a 529 Plan and the beneficiary is a family member, you can actually spread the gift out over 5 years, but you can’t exclude more than $10,000 per year in that case. Anything over that is technically “subject to” the gift tax. Unless the plan has a limit to it, you can give more, but it creates a gift tax issue.
But there’s a funny thing about the gift tax: all it does is it eats into your federal estate tax exemption. No taxes are actually due until you have given away the maximum estate tax exemption which is currently $11,500,000. That’s a really big number. Only 0.1% of Americans who die in any year will owe any estate tax. For the rest of us, this is not a real issue. So practically speaking, for most people, there are no tax limits to what you can put into a 529 Plan. And don’t worry about filing a gift tax return. The penalty for failing to file is a percentage of the taxes due. No taxes due, then no penalty. But I digress.
When I have a client come to me with a 529 Plan, we have to decide how to plan for it. So long as they are alive, they can always change the beneficiary. But if they die with money still in the plan, what happens to those assets? It turns out that you can name a successor owner of the account. And that successor can be your trust. That way if the beneficiary dies before everything is withdrawn, if you are not able to change the beneficiary due to your death or incapacity, the successor owner can make the change. Without planning properly, the Plan assets could end up in probate. And that’s what we want to avoid.
So my advice is that if the plan permits it, name your revocable trust as the successor account owner. That way, if the primary beneficiary dies and you can’t or don’t change the Plan, so long as you’ve named your trust as the successor owner, the trustee can take care of those assets. The problem, though, is that I don’t know if all 529 Plans allow for a trust to be a successor owner. You’ll have to talk to your financial advisor about that.
Having said all of that, it is important to note that helping a child or grandchild with college or graduate school or a vocational or trade school is always appreciated.
Call if you have questions.
Without a plan in place things fall apart.
Fred L. Vilbig © 2019
Life is short. The older I get, the more evident that becomes. When I was young, 30 seemed so old; 60 seemed like forever away and 70 was an eternity, and 80 or 90 was just incomprehensible nonsense. And then suddenly, it’s here. We don’t necessarily feel that old. In fact, in our heads, we’re still 25 or 30, but the mirror tells us something entirely different. How can all of that happen?
And when you start to think about the brevity of life, you can start to think about what your life has meant. We take ourselves entirely too seriously (and probably rightfully so) to just see ourselves as some passing mist – here today and gone and forgotten tomorrow. Many people start to think about their legacy – when we’re gone, how will people remember us?
That was brought home to me recently when working with some business owners. They had spent most of their adult years nurturing and growing a business, and now time was catching up. They wanted to plan what to do carefully so there wasn’t a train wreck when they died, but they were having trouble letting go. This is very common.
One of the business owners had a child involved in the business and two others who weren’t. He really wanted things to end harmoniously for the family as a whole, protect the son in the business because of the grandchildren, and also protect the employees, some of whom had been with him for years. It was sort of complex calculus.
Another business owner didn’t have any family active in the business, but the business was the principal asset of his estate. The most likely successors to his business were some key employees. So he wanted to plan a fair transition that protected employees while also providing an inheritance for his family.
Although there may be similarities in different business plans like this, I have found that subtle differences in focuses can have major impacts on the resulting plan. The dynamic relations between family members can result in vastly varying solutions. The complex politics of a business can require a carefully finessed plan that makes individuals feel valued without undermining the operation of the business. And then there’s the question of getting it all financed.
And I’ve seen many times where business owners just run out of time. Once a fifty-year-old trial attorney I knew dropped dead on the beach because he was so stressed out about his partners forcing him to take a vacation. Several times we have had healthy people simply go to sleep never again to wake up. And without a plan in place (sure they had thought about it), things fell apart: the business was sold to outsiders at a discount and the surviving family got shortchanged.
So what is your legacy? Will you be soon forgotten for lack of a plan, or will you be fondly remembered through the continuation of the business you have (almost miraculously) grown into a success? I’d love to have a chance to talk with you about this.
HOME FOR THE HOLIDAYS
Fred L. Vilbig © 2018
The holidays are great. The food, getting together with family, other people’s decorations. Yes, I said other people’s decorations. We have a peak on our roof that is about 30 feet up, and it must be at least 100 feet down. Yes, I’ll get the decorations up, but it is a death defying feat if I say so myself.
So where was I? Oh, yes: the holidays. My wife’s favorite holiday is Thanksgiving because it just involves cooking a big meal, and she’s a great cook. That’s lucky for my kids since I am not such a great cook, and it really stresses me out trying to get everything on the table at the same time while it is still hot.
But either at Thanksgiving or Christmas, the family gets together for a big meal. The out-of-town kids fly or drive in, and the in-town kids come over for a full house like it used to be. It seems that our holiday dinners last a long time with people staying around the table reminiscing about things. My wife and I often listen to the stories about what the kids did when they were young. Later we’ll check with each other and find out that neither of us knew anything about those things. Often we’re surprised, but at least no one got seriously hurt.
In addition to all of the good times that we have at the holidays, they are also a good time to check up on family members, particularly our parents. For some, we see our parents on a regular basis. We may not notice the little, subtle changes that may be taking place. For others who see their parents only once or twice a year, the accumulation of these little changes can be shocking.
When you’re home for the holidays, you may want to pay attention. Are they eating right? Are they dressing appropriately for the weather? As we age, we all get a little forgetful, but are they getting forgetful to the point that it is a problem? Have they gotten lost when going to the store? Do you see big changes in habits that seem to be ways of compensating for something? Did they use to be social, and now they are a homebody? Do you see big changes in their personality?
As we age, there are changes, but the question is whether they are creating problems. If not, it might still be a good idea to check to make sure that everything is in order. Do they have a will and/or a trust? Do they have a durable power of attorney? Do they have a medical directive that includes a medical power of attorney and a living will? And it’s important for the children to know who is going to be primarily responsible if something happens.
These may be tough, maybe even awkward questions to ask, but they are important. Surprises are not welcome, particularly when it is too late to fix things. In prior columns, I have written about times we have fortunately discovered problems before it was too late. And in other columns, I have written about those times we were too late to fix the problem directly, but we were able to find ways to work around the problem. But there are times when we discover the problems too late to fix other than by going to court, and the client ends up paying a lot of money in legal fees. So even though the questions may be tough and awkward, not asking them can end up costing a lot of money and aggravation.
So enjoy your holidays, but you might want to ask some questions … before it’s too late.