A new federal law known as the SECURE Act took effect on January 1, 2020. The new law makes changes to the rules governing retirement accounts like IRAs and 401(k) plans. Three changes that affect the most people are:
- Individuals can contribute to traditional IRAs at any age, even after they retire.
- The age when required minimum distributions begin has been raised from 70.5 to 72.
- Qualified retirement plans and IRA benefits generally have to be distributed within 10 years of the employee or IRA owner’s death.
The first and second changes are self-explanatory. However, the third change needs further explanation. Under the old rules, if a retirement account had a designated beneficiary, then the beneficiary’s life expectancy could be used to “stretch-out” the distributions of an IRA (and the tax consequences of those distributions) over the beneficiary’s remaining lifetime. The SECURE Act ends the beneficiary’s ability to “stretch-out” the distribution of the IRA, and instead mandates distribution within 10 years after the death of the owner, with a few particular exceptions, such as in the cases of a surviving spouse, a minor child, or a disabled beneficiary.
The new rules do not require annual distributions over the 10-year period, but just that everything in the IRA or retirement plan be distributed within 10 years. Some people may have created trusts that took advantage of the “stretch-out” rules by requiring annual distributions of income to the beneficiary. It might be worth reviewing your estate planning documents with the drafting attorney to make sure that the documents still achieve your goals.
Marianna is an associate at the Law Offices of J. Christopher Miller, PC. 678-746-2900 NorthFultonWills.com
Part of estate planning is having a well-drafted Will signed and ready to-use. Just as important, though, a good estate plan makes sure that beneficiary designations are in place and up-to-date. The reason is that a Will only controls assets that are owned by an individual when they pass away that are NOT designated to a beneficiary. Old beneficiary designations and hastily completed forms can have serious consequences on how assets get distributed when a person passes away.
Name adults or Trusts as beneficiaries. One common pitfall we see is people naming minor children as beneficiaries of life insurance policies or retirement accounts. This is a problem because when a minor is put in the place of owning assets in his or her own name, then the Probate Court will require a conservatorship. A conservatorship is a court-supervised account that cannot be accessed without court permission and then is distributed to a child on his or her 18th birthday, whether the child is ready to manage those funds or not. A Trust can be created inside of a Will or in a separate document to let a named Trustee manage the funds for a minor and follow specific instructions about how and when to distribute the funds to their intended beneficiary.
Name contingent beneficiaries. Another mistake that people make is to name a primary beneficiary on their accounts and then leave the contingent beneficiary designation blank. We find this especially true when clients are married without children. A contingent beneficiary is a person (or people) who stand next in line to receive assets after the death of an account holder if the primary beneficiary is not alive. If no contingent beneficiary is named, then those assets often fall back into the probate estate of the decedent, and get distributed as part of a Will’s directions, or to the closest living relatives of a decedent.
Name new beneficiaries as life events unfold. People who have second and third children should pay attention to the beneficiaries they have designated, because beneficiary designations do not automatically include subsequent children. Likewise, beneficiary designations should be updated after a marriage or a divorce, because Georgia law tries to interpret your wishes about how your estate distributions should be impacted, but Georgia law does not yet automatically revoke or change beneficiary designations that apply to bank accounts flowing outside of probate.
Every now and again, a person will die with a Will signed long ago. The Georgia Probate Code recognizes this possibility and gives Executors and the lawyers they hire a path to admit old Wills to probate.
A change of circumstances does not automatically revoke a Will. If a Georgia resident gets a divorce and then dies before changing his or her Will, then the former spouse is treated as deceased for the purposes of interpreting the Will, but the other terms of the Will are still respected. That means a former spouse’s relative might still be an Executor or beneficiary of the Will.
If a person gets married and then dies before changing his or her Will to include the new spouse, then the new spouse is entitled to claim the same share as if the decedent had no Will. However, the rest of the Will, including the choice of Executor, is still is a valid instruction and remains in full effect.
If a person has a new child and doesn’t mention that child in his or her Will, then that child has a right to claim a part of the estate, even if a spouse survives and inherits the estate while the other children receive nothing. People who might have children should make sure that their Wills include a sentence that contemplates future children, and that way, the future children will be treated the same as children named in the Will.
A faded old Will can still be used to control a person’s estate. If the Will is accompanied by a Self-Proving Affidavit, which is a document showing that both witnesses were in the same room as the person signing the Will and the person signing the Will knew what they were doing and were acting on their own, then probate can flow smoothly. Alternatively, the Executor can either track down one of the witnesses, or if they are both unavailable, then supply affidavits from two people who can attest to the decedent’s signature. This alternative honors the wishes of someone who signed a Will and then lived a long and interesting life.
Estate planning for single parents is sometimes twice the work. It is not only important to think about providing care for your children, but also providing care for yourself. In a two-parent household, it is understood and preferred that the surviving parent take care of the children or an ailing spouse. However, it is not as clear cut in a single parent situation.
When thinking about estate planning, parents tend to think about their children first. If they have young children, they want to appoint a Guardian for the children in their Wills. An appointment through the Will does not automatically make the nominated person the Guardian, but it does serve as strong evidence during a Guardianship process that the nominated Guardian is the best person for the job.
The next thing to consider is who will be taking care of the children financially. When you leave behind money to a minor, you want to create a Separate Trust in your Will and name a Trustee to hold the funds until your child is old enough to manage the money on their own. If trusts are not created, then the probate court will set up a conservatorship. The Judge decides who holds the funds for the child, restricts the investment of those funds, and hands the money to the child after their 18th birthday. The surviving parent is first in line to serve as conservator, which is not always preferred, especially in the case of a divorce.
Single parents often do not think about taking care of themselves, as the focus is on the children. However, it is also important to think about appointing financial and health care agents for you during your lifetime, so that there will be someone acting for you in a time of need. Some good agent candidates are a sibling, trusted friend, or an adult child.
Marianna Chaet is an associate at the Law Offices of J. Christopher Miller, PC.
We all like to get away. Many people purchase out-of-state vacation properties to do just that. They often consider the tax consequences of the purchase, but do not give much thought to the effect it will have on their estate planning.
If a person passes away with real estate in his or her name, then their Executor may have to get authority to act on behalf of the estate in that particular state. Some states accept the doctrine of “muniments of title,” which means they accept the home state’s probate and do not require a new probate for the Executor. Other states require the Executor to open a second probate matter entirely. In either case, the Executor has to deal with multiple attorneys in multiple states to transfer the property.
A common way to fix this problem is to create a trust and record a deed placing the out-of-state property into the trust. The property owner still has full control of the property during his or her lifetime as trustee of his or her trust. However, when he or she passes away, the property flows outside probate because it is in the name of the trust. The successor trustee can then deal with the property without having to open multiple probates.
If a person owns property in multiple states without a trust then the Executor’s job becomes exponentially more expensive and time consuming as he or she has to get court permission to act in multiple states. Putting out-of-state property into a trust saves that person much time and headache.
In Georgia, a surviving spouse gains rights because a spouse is an heir-at-law, or a closest living relative, of someone who passes away. However, a surviving spouse does not automatically get everything. That is really an urban myth, even though there is a grain of truth in it. That grain of truth only arises if all the facts align just right.
In many cases, people want a surviving spouse to get everything, and that is why the default rules are built that way. For example, if a person dies without any Will and without children, then a new spouse can claim the estate because the surviving spouse is the only closest living relative and the deceased spouse has written nothing different.
If a new spouse is not mentioned in an existing Will which does not specifically state a future marriage is contemplated, and if that person has no children, then the probate code gives a surviving spouse the right to claim the decedent’s estate after debts and expenses are paid.
People can override the default rules by signing a valid Last Will and Testament. A Will spells out who takes charge of the estate and who receives property from the estate. The Will can be signed either before or after the marriage, and it should specify that a person is either already married or about to get married. By mentioning the marriage, a Will’s directions then control the estate and the default rules fall away.
Other ways to exercise more control over how assets flow are by designating beneficiaries of retirement accounts or insurance policies and by adding joint owners to various assets. Beneficiary designations transfer assets outside a Will, and take priority over the probate laws. Software programs and on-line services that help you draft a Will for a low cost often leave out language that describes these rules, and they don’t tell you about options that might exist outside the Will. They are not as effective as a professionally drafted document, so getting married is yet another reason to sit down with a good advisor and make changes to your Will.
Benjamin Franklin and Daniel DeFoe taught us to rely on two certainties: death and taxes. However, dying does not necessarily lead to taxes. In fact, the federal estate tax exemption in 2019 is $11.4 million per person, which means that assets flowing through more than 99% of the estates this year will not be subject to estate taxes. A handful of states impose their own estate and inheritance taxes, but Georgia is not among them.
As a general rule, assets received as an inheritance do not typically show up on a person’s income tax return. Usually, it is only the dividends and interest earned on inherited property that count as income.
The biggest exception to this rule applies to traditional IRAs and 401(k)s. Because the income flowing into these retirement plans is not taxed at the time it is earned, distributions from those plans are treated as taxable income to the beneficiaries. Just as income tax is due if a retiree pulls money out of a traditional IRA, income tax is also paid by a beneficiary in the year that a beneficiary withdraws funds from that IRA.
The income tax burden on traditional IRAs (as opposed to Roth IRAs), means that the slowest distribution schedule is also the most tax efficient. Individual beneficiaries can use their remaining life expectancies to calculate the minimum IRA distributions and defer most of the income tax liability into future years. Leaving an estate as beneficiary or having no beneficiary at all is sometimes the worst plan because the entire IRA is subject to the “five-year rule” and must be distributed within 5-6 years. The estate then pays the income tax on each of those distributions in the year that they are made. Trusts can also be named as beneficiaries, but the rules there get complicated fast. Some Trusts are subject to the five-year rule, and other Trusts qualify to let the life expectancy of the oldest beneficiary stretch out the IRA distributions. It is a good strategy to review your beneficiary designations with a competent adviser and think about how your legacy could be more tax efficient for your beneficiaries.