A couple of strategies frequently employed with social security benefits in retirement planning are known as file and suspend and restricted applications. With file and suspend, an individual who has reached full retirement age files for social security benefits and then immediately suspends receipt of the benefits until a future date. The person’s spouse would then claim a spousal benefit. The benefits of the main beneficiary would continue to grow at the rate of 8% per year while suspended. With the restricted application strategy, if the spouse had reached full retirement age and was entitled to his/her own benefits, the spouse would file for the spousal benefits only, allowing his/her own to continue to grow as well. Under the terms of the Bipartisan Budget Act of 2015 (the Act) the ability to implement these strategies is being eliminated. However, there are some exceptions. For individuals who are 62 or older, by the end of 2015 the restricted application strategy will continue to be available. Additionally, if you file and suspend within 180 days of enactment of the Act, you will be grandfathered. If you might benefit from either of these strategies, we encourage you to speak with a competent financial advisor soon before the opportunity goes away.
We just finished our fall workshops on estate and succession planning for farmers and ranchers. I was amazed again at the great response. People have real desire to learn how best to deal with the issues involved in transitioning a family farm or ranch to the next generation. My hope is always that people leave our workshops feeling empowered; that they feel like there is a way through what may seem an insurmountable challenge. Each family is unique and requires unique planning, but there are certain truths that exist in every case. There are four basic areas that need to be addressed:
- Business Planning,
- Retirement Planning (which includes long term care planning),
- Succession Planning, and
- Estate Planning.
At Hallock & Hallock as we move with you through our defined process we are able to develop a strategy that will work for your unique situation.
Often the reason for fear and anxiety is a lack of knowledge. One of the best ways to begin your quest for knowledge in this area is to join with others in a group learning environment. That is one of the reasons we enjoy putting on our workshops. We see that light go on for families and the fear starts to leave. We will be having another series of workshops starting in January and hope more will join us. You should also consider attending the two-day workshop in December put on by Utah State University Extension in St. George. That event will take place on December 5th and 6th. For more information about the USU workshop you can click here. We hope to see you soon.
It’s been a little crazy around H&H this week with our fall workshops in full swing. I thought for today’s post I would pass along some recent news from the tax world heading into 2015.
- The Annual Gift Tax Exclusion will remain at $14,000 per person.
- The Estate, Gift and Generation Skipping Tax Exemption will increase to $5.43 million per person.
- The limit on annual contributions to a 401(k) plan will increase to $18,000 and if you are 50 or older you will be able to contribute up to $24,000.
- IRA contributions remain capped at $5,500 or up to $6,500 if you are 50 or older.
We are still waiting to see if any of the expired tax provisions will be extended by the current lame duck Congress. Stay tuned.
Last week the United States Supreme Court issued the long awaited decision in the case of Clark v. Rameker. The decision resolved a conflict among the lower courts as to whether or not an inherited retirement account was exempt from creditor claims in Bankruptcy. Generally, your own retirement account (Traditional IRA, Roth IRA, 401K, 403B and the like) is exempt from the claims of creditors, meaning it cannot be seized by judgment creditors or lost in a bankruptcy. However, it has been unclear whether this same protection is available to retirement accounts you inherit from another.
The relevant facts of the Clark case are as follows: In 2000, Ruth Heffron established an IRA and named her daughter, Heidi Heffron-Clark, as the sole beneficiary. Ms. Heffron died in 2001 and her IRA passed to her daughter. Clark elected to take monthly distributions from the account. Subsequently, in October 2010, she and her husband, filed for bankruptcy. At the time they filed their bankruptcy petition, the inherited IRA was worth approximately $300,000. They claimed that the inherited IRA was exempt from the bankruptcy estate. The bankruptcy trustee and unsecured creditors objected, arguing that the monies in the inherited IRA were not retirement funds and thus should be available to satisfy creditors.
In a unanimous decision, the Supreme Court found in favor of the bankruptcy trustee and unsecured creditors. The decision was based upon three points:
- The holder of an inherited IRA may never invest additional money in the account.
- Holders of inherited IRAs are required to withdraw money from the accounts, no matter how far they are from retirement.
- The holder of an inherited IRA may withdraw the entire balance of the account at anytime—and use it for any purpose—without penalty.
This decision makes clear what we have been advising our Clients for some time, if providing asset protection to your beneficiaries is important, the Retirement Plan Legacy Trust™ is an important tool for you.
The Retirement Plan Legacy Trust™ is a stand-alone trust drafted specifically to comply with the complex rules regarding qualified plans and IRAs. In addition to the asset protection that was not available to the Clarks, establishing a Retirement Plan Legacy Trust™ and naming it as the beneficiary of an IRA or qualified plan can provide a number of benefits. These include:
- Protecting the individual trust beneficiary from his or her temptation to waste “found money.” The Trustee you name is in control of how quickly monies can be disbursed from the Trust.
- Predator protection – Even if the individual beneficiary does not have spendthrift tendencies, there are many out there whose interest lies in separating the beneficiary from their money and property.
- Divorce protection – With the national divorce rate above 50%, it is impossible to determine which marriages will stand the test of time. A Retirement Plan Legacy Trust™ keeps the inherited IRA from being divided or even lost in a divorce.
If you have a retirement account and are concerned about the effects of the Clark decision on your plan, please give us a call.
Last year in this Blog I wrote about the efforts of Sen. Max Baucus (D-Mont.) to limit the ability of non-spouse beneficiaries of IRAs to stretch out withdrawals over their lifetime. Presently a non-spouse beneficiary can enjoy years, if not decades, of tax deferred or tax free growth on inherited IRAs (traditional or Roth). Last week, the Senate took up this cause again in relation to its efforts to fund the extension of low interest rates on student loans. Though it did not pass, 51 Senators voted in favor of a bill that would require, with limited exceptions, retirement accounts inherited by an individual other than a spouse to be completely distributed within five years of the death of the owner. Distribution means the end of the tax deferral or in the case of Roth IRAs the tax free growth. It is estimated that this limit would raise nearly $5 billion over the next decade. This proposed limit was also found in President Obama’s 2014 budget as well as other proposals to simplify the tax code. The proposals did not seek to limit the options that presently exist for spouses.
All of this leads to the conclusion that the days of the stretch IRA may be numbered and the way we plan for retirement assets will have to change. In the interim, there is still planning that can matter regardless of what happens with the stretch:
1. Review and Update Beneficiary Designations. The most important thing you can do is regularly review and update your beneficiary designations with your advisors. A misstep may result in even your spouse losing the roll over or stretch options.
2. Consider Charitable Giving. If you are thinking about making a charitable contribution anyway, consider making it from your traditional IRA. You or other non-charitable beneficiaries will pay tax on these distributions where the charity will not.
3. Consider Using Retirement Account Assets to Fund the Purchase of Life Insurance. This technique allows you to leverage and replace dollars lost in taxes with an asset (life insurance) that will not be subject to income tax.
4. Consider a Retirement Plan Legacy Trust™. While some of the benefits of mandating the stretch in such a trust may eventually be lost, a Retirement Plan Legacy Trust™ can still provide your beneficiaries with protection from creditors, predators, a divorcing spouse, etc.
Retirement plans are an increasingly important part of every individual’s estate. Careful planning is required to make sure that tax benefits are maximized and the desired results obtained.
I have been working the last several days on a presentation titled Estate Planning for Retirement Plans to be presented at the free financial education series on retirement preparation sponsored by USU Charter Credit Union and Utah State University Extension. In doing so I was struck again by the unique estate planning needs of blended families. Blended families can involve children from a prior marriage as well as joint children. Blended families involve both younger and older couples, and nearly everyone in between.
Most parents want to ensure that at least some of their assets will pass to their children. However, with blended families absent good estate planning, there is no guarantee that their children will inherit their assets. In fact, if the couple creates common “I love you” wills such that their assets pass to the survivor of them, there is a significant likelihood their children will be totally disinherited. This is because all of their assets will pass to the surviving spouse to do with as he or she pleases. This is also the case with beneficiary designations on assets like retirement accounts or life insurance.
With proper planning, however, provision can be made to ensure that your spouse is cared for while and the same time making certain that the estate ultimately makes its way to your children. A sound plan would almost always include a pre-nuptial or post-nuptial agreement (preferably a pre-nuptial agreement) as well as a Living Trust. The great philosopher Yogi Berra once said: “If you don’t know where you’re going, you might not get there.” This reminds me of estate planning. Proper planning involves understanding our unique situation, knowing the objectives we want to achieve and then using the right tools to get us where we want to go. Blended families have unique issues and challenges – failure to plan properly will result in arriving at an unintended destination.
Sen. Max Baucus, D-Mont., chairman of the Senate Finance Committee has added a provision to The Highway Investment, Job Creation and Economic Growth Act of 2012 that will reduce the value of inherited IRAs, commonly referred to as stretch IRAs by no longer permitting tax deferred stretches of IRAs for beneficiaries other than a spouse, minor children or the disabled. Others, such as adult children, would only be permitted a five-year window to defer. The provision would require beneficiaries to pay taxes on inherited IRAs over five years instead of spreading them over their lifetime. If passed, the provision would apply to deaths after Dec. 31, 2012. During the markup of the bill, Baucus said that “IRAs are intended for retirement,” adding that IRAs are being “used by some taxpayers to give tax-free benefits” to future generations.
While many in the financial industry are mobilizing to stop the efforts of Sen. Baucus, stay tuned. If this passes it will have major implications on how we plan for retirement accounts.