Source: http://estate-planning.ultratrust.com/author/rvbeatrice/
Timestamp: 2019-04-20 04:17:46+00:00

Document:
An Estate Plan is a plan, clever enough for your unanticipated life events and dull enough to think your heirs merited what you left them. Most people perceive a “will” as their estate plan in its entirety. Many also believe that a properly executed will naming heirs to your assets is enough to overcome the challenges deserving of who get’s what after your death in satisfaction of what they think you owe them. Not to exclude the IRS and other agencies.
After the widespread litigation and underemployed lawyers, a will in its simplest description, is nothing more than a wish list of their dreams because it’s easier than self-deceit. A will can be contested, must be probated (made public) so that the wish list can be challenged by heirs, and all potential real and unexpected creditors. The cost, time delays, and subsequent clearance of all real and not so-real challenges to the probate process. A will, properly drafted or not, is worth the flush of toilet paper, says Rocco Beatrice, Managing Director for Estate Street Partners, Boston.
In (RE Honigman: Court of Appeals of New York, 1960, 8 N.Y.2d 244, 168 N.E.2d 676, 203 N.Y.S.2d 859): A husband cut his wife out of his will because he believed that she was cheating. After he died, the wife argued that he was suffering from insane delusions, but the court did not believe her argument. She then appealed the verdict and had the will overturned to collect the assets.
Gilmer v. Brown: A woman who was advancing in age and who had been financially taken advantage of decided to obtain a guardian to safeguard her money. After a guardianship had been set up for her, she executed a will. At her death, the family challenged the will saying that she did not have the capacity to enter into a will because she had a guardian. The court case continued for years tying up the estate. Finally the appellate court ruled that the standards for capacity are not the same as the standards for guardianship and the estate was finally passed through the will.
In Re Estate of Marsh: An elderly woman with alzheimer’s disease wanted to some of her assets to a person who had helped her buy a condo. Her family began to fight over this and she decided to write a second will leaving the assets to her son and daughter-in-law and none to her daughter or husband. She wrote that she hoped that this would stop the fighting. At her death, her husband probated the will. The daughter and son contested the will saying that she was incompetent to sign a will and/or she had been unduly influenced by her son. The mere fact that the woman had alzheimer’s disease and that her son had voiced his wishes to receive assets from the sale of the condo was enough for the appellate court to sent the case back down to the lower court to be retried.
Eliminate potential frivolous lawsuits from known present, past, and unknown future potential creditors, including IRS and other government, or quasi-government agencies i.e. Medicaid.
It must consider the income tax consequences up to and after the death of the individual’s accumulated wealth. It must be able to reduce, if not eliminate, the gift tax consequences, the income tax consequences, the estate tax consequences, future generation income and ad-valorem taxes, and must be flexible enough to accommodate future legislated assaults.
It must consider your family dynamics of present and future generations. Age of the individuals owning the assets, minor children, future generations, provision for incentives for how, when, and circumstances of distributions. What if you have a rocky marriage, second marriage, minor children requiring guardianship, ungrateful or problem children, children of a prior marriage, rocky marriages of your adult children, financial capability of your children, legal entity ownership of your assets, higher than normal risk of owned businesses, complicated financial arrangements, future income streams, your personal needs and desires.
It must consider government present legislation and compliance, future legislative proposals, regulations, taxation, and other general assaults on your wealth.
You get what you pay for. A will is cheaper than a full blown estate plan requiring professional due care addressing past, present, and future considerations. A will can cost you anywhere from $250 to $2,000 but changes nothing, because title to your assets remains with the most exposed individual, you. Anything titled in your name, or associated, or remotely connected to your name, is subject to a frivolous lawsuit or worse, judicial or legislative confiscation i.e. Medicaid, taxation, or regulation. That’s why I state, a will is not worth the paper it’s written on.
Reposition your ownership / legal title to your assets.
Eliminate or reduce frivolous lawsuits.
Eliminate the Medicaid spend-down provisions and related state recovery.
Reduce your current and anticipated future income tax liability.
Take advantage of current reportable gift-tax exclusions ($5,250,000 for 2013) and anticipate compliance or the elimination of future law changes.
Dictate from your grave, the disposition and use of your assets.
Provide incentives for your children or other heirs.
Be flexible to make changes as they become necessary to be in compliance with new laws and regulations.
Be in compliance for the next 100 years.
Provide a back-up exit plan.
The largest benefit of a will is it is an efficient way to choose a legal guardian for a minor child, therefore those with minor child should include a will as a part of their estate planning. Hire a professional to do your estate planning. One that has the intellect to distinguish a robotic, one size fits all, copy and paste, … to experience gained by gray haired experience and creativity driven by hunger, love, pain, and fear.
A comprehensive estate plan is imagination meeting reality.
Protect your assets for yourself and your children and beneficiaries and avoid tax dollars. Assets can be protected from frivolous lawsuits while eliminating your estate taxes and probate, and also ensuring superior Medicaid asset protection for both parents and children with our Premium UltraTrust Irrevocable Trust. Call today at (888) 938-5872 for a no-cost, no obligatioin consultation and to learn more.
Rocco Beatrice, CPA, MST, MBA, CWPP, CAPP, MMB – Managing Director, Estate Street Partners, LLC. Mr. Beatrice is an “AA” asset protection, Trust, and estate planning expert.
DYE, J. Frank Honigman died May 4, 1956, survived by his wife, Florence. By a purported last will and testament, executed April 3, 1956, just one month before his death, he gave $5,000 to each of three named grandnieces, and cut off his wife with a life use of her minimum statutory share plus $2,500, with direction to pay the principal upon her death to his surviving brothers and sisters and to the descendants of any predeceased brother or sister, per stirpes. The remaining one half of his estate was bequeathed in equal shares to his surviving brothers and sisters and to the descendants of any predeceased brother or sister, per stirpes, some of whom resided in Germany.
When the will was offered for probate in Surrogate’s Court, Queens County, the widow Florence filed objections. A trial was had on framed issues, only one of which survived for determination by the jury, namely: “At the time of the execution of the paper offered for probate was the said Frank Honigman of sound and disposing mind and memory?” The jury answered in the negative, and the Surrogate then made a decree denying probate to the will.
Upon an appeal to the Appellate Division, Second Department, the Surrogate’s decree was reversed upon the law and the facts, and probate was directed. Inconsistent findings of fact were reversed and new findings substituted.
We read this record as containing more than enough competent proof to warrant submitting to the jury the issue of decedent’s testamentary capacity. By the same token the proof amply supports the jury findings, implicit in the verdict, that the testator, at the time he made his will, was suffering from an unwarranted and insane delusion that his wife was unfaithful to him, which condition affected the disposition made in the will. The record is replete with testimony, supplied by a large number of disinterested persons, that for quite some time before his death the testator had publicly and repeatedly told friends and strangers alike that he believed his wife was unfaithful, often using obscene and abusive language. Such manifestations of suspicion were quite unaccountable, coming as they did after nearly 40 years of a childless yet, to all outward appearances, a congenial and harmonious marriage, which had begun in 1916. During the intervening time they had worked together in the successful management, operation and ownership of various restaurants, bars and grills and, by their joint efforts of thrift and industry, had accumulated the substantial fortune now at stake.
The decedent and his wife retired from business in 1945 because of decedent’s failing health. In the few years that followed he underwent a number of operations, including a prostatectomy in 1951, and an operation for cancer of the large bowel in 1954, when decedent was approximately 70 years of age.
From about this time, he began volubly to express his belief that Mrs. Honigman was unfaithful to him. This suspicion became an obsession with him, although all of the witnesses agreed that the deceased was normal and rational in other respects. Seemingly aware of his mental state, he once mentioned that he was “sick in the head” (“Mich krank gelassen in den Kopf”), and that “I know there is something wrong with me” in response to a light reference to his mental condition. In December, 1955 he went to Europe, a trip Mrs. Honigman learned of in a letter sent from Idlewild Airport after he had departed, and while there he visited a doctor. Upon his return he went to a psychiatrist who Mr. Honigman said “could not help” him. Finally, he went to a chiropractor with whom he was extremely satisfied.
On March 21, 1956, shortly after his return from Europe, Mr. Honigman instructed his attorney to prepare the will in question. He never againjoined Mrs. Honigman in the marital home.
To offset and contradict this showing of irrational obsession the proponents adduced proof which, it is said, furnished a reasonable basis for decedent’s belief, and which, when taken with other factors, made his testamentary disposition understandable. Briefly, this proof related to four incidents. One concerned an anniversary card sent by Mr. Krauss, a mutual acquaintance and friend of many years, bearing a printed message of congratulation in sweetly sentimental phraseology. Because it was addressed to the wife alone and not received on the anniversary date, Mr. Honigman viewed it as confirmatory of his suspicion. Then there was the reference to a letter which it is claimed contained prejudicial matter – but just what it was is not before us, because the letter was not produced in evidence and its contents were not established. There was also proof to show that whenever the house telephone rang Mrs. Honigman would answer it. From this Mr. Honig man drew added support for his suspicion that she was having an affair with Mr. Krauss. Mr. Honigman became so upset about it that for the last two years of their marriage he positively forbade her to answer the telephone. Another allegedly significant happening was an occasion when Mrs. Honigman asked the decedent as he was leaving the house what time she might expect him to return. This aroused his suspicion. He secreted himself at a vantage point in a nearby park and watched his home. He saw Mr. Krauss enter and, later, when he confronted his wife with knowledge of this incident, she allegedly asked him for a divorce. This incident was taken entirely from a statement made by Mr. Honigman to one of the witnesses. Mrs. Honigman flatly denied all of it. Their verdict shows that the jury evidently believed the objectant.
Under the circumstances, we cannot say that this was wrong. The jury had the right to disregard the proponents’ proof, or to go so far as to hold that such trivia afforded even additional grounds for decedent’s irrational and unwarranted belief. The issue we must bear in mind is not whether Mrs. Honigman was unfaithful, but whether Mr. Honigman had any reasonable basis for believing that she was.
It is true that the burden of proving testamentary incapacity is a difficult one to carry (Dobie v. Armstrong, 160 N.Y. 584), but when an objectant has gone forward, as Mrs. Honigman surely has, with evidence reflecting the operation of the testator’s mind, it is the proponents’ duty to provide a basis for the alleged delusion. We cannot conclude that as a matter of law they have performed this duty successfully. When, in the light of all the circumstances surrounding a long and happy marriage such as this, the husband publicly and repeatedly expresses suspicions of his wife’s unfaithfulness; of misbehaving herself in a most unseemly fashion, by hiding male callers in the cellar of her own home, in various closets, and under the bed; of hauling men from the street up to her second-story bedroom by use of bed sheets; of making contacts over the household telephone; and of passing a clandestine note through the fence on her brother’s property – and when he claims to have heard noises which he believed to be men running about his home, but which he had not investigated, and which he could not verify – the courts should have no hesitation in placing the issue of sanity in the jury’s hands. To hold to the contrary would be to take from the jury its traditional function of passing on the facts.
The proponents argue that, even if decedent was indeed laboring under a delusion, the existence of other reasons for the disposition he chose is enough to support the validity of the instrument as a will. The other reasons are, first, the size of Mrs. Honigman’s independent fortune, and, second, the financial need of his residuary legatees. These reasons, as well as his belief in his wife’s infidelity, decedent expressed to his own attorney. We dispelled a similar contention in American Seamen’s Friend Soc. v. Hopper (supra, p. 625) where we held that a will was bad when its “dispository provisions were or might have been caused or affected by the delusion” (emphasis supplied).
The order appealed from should be reversed and a new trial granted, with costs to abide the event.
FULD, J. (dissenting). I am willing to assume that the proof demonstrates that the testator’s belief that his wife was unfaithful was completely groundless and unjust. However, that is not enough; it does not follow from this fact that the testator suffered from such a delusion as to stamp him mentally defective or as lacking in capacity to make a will.
Moreover, I share the Appellate Division’s view that other and sound reasons, quite apart from the alleged decision, existed for the disposition made by the testator. Indeed, he himself had declared that his wife had enough money and he wanted to take care of his brothers and sisters living in Europe.
In short, the evidence adduced utterly failed to prove that the testator was suffering from an insane delusion or lacked testamentary capacity. The Appellate Division was eminently correct in concluding that there was no issue of fact for the jury’s consideration and in directing the entry of a decree admitting the will to probate. Its order should be affirmed.
Chief Judge Desmond and Judges Froessel and Burke concur with Judge Dye; Judge Fuld dissents in an opinion in which Judges Van Voorhis and Foster concur.
In re ESTATE of Roy MARSH, deceased.
Blue Valley Lutheran Homes Society, Inc., a Nebraska nonprofit corporation, Intervenor-Appellant.
1. Wills. Generally, where a part of a will is invalid, the valid bequests should be sustained unless to do so would defeat the testator’s intent and interfere with his general scheme of distribution, or work an injustice to other heirs.
2. Wills: Judgments: Appeal and Error. Findings that certain portions of a testamentary document are the products of undue influence are determinations of fact. As such, the standard of review is whether the findings are supported by sufficient evidence, which are not to be disturbed unless clearly wrong.
3. Wills: Judgments: Appeal and Error. The finding that a partially valid testamentary document is or is not to be given dispositive effect is equitable in nature and, on appeal, reviewed de novo on the record.
Michael L. Jeffrey of Jeffrey, Jeffrey, Hahn & Hemmerling, P.C., Lincoln, and William C. Waller, Jr., and Denis H. Mark of Wagner & Waller, P.C., Englewood, Colo., for appellants.
David E. Cording, Hebron, for intervenor.
Joseph Ginsburg of Ginsburg, Rosenberg, Ginsburg, Cathcart, Curry & Gordon, Lincoln, for appellees Buckles.
BOSLAUGH, HASTINGS, WHITE, CAPORALE, SHANAHAN, and GRANT, JJ.
This is an appeal taken by the contestants, the testator’s heirs at law, and the intervenor, Blue Valley Lutheran Homes Society, Inc., from the judgment of the district court which, applying special jury findings, declared portions of a will of Roy [342 N.W.2d 375] Marsh, deceased, invalid as being the result of undue influence exercised by Peggy Sweetser, one of the proponents-appellees. That court held the remaining portions thereof valid. Another beneficiary under said will, Willa Buckles, is the remaining proponent-appellee. For the reasons discussed hereinafter we find the entire will invalid, and therefore reverse the trial court’s judgment and remand the case for further proceedings not inconsistent with this opinion.
The facts, though somewhat complex, are not in serious dispute. In the early 1950s the decedent, a lifelong bachelor and Thayer County farmer, estranged himself from his brother and sister due to a dispute, the details of which are unimportant to this case. That estrangement continued until Marsh’s death on November 6, 1980, and is evidenced by the provisions in every testamentary document Marsh executed since the 1950s, each of which contains a specific statement that his family was to receive none of his estate.
In the early 1950s Marsh became acquainted with Willa Buckles, nÃ©e Jaycox, then a high school student and waitress at a Hebron, Nebraska, cafe. In a 1953 will Marsh provided that she receive a $5,000 devise. After she married, Marsh provided the couple with the use of a quarter section of farmland. Codicils to Marsh’s 1953 will, executed in 1966 and 1969, provided that the Buckleses receive over 1,000 acres of Marsh’s farmland, and Willa’s cash devise was increased to $10,000. This 1953 will devised the residue of the estate, after distribution of specific bequests, to the city of Hebron.
On the same day, Marsh executed a new will. This 1970 will devised a quarter section of land to Blue Valley, as their agreement provided. The specific devises of money remained the same, including the $10,000 devise to Willa Buckles. The land devised to the Buckleses remained the same, but, in addition, they were also to receive all of Marsh’s farming equipment and machinery. This will eliminated the city of Hebron as a beneficiary and provided that the first $250,000 of the residue of Marsh’s estate, after the payment of the specific devises and expenses, go to Blue Valley, and the remainder be divided equally between Blue Valley and the Buckleses.
In 1972 Marsh moved into the Blue Valley home and there met Peggy Sweetser, a nurse’s aide and, later, a licensed practical nurse. Sweetser initially endeared herself to Marsh by preparing him a bowl of potato salad, and soon thereafter entered into the group of persons who were the objects of Marsh’s generosity. Prior to his death, Marsh gave Sweetser a car, the free use of a house, a salary for minimal duties, and other gifts. After Marsh’s death Sweetser became the owner of bank deposits and mutual funds in the amount of $130,000, upon which she had been named either joint owner or death beneficiary. Both the Buckleses and Blue Valley received substantial gifts from Marsh as well.
In April of 1978 Marsh executed a codicil to the November 1977 will, naming Willa Buckles and Sweetser as his personal representatives. In April of 1980 Marsh executed a codicil providing for contingent beneficiaries should the primary beneficiaries predecease him.
While the record is not entirely clear on the matter, it appears that the November 1977 will, including its later codicils, was found by the county court for Thayer County to be Marsh’s valid last will. That decision was appealed to the district court wherein Willa Buckles and Sweetser became the proponents of that will and Marsh’s heirs at law became the contestants. Blue Valley filed a petition in intervention which took the same position as that taken by the heirs in attacking the 1977 will as being the product of undue influence.
Trial was had to a jury which, by special verdict, found that both codicils to the 1977 will, in their entirety, and the devises to Sweetser, both specific and residual, of that will were the products of Sweetser’s undue influence upon Marsh. The trial judge reserved for himself the question of the validity of the remaining portions of that will. He ruled that the November 1977 will, less the tainted provisions, was the valid last will of Marsh, and certified that result to the county court.
The dispositive assignment of error made by Blue Valley and Marsh’s heirs at law is the assertion that the district court erred in ruling that the 1977 will was only partially invalid.
We note that Sweetser has not filed a brief in this court and that none of the parties attack the jury’s finding that certain portions of the 1977 will and each of its codicils were the product of Sweetser’s undue influence on Marsh.
The parties are in disagreement as to the appropriate standard of review in this court of the trial court’s determination that the 1977 will was only partially invalid. Blue Valley and the heirs contend that the finding is one of law and, thus, the district court’s finding is no restraint on our inquiry into its propriety on appeal, as we must make our own determination of legal matters. See Elrod v. Prairie Valley, 214 Neb. 697, 335 N.W.2d 317 (1983). The Buckleses, on the other hand, contend that the ruling determined a question of fact and, thus, we are bound by the trial court’s finding unless it is not supported by sufficient evidence. Minor v. Bickford, 195 Neb. 402, 238 N.W.2d 243 (1976). No one claims that the trial judge invaded the jury’s province by taking upon himself the decision of whether the 1977 will, less the devises and codicils found by the jury to be the product of undue influence, was valid.
The procedure employed by the trial judge has been implicitly approved by us in Spinar v. Wall, 191 Neb. 395, 215 N.W.2d 98 (1974), and In re Estate of George, 144 Neb. 887, 15 N.W.2d 80 (1944). However, we have been directed to no case, and we find none, which specifically and directly holds that the issue of partial or total invalidity of a will containing void provisions is a question for the court. For the answer to this question we look at the rule of partial invalidity as adopted in Nebraska. In re Estate of George states at [342 N.W.2d 377] 898, 15 N.W.2d at 87: ” ‘The general rule that, where a part of a will is invalid, the valid bequests should be sustained, has its limitations; and when the rule will defeat the testator’s intent, and interfere with the general scheme of distribution, or work an injustice to other heirs, it should not be applied.’ ” We now hold that whether a will which is only partially valid should be given any dispositive effect presents a question which is equitable in nature, a matter for the court. The standard of review in such a case is thus a hybrid one. The findings that certain portions of a testamentary document are the products of undue influence are determinations of fact. As such, the standard of review is whether the findings are supported by sufficient evidence, which are not to be disturbed unless clearly wrong. Jameson v. Giacalone, 215 Neb. 33, 337 N.W.2d 120 (1983); In re Estate of Bouma, 206 Neb. 209, 292 N.W.2d 37 (1980). The finding that a partially valid testamentary document is or is not to be given dispositive effect is equitable in nature and, on appeal, reviewed de novo on the record, subject to the rule that where credible evidence is in conflict on material issues of fact, this court will consider the fact that the trial court observed the witnesses and accepted one version of the facts over another. Burton v. Annett, 215 Neb. 788, 341 N.W.2d 318 (1983).
Our de novo review, conducted in accordance with the foregoing rule, leads us to the conclusion that the November 1977 will, less the provisions which are the product of Sweetser’s undue influence, should not be upheld.
It is apparent that, since 1953, Marsh desired that the bulk of the residue of his estate be used for some public, charitable purpose. His 1953 will provided that the city of Hebron, after satisfaction of that will’s specific devises, was to receive the residue of his estate. By his 1970 will a large portion of his estate was to go to Blue Valley. It is only after the influence of Sweetser began to work on Marsh that these charitable devises were reduced in Marsh’s wills. In the November 1977 will, instead of Blue Valley receiving the first $250,000 and half of the remainder of the residue of Marsh’s estate, as provided under the 1970 will, Blue Valley was to receive only $25,000 of the residue, and the Buckleses and Sweetser were to receive the remainder. Since the residual provision for Sweetser was declared invalid, it appears, though we do not decide, that the Buckleses would receive the entire residue after the $25,000 devise to Blue Valley. See Neb. Rev.Stat. § 30-2344 (Reissue 1979), which provides that, with certain exceptions, if a devise other than a residuary one fails for any reason, it becomes part of the residue. If § 30-2344 would not apply, it appears that Marsh’s estate would be subject to a partial intestacy and that portion would pass to his heirs, Marsh’s manifestly adamant wishes to the contrary notwithstanding. See Neb. Rev.Stat. § 30-2301 (Reissue 1979), which provides that any part of an estate not effectively disposed of by will passes to the testator’s heirs.
Neither alternative fulfills Marsh’s intent, absent the undue influence, as either would violate the general scheme of distribution he has embraced since the early 1950s. As such, the November 1977 will fails completely and is of no force or effect. See O’Brion, Appellant, 120 Me. 434, 115 A. 169 (1921).
If estate planning or asset protection crossed your mind the last few years, now is time to do something. A few hours could save your family millions as the marginal estate taxes and gift taxes are dramatically increasing in 2013.
“If you want to take advantage of this year’s gift tax reduction, I suggest you run, not walk to a competent estate planner,” warns Rocco Beatrice, Executive Manager of Estate Street Partners. The $10,240,000 gift tax exemption for couples ($5,120,000 for a single person) in 2012 is unprecedented. How unprecedented? At 12:01am on January 1st, this same exemption drops to $2,000,000 ($1,000,000 for a single person). “It seems that the smart business person is also a procrastinator when it comes to estate planning. All year I have talked to people who told me they need an estate plan but with the year ending, they are just coming through the door now,” proclaims Mr. Beatrice.
The people that are streaming through the doors are anyone with more than $1,000,000 in assets. In 2012 a couple can not only give more, but if they go over, the tax rate is only 35%. In 2013 any gift over $1,000,000 will incur a 55% tax rate. “With a house, investments and savings, people who don’t consider themselves wealthy go over that magic two-million mark. Without gifting their money this year, their estate could be taxed 55%, and that is not a small number. These are the forward-thinking people making calls and appointments,” explains Mr. Beatrice.
Estate planners offer many different strategies, but arguably the number one strategy to take advantage of the current large gift tax exemption is an irrevocable trust. These trusts are sophisticated instruments with many nuances that are written specifically for each client. They allow the grantor (person funding the trust) the ability to gift assets under the tax exemption for this year, but the assets are held for the beneficiaries, sometimes for many generations. Because of their sophistication, they take time to draft, time that clients and estate planners are running out of.
An irrevocable trust can accomplish many different goals all at the same time. Funded sooner rather than later, it allows a person to qualify for Medicaid when the time comes for nursing home care. A trust can protect assets in the event of a lawsuit or bankruptcy. It also provides a roadmap for how a person would like their funds used after they are gone. A trust can even provide for the care of a beloved pet. “People calling up trying to take advantage of the gift tax exemption are discovering all of the options open to them. This is great for them, but these requests add to the time it takes to draft them,” explains Mr. Beatrice.
What is an Independent Retirement Account? What is the difference between inheriting an IRA from a spouse and a non-spouse? What if there is more than on qualified beneficiary in the distribution of an IRA? What is a non-qualified beneficiary?
If you inherit an IRA from a spouse, you have the option of taking the IRA as your own and also making further contributions to the account. If you choose to take the IRA as your own, you may choose beneficiaries and extend the tax-deferred benefits of the account. Another option available from inheriting an IRA from a spouse is the opportunity to begin receiving distributions from the account. Distributions must begin on the later date of when the original owner would have turned age 70 &fract12; or by December 31st of the year following the date when the owner died.
If you feel financially secure, you may choose to disclaim the inherited assets and pass on the IRA to the next designated beneficiary. Disclaiming an IRA or any assets in general is irrevocable. Prior to making this decision you should consult with a financial advisor such as Estate Street Partners who will be able to describe the tax advantages and disadvantages of this choice.
If you inherit an IRA from a non-spouse, such as a parent, relative, or other individual, your options are much more limited. A non-spouse beneficiary of an IRA can transfer the assets into an Inherited IRA Beneficiary Distribution Account or disclaim all or part of the inherited IRA.
If you transfer the inherited IRA into a Distribution Account, you can begin receiving distributions according to the one year or five year rule. If you choose to receive distributions under the one year rule, you must begin receiving distribution payments by December 31rst in the year following the year when the IRA owner died. Distribution amounts are determined by the age of the beneficiary.
Under the five year rule the beneficiary must receive the full interest of the IRA by the end of the fifth year following the year when the IRA owner died. If you choose to disclaim all or part of the inherited IRA you have only nine months following the death of the IRA owner to make this decision. It is an irrevocable decision and the disclaimed assets will pass to the next eligible beneficiary. Unlike a spouse – spouse transfer of an IRA, if you are a non-spouse beneficiary of an IRA you cannot make additional contributions to the account.
If there is more than one qualified beneficiary (an actual person), the rules for distribution get more complicated. Designated beneficiaries must be determined by September 30th of the year following the year when the IRA owner died, and multiple beneficiaries have until this date to create separate Distribution accounts for their shares of the IRA.
If the beneficiaries create separate accounts then the distribution amounts will be determined individually and based on each beneficiary’s life expectancy. If the beneficiaries do not create separate account by September 30th of the year following the IRA owner’s death, the distribution amount from the inherited IRA will be determined by the life expectancy of the oldest beneficiary. This creates a disadvantage for the younger beneficiary since the distribution amount will be higher, and therefore the tax required on the distribution will also be higher.
If the IRA owner named a qualified and non-qualified beneficiary (not an actual person), there are a couple of options available for both parties. Typically, if the owner died before their required distribution date (age 70 ½) the balance of the IRA must be distributed within five years of his/her death. If the owner died after they started receiving distributions (age 70 ½) the balance of the IRA will be distributed according to the age of the beneficiary.
If a non-qualified beneficiary is named the distribution rules can get complicated. For example, if a church is named as a beneficiary along with a surviving son, both beneficiaries must receive distributions according to the five year rule. However, if the church elects to receive its share of the IRA prior to September 30th of the year following the owner’s death, the son can be determined the designated beneficiary and use his life expectancy to determine future distributions.
If no beneficiary is named than the IRA will most likely pass to the estate of the deceased. In this situation the IRA loses its tax deferred benefits, is subject to taxation on all interest accrued to that point, and is open to collection from creditors. To avoid creating a tax headache for your beneficiaries it is important to consult with a financial advisor such as Estate Street Partners to designate specific beneficiaries for your IRA to prevent the savings from being lost to your estate.
Click the following link to read Part 1 of our article 2010 Tax Act: Estate Planning & Asset Protection. We discuss in Part 1: How does the 2010 tax laws by Obama affect estate planning for 2010, 2011, 2012?
Many clients who have learned that the Tax Act will only last two years will wait until the end of 2012 to plan. This is not a good idea. Time and economic fluctuations concern the estate-tax laws and have an effect on the ability to meet estate planning objectives. Family loans, GRATs (Grantor Retained Annuity Trusts) and charitable lead annuity trusts (CLATS) are affected by interest rates. Since December the interest rates have risen dramatically and long-term interest rates were 3.53%. For the same types of transactions in January, the interest rates were already at 3.88%. Additional spikes over time will erode the advantages that planning strategies could obtain. When estate planning, time is of the critical. It is suggested that planners urge clients to act as soon as possible to avoid the implications of higher interest rates in the future.
GRATs (Grantor Retained Annuity Trusts) will remain a good, potential planning strategy for those with a high net worth. Many financial planners believed that GRATs would be eliminated or restricted, but they were not axed in the new tax law. However, the restriction or elimination of the GRATs (Grantor Retained Annuity Trusts) will in effect after December 2012. High net worth clients who would benefit from GRATs should plan on using them while they can. Financial advisors must also help clients evaluate GRATs and understand what the advantages and disadvantages are of using GRATs in comparison to gifts of installment sales to grantor trusts when considering the five million dollar tax exclusion. If the assets that are inside the GRAT do not surpass the federal interest rate or if the taxpayer should decease while the annuity term is in effect, this estate planning strategy will not be fruitful. With an absolute gift, actual growth will lie outside of the estate and an installment sale to grantor trust will generally surpass a GRAT (Grantor Retained Annuity Trust) since the interest rates that are used are lower. In this case, the estate planning strategy can still be beneficial even if the client were to decease before the load of the installment sale is fully paid back and, opposite to the effects of a GRAT, the GST (generation skipping transfer) can be . Unlike a GRAT, the taxpayer’s exemption can be beneficially exploited.
There are some people who will deduce that a $5 million exclusion will allow them to annul their life insurance that is used to pay for the estate-tax encumbrance. People are advised not to make these deductions. The estate-tax rules are still there and may return in 2013. Financial advsiors should cautiously reevaluate life insurance coverage and take a look at forecasts in order to analyze the actual need for life insurance and to evaluate whether trusts that were originally grantor trusts should be changed to non-grantor. If the client has a life insurance policy that is not in trust, the $5 million exclusion could change insurance planning. Financing or split-dollar insurance could be undone by making a gift to an insurance trust. This trust would not be taxed on account of the new exemption.
For many years, planners have recommended the use of bypass and marital deduction trusts when planning. Many clients should have wills that will include these types of trusts. Planners need to take the time to explain to the client why the new provisions of the law are actually traps for unwary taxpayers. They should not be relied upon and traditional bypass trust planning remains important.
The 2010 Tax Act has changed estate planning completely, but these changes will only last for two years. Some clients who take advantage of this situation could benefit in many ways. Advisors should help all clients understand the changes that have been made and the opportunities that are now available as a result.

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