Strange Inheritances

Sometimes, estate planning attorneys deal with some unusual items. Our clients have collections of items, like baseball cards, books, or dolls. Some of these items can be quite rare and valuable. Other times, the items may not have significant monetary value, but they may have great emotional value due to the connection with the individual and their past.

There are two ways to handle these items in an estate plan, if the items are tangible personal property. First, they simply may be listed on the tangible personal property list which is referenced in the estate plan and on which the client lists the items with sufficient specificity to identify the items. The client lists to whom the items are to pass and then signs it and dates it. In most, if not all, states, this tangible personal property list referenced in other estate planning documents, like a trust, need not have the normal formalities of a Will or trust. That is a very easy way for a client to achieve their goal. It is also very flexible, as the client can change their mind and do so without redoing their entire plan. They simply complete a new list and sign it and date it.

However, even if the item is tangible personal property, if the item is of particularly high monetary or emotional value, you may consider listing it with specificity as a specific bequest in the trust or Will. This can help avoid (or diminish) a family conflict because of the increased formalities involved.

A relatively new television program on the Fox Business cable network, Strange Inheritances, examines some odd bequests. While these are mostly tangible personal property, some are not. If you think you have had a client with a particularly unusual bequest, Strange Inheritances wants to hear from you and your client. You might be on the program! Also, please post about your unusual bequests in the comments.

By: Stephen C. Hartnett, J.D., LL.M.

Two Roth Conversion Tax Scenarios: Communication is Key

Good communication with your tax preparer is essential to make sure that your tax return is prepared correctly. This is important whether you meet with your tax preparer in person or, as many people do, whether you mail in/drop off your pertinent tax information to have your return prepared.

Even if you’ve kept track of all your records perfectly, have every receipt and tax form that’s needed and are well organized, without proper communication, there could easily be errors on your return through no one’s fault in particular.

Consider the following two scenarios:

In the first scenario, you’re 65 years old and have an IRA that consists entirely of pre-tax money. To help pay for some of your bills, you decide to take a distribution of $20,000.

In a second scenario, you’re the same age, 65, and you have the same IRA consisting entirely of pre-tax money, except this time, you convert $20,000 to a Roth IRA.

When tax time comes around, you will want to properly report either of these transactions to make sure you avoid any problems with the IRS, right? Of course you do, but here’s the problem, in both of the scenarios above, you’ll receive an IRS Form 1099-R showing a distribution of $20,000. Furthermore, both 1099-R forms will show a Code 7 in Box 7 to indicate a “Normal distribution.” In every way, shape and form, the two 1099-R forms will be identical.

So how then, will your tax preparer know that you made a Roth conversion? Well, you have to tell them! Now you might be thinking to yourself why, if the 1099-R forms are the same, would it matter? The simple answer is that even though the 1099-R reporting from your IRA custodian to the IRS is the same in both scenarios, your reporting of the transactions on your personal income tax return is different. With the Roth IRA conversion, you have to file IRS Form 8606, whereas that form is not necessary if you simply take a distribution (that’s not converted).

So remember, it’s not just good marriage advice, but good tax advice too... communication is the key to success!

By Jeffrey Levine, IRA Technical Expert

Why You Should Update Your Estate Plan

When you execute your estate plan, there is a real sense of accomplishment. Ironically, once one has completed this valuable document. They file it in a safe place and fail to review it for needed updates. Meanwhile, major life events, like a marriage or divorce, birth of a child, sale or purchase of property, winning money, inheriting assets, or starting a business may occur.

Some mistakes which one will miss by not reviewing their estate plan are very costly. One critical mistake that many people make is that they sell their home and forget to put their new home in the trust. This would cause the new home to go through probate to be transferred to the intended beneficiaries. Another problem that we, as your financial advisor, often find during a financial review is the beneficiary designation was not changed when that the heir pre diseased the owner of the plan. Another small correction in designating beneficiaries, can circumvent the possibility of having benefits taken by an ex-spouse (if your child and heir are diseased), which may cut your grandchildren out completely. You can ensure that benefits stay within your family and children, by using the legal term “per stripes” after the name of the heir. In some cases, outdated or inadequate estate plans have led to highly publicized disputes between heirs, causing squandered fortunes and diminished legacies. These situations are more tragic because they are usually entirely preventable. Tragedies seem worse when we know that they were stoppable.

Estate planning can be stressful for family members to discuss. Many times disputes arise, and conversations on the plan may become difficult. A good advisor can help bridge family divide and show the family, through education, how the benefits of clearly defining their trusts and beneficiaries, can result in a more peaceful transfer of assets.

Trusts help to avoid taxation or reduce it. The key of a successful wealth transfer is to treat it as a generational family strategy. Generation stretching may be considered for taxation reductions and to provide continued legacy years ahead.

The reasons that one may not update their plan may be the cost of re-doing an estate plan as well as the difficult decisions one has to make. However, the biggest reason that people fail to update their estate plan is that their advisor failed to bring it to their attention. Some advisors may not have the knowledge of estate planning and may avoid talking to their clients about this.

There are two major times you should review your plan.

When serious life event changes have occurred, such as a divorce, etc. Every few years to make sure you are taking advantage of any changes in tax laws.

Contracts such as Life insurance or annuities do not necessarily have to be in your trust as they have designated beneficiaries, however, the designations should align with designations in the trust. Beneficiary designations should be reviewed often to make sure that your wishes are carried out, and life will be much less complicated for the inheritors.

By Janice Gough