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Avoiding Charitable IRA Beneficiary Mistakes in 5 Easy Steps

This holiday season, you may be considering using your IRA to benefit your favorite charity. If you decide to do so, there are certain traps you should avoid to maximize benefits to both the charity and the other beneficiaries of your IRA. 

Can IRAs be used to benefit a charity?
IRAs can be a great source of funds to provide a benefit for a favorite charity, but using these funds can create a number of traps that must be avoided in order to maximize benefits to both the charity and other IRA beneficiaries.

 

Here are 5 steps you can take to maximize your benefits:

1. Name the charity directly on your beneficiary form. The money will go directly to the charity, avoiding both the time and expense of probate. Additionally, the distribution to the charity will not be considered income to the estate of the deceased IRA owner. 

2. Set up separate accounts. Consider transferring the portion you intend to leave to charity into a separate IRA account. If other beneficiaries inherit the same IRA as a charity and the charity’s portion is not “cashed out” or split within the IRS prescribed time frames, the stretch IRA for the living beneficiaries will be lost. 

3. Reverse your bequests. If you have made provisions for certain charities under your will and also have retirement plans, an effective tax strategy would be to reverse the bequests with non-retirement assets. This way, the charity receives the same amount that you were going to leave them in your will, but your heirs will end up with more, because the money they will inherit will not be subject to income tax, as the retirement plan would be.

4. Don’t convert assets you plan to leave to a charity. Many charitable organizations and religious groups are structured tax-exempt organizations. When an IRA is left to one of these charities, the charity does not have to pay income tax on the distribution as other beneficiaries would. As a result, if you intend to leave your IRA to charity, converting it to a Roth IRA is generally not a wise move. Why pay income tax on the conversion when the money will be going to the charity tax free anyway?

5. Beware of naming a charity as a trust beneficiary. A charity is known as a “non-designated beneficiary,” because it does not have a life expectancy. In general, trusts are also non-designated beneficiaries. Certain trusts, known as see-through (or look-through) trusts allow for post-death distributions to be stretched based on the trust beneficiary with the shortest remaining life expectancy. Since a charity has no life expectancy, if it is named as a beneficiary of a trust that is also inheriting an IRA, it can eliminate the stretch for the remaining trust beneficiaries.

 

For professional assistance with your charitable gifting and legacy planning options, click here to contact us.

 

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Leaving a Legacy: 3 Differences Between Life Insurance and Roth IRAs

Life insurance and Roth IRAs have a basic structure in common: they are both wealth transfer tools that help facilitate an efficient transfer of assets from one generation to the next and can provide a tax-free legacy.

Despite their similarities, life insurance and Roth IRAs are very different, and the rules that apply to one don’t always apply to the other. In fact, this is the case more often than not. Below, we discuss the three main differences between these two retirement planning vehicles. 

#1
Roth IRAs are always included in your estate. Thanks to the current $11.2 million federal exemption amount — the amount that can pass estate tax-free to beneficiaries — estate tax concerns are nowhere near what they used to be. The overwhelming majority of Americans will not owe any federal estate tax when they die. Still, there’s a small segment of the population that has to contend with such concerns. Plus, a number of states still impose state estate taxes, and many of those states have set their own exemption amounts much lower than that of the federal level. In such cases, life insurance may offer an advantage over Roth IRAs.

Here’s the deal in a nutshell. The “I” in IRA stands for individual. This means it’s always yours, and the value of your Roth IRA is always included in your estate. If you’re above the federal estate tax exemption amount or your applicable state estate tax exemption amount, your beneficiaries could end up owing estate tax — at the federal level, state level or both — on what you thought were “tax-free” Roth IRA assets.

In contrast, life insurance can be structured so that it’s outside of your estate. Not only does this produce an income tax-free benefit to your heirs but also one that is not subject to estate tax, regardless of the value of your estate when you die. In other words, it is a truly tax-free benefit. There are a variety of ways to accomplish this, including having an irrevocable trust purchase the life insurance policy. To figure out the option that is best for you, consult with your insurance advisor, tax professional or estate planning attorney — or better yet, all three!

 

#2
There’s a limit to the amount you can contribute to a Roth IRA. When it comes to the tax code, there is a giant hole for life insurance. Insurance carriers may limit the amount of insurance they’ll offer you based on a variety of factors, including your health, annual income and net worth. That has absolutely nothing to do with the tax code. As far as Uncle Sam is concerned, you can have as much insurance as you want, or perhaps, as much as you can get. In contrast, if you want to make annual Roth IRA contributions, you’re fairly restricted. For 2018, you cannot contribute more than $5,500 ($6,500 if age 50 or older by the end of the year) to a Roth IRA. You can, however, convert any existing IRA or eligible retirement plan funds to a Roth IRA.

Additionally, there’s no rule on what type of income you need to purchase life insurance or how much or how little you need to have. Roth IRA contributions, on the other hand, do have such restrictions. Roth IRA contributions can only be made with income that qualifies as “compensation,” which is typically earned income. In contrast, life insurance premiums can be paid with any type of income, including interest, dividends and Social Security, all of which are not considered compensation. If you had no income, you could simply pay for life insurance premiums from your existing assets (although in reality, if you have assets, you’re almost certainly going to have some income, even if it’s just interest).

There are issues on the other side of the spectrum too. If you have too much income, from whatever sources, you are prohibited from making any Roth IRA contributions. To learn more about those limits, please contact us. With life insurance, there’s no limit to the amount of income you can have. In fact, all things being equal, you can generally qualify for more life insurance with a higher income.


#3
There are no RMDs for life insurance.  When you leave a Roth IRA to non-spouse beneficiaries, such as children, they must generally begin taking RMDs (required minimum distributions) from the inherited Roth IRA no later than the year after they inherit. These distributions are usually tax free, but they must be taken nonetheless. When beneficiaries inherit life insurance, there are no RMDs to worry about. While not having to deal with RMDs is nice, it doesn’t necessarily make life insurance a better option for your planning than a Roth IRA.

Consider the following: when a beneficiary inherits life insurance, the only amount they’ll receive tax free is the actual life insurance proceeds. If they don’t need the money right away, they might invest the proceeds, but whatever interest, dividends, capital gains or other income those investments generate will be taxable (unless they are invested in assets that don’t produce taxable income, such as municipal bonds). In contrast, while the inherited Roth IRA will have RMDs to deal with, those amounts may be relatively minimal. 

For example, take someone who inherited a Roth IRA at age 50. RMDs would start out at roughly 3% of the account value. The rest of the Roth IRA can be left alone to grow. That growth can later be distributed tax free as well. A beneficiary of a $500,000 life insurance policy will only receive $500,000 income tax free, while a beneficiary inheriting a $500,000 Roth IRA may receive many times that amount in tax-free distributions over the course of their lifetime, particularly if they stick to taking only the RMD each year and no more.

 

A Final Thought

The first step to maximizing your legacy is to meet with a professional advisor. Click here to contact us and schedule your Free Introductory Call so that we can assess your situation and help you make the best decision for you and your loved ones. 

If you’re looking to leave a legacy to your heirs when you die, there are many tools to consider. Life insurance and Roth IRAs are two of the many options available. In some cases, life insurance may not be available due to poor health. In other cases, such as when your beneficiaries will be in a lower bracket than you are now, there may be a greater net benefit by leaving them larger amounts of tax-deferred accounts, like IRAs, instead of a smaller amount like Roth IRAs. The bottom line is that every situation is different and there’s no one-size-fits-all solution. Do your homework, seek competent advice and make a decision that best fits your individual situation and goals.

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Planning For Multiple Beneficiaries in 5 Easy Steps

For some people, leaving a legacy is as simple as naming their spouse as their sole beneficiary, but for many, there is a list of loved ones they want to include. Beneficiary planning can be tricky, and if you’re planning to leave your assets to more than one person, you need to ensure that you’re setting everything up correctly.

When do multiple beneficiaries exist? 
Multiple beneficiaries exist when an individual names more than one beneficiary for their IRA.

When should you name more than one beneficiary? 
When you want your IRA assets to go to more than one person or entity without having to incur additional fees or paperwork by maintaining separate accounts for each beneficiary.

 

Here are 5 steps you can use to plan for multiple beneficiaries: 

1. Due date for designated beneficiaries. September 30 of the year following the year of the IRA owner’s death is the date designated beneficiaries are determined for purposes of post-death stretch payments. 

2. Due date for non-designated beneficiaries. These beneficiaries should be cashed-out before the September 30 date mentioned above. These beneficiaries include charities, estates and non-qualifying trusts since they have no measurable life expectancies. If they are not cashed out in time, they could prevent other beneficiaries from being able to stretch out distributions.

3. Due date for separate inherited IRAs. These should be established and funded for each designated beneficiary by December 31 of the year following the year of the account owner’s death. These accounts must retain the decedent’s name as part of their title and include language identifying them as “inherited” or “beneficiary” accounts, but they must use the beneficiary’s social security number for reporting purposes.

4. Maximize the stretch. Each designated beneficiary identified by September 30 can utilize his or her own single life expectancy to maximize the stretch IRA if a separate account is established and funded by December 31. The single life expectancy factor is determined in the year following the year of the account owner’s death. Going forward, the factor is simply reduced by one each year (unless the sole beneficiary is the spouse, in which case he/she re-determines his/her life expectancy each year).

5. What if you don’t split the account in time? The single life expectancy of the oldest beneficiary must be used to calculate payments to all beneficiaries if separate inherited accounts are not established in time.

 

Still have questions or need help with your unique situation? Click here to contact us and schedule your Free Introductory Call so that we can assess your situation and help you make the best decision for you and your loved ones. 

 

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The Spousal IRA Beneficiary Decision Tree

When you’re grieving the loss of a spouse, questions about how their financial assets will be passed on to you may be the last thing on your mind. But if your husband or wife was the owner of an IRA, there are important decisions you will need to make about your inheritance.

It’s critical that you understand the options available so that you can make the most out of your assets. In the document below, there are a series of questions that can help guide you through your decision making process. 

Click here to download “The Spousal IRA Beneficiary Decision Tree.”

Here are a few factors that will effect the options that you have and the decision you will need to make. You may not know the answers to all of these questions right now, but in order to use the “The Spousal IRA Beneficiary Decision Tree.” effectively, you'll need to be able to answer all of the questions below:

  • The age of you and your spouse at the time of passing.
  • What matters most to you right now in terms of this inheritance?
  • Would you prefer avoiding penalties?
  • Do you plan to give this inheritance to your beneficiaries?
  • Would you like to delay the rollover?

It can be difficult to understand your options and what is best for your unique situation. In order to make the best decision to protect your assets and the assets of your loved ones, it is best to consult with an experienced advisor that will put your needs first.

Click here to schedule your free, no-obligation Introductory Call with Portnoff Financial.

 

 

 

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4 Requirements of a See-Through Trust

Are you looking to have control over your IRA assets after they’ve been passed along to your beneficiaries? You’ve worked hard to build your nest egg, and you want to ensure that your assets are utilized in the best way possible—but how?

A see-through trust is a trust that is treated as the beneficiary of your IRA and can provide you with a higher level of control over your assets. However, there are certain requirements that must be met in order for a trust to qualify as “see-through.” If it doesn’t, the IRA will be treated as if there was no designated beneficiary, and the payout will be based on the rules that apply in that situation. 

To qualify as what the IRS refers to as a “see-through” trust for IRA distribution purposes, the trust must meet the following four requirements outlined in Regulation Section 1.401(a)(9)-4, A-5.

We've summerized the requirements below: 

1. The trust is valid under state law or would be but for the fact that there is no corpus. 

2. The trust is irrevocable or the trust contains language to the effect it becomes irrevocable upon the death of the employee or IRA owner.

3. The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s or IRA owner’s benefit are identifiable.

4. The required trust documentation has been provided by the trustee of the trust to the plan administrator no later than October 31st of the year following the year of the IRA owner’s death.

Click here to download “4 Requirements of a See-Through Trust” to see exactly why the IRA should NEVER be moved into the trust.

For professional assistance with your IRA beneficiary planning, Click here to contact the office nearest you.

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Beneficiary Form Checklist

Naming the beneficiaries of your retirement assets may seem like an obvious task to complete as you plan for the future, but it is often also one of the most overlooked. Failing to properly update your beneficiary forms can compromise the legacy you worked so hard to build. 

To help ensure your assets are handled properly after your death, click here to download a “Beneficiary Form Checklist.”

For professional assistance with your beneficiary forms, click here to contact the office nearest you.

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Examining Qualifying Longevity Annuity Contracts in 5 Easy Steps

What is a QLAC (Qualifying Longevity Annuity Contract)?
A QLAC is a type of fixed income annuity that has special attributes and is held in a retirement account. 

Let's examine qualifying for longevity annuity contracts in 5 steps:

1. RMD (required minimum distribution) exclusion. The fair market value of your QLAC is excluded from your RMD calcuations. What’s the benefit? You can keep a greater portion of your IRA (or other retirement account) intact longer while enhancing the income stream the annuity will provide in the future.

2. The distribution deadline. You don’t have to start taking distributions from your QLACs at age 70 1/2, but you can’t delay them indefinitely. QLAC distributions must begin no later than the first day of the month after you turn age 85.

3. Your investment threshold. You will be limited as to how much of your retirement savings you can invest in a QLAC. The limit will be the lesser of $130,000 or 25% of your applicable retirement account assets. The 25% limit applies on a per account basis except for IRAs, BUT the $130,000 is a cumulative limit for all QLACs in all retirement accounts. For IRAs, the 25% limit will apply to the prior year-end total of all IRAs (not including Roth IRAs). 

4. Facts to keep in mind. QLACs cannot be variable or equity-indexed annuity contracts, though insurance companies may offer contracts with cost-of-living adjustments. QLACs cannot offer any cash surrender value. So if you buy one, just be sure you won’t be needing that lump-sum of money anytime soon! 

5. The death benefit. QLACs can offer two death benefit options: a life annuity (the rules can vary depending on a number of factors) and a return-of-premium option. These, of course, are the potential death benefit options allowed by the tax code, but that doesn’t mean that every QLAC contract will offer all of these options.

Have questions or need more information on QLACs or your unique situation, click here to contact the office closest to you. 

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Is a Trusteed IRA a Good Strategy for You?

Leaving a legacy to your loved ones may be important to you, but when the time comes for your beneficiaries to receive your IRA assets, are you confident they will use their inheritance in a way that you’d want them to? There are options available for you to have varying levels of control over how your beneficiaries use your assets after you’ve passed. You may want to consider either a trusteed IRA or a trust, but how do you know which option is best for you?

We've developed this worksheet for you to use to help decide what level of control you would like to have. Click here to view it.

How much control do you want over beneficiaries after death? No control? Total control? Somewhere in between? 

Some things you will need to consider when making this decision: 

  • Different levels of creditor protection
  • Size of your IRA
  • The price you're willing to pay
  • Using an individual as Trustee
  • Trust tax returns for IRA
  • Holding RMDs after passing
  • Allowing trustee to act on your behalf before passing
  • Qualifications for IRS "See-Through" trust

And much much more. This worksheet will help you walk through and develop a strategy that matches your financial situation and needs. 

View the worksheet here. Prior to taking any action, you should consult with a qualified financial adviser.

If you have any questions or need further information, click here to contact the office nearest you so that we can help. 

 

 

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Calculating an IRD Deductionin 5 Easy Steps

Have you recently inherited a loved one’s retirement assets? You should know that there is an income tax deduction available to you called the income in respect of a decedent, or IRD, deduction. When certain inherited assets are hit with both federal estate and income tax, this deduction can help offset the impact.

Your IRD deduction should be included on your 1099-R, but it can be easily overlooked by your accountant in the chaos of tax season. Taking the time to ensure it is filled out correctly can help you keep more of your inheritance in your hands.

What is an IRD (Income in Respect of a Decedent) deduction? An IRD deduction is a way of offsetting the impact of double taxation (federal estate tax and income tax) on certain inherited assets. It’s an income tax deduction for the beneficiary (miscellaneous itemized deduction, not subject to limitations).

When should you look for an IRD deduction? When an individual receives a 1099-R for a distribution that has code 4 (the death code) in Box 7. Don’t expect the CPA to pick up on this. In the tax time crunch it is easily overlooked.

Let's discuss how to avoid double-taxation on your inheritance in 5 easy steps.

1. Find out the amount of federal estate tax paid by the decedent. It’s listed on page 1 of the decedent’s estate tax return, Form 706.

2. Create an imaginary estate tax return that assumes no IRA. You’ll need an estate tax planning software program to do it. Plug in the value of the estate after subtracting the value of the IRA. This will tell you what the federal estate tax would have been if there were no IRA in the estate.

3. Subtraction. Subtract the imaginary federal estate tax as if there were no IRA (figured in step 2) from the federal estate actually paid (in step 1). That result is the amount of the IRD deduction.

4. Division. Divide the IRD deduction (from step 3) by the amount of the IRA included in the estate. This will give you the percentage of the deduction you (the beneficiary) will be able to claim at each withdrawal from the inherited IRA.

5. Multiplication. Multiply the amount of the IRA distribution you took during the year by the percentage in step 4 to get the amount of your annual IRD deduction. You cannot claim this deduction in a year that you did not withdraw from the inherited IRA. 

Prior to taking any action, you should consult with a qualified financial adviser. If you have more questions about your unique situation, click here to contact the office nearest you.

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Avoiding Non-Spouse Beneficiary Mistakes in 5 Easy Steps

How can I avoid making costly mistakes when I inherit an IRA from a person who was not my spouse? Inheriting an IRA can be a financial windfall, but it’s important to understand the complex, specific rules that apply to non-spouse IRA beneficiaries to avoid critical errors. 

1. At first, don’t do anything! Especially, don’t take a distribution from the IRA. Doing so without proper planning may forfeit years of potential tax-favored investment returns. Inherited IRA funds are distinct from IRA funds you save for yourself. They can’t be commingled with your other IRAs, you can’t make contributions to an account that holds them, and they can’t be converted to inherited Roth IRAs. Before acting, consult with a qualified advisor to learn the rules and plan how to best use the inherited funds in your personal situation.

2. Transfer inherited funds from the deceased owner’s IRA into your own new “inherited IRA.” In addition to moving the funds to a financial institution you prefer, this lets you “stretch” distributions from the IRA over your life expectancy to obtain more years of tax-favored returns (if you are younger than the deceased). The transfer between institutions must be made directly, trustee-to-trustee (non-spouse beneficiaries can’t use 60-day rollovers).

3. If the original IRA has multiple beneficiaries, split it so each obtains a separate inherited IRA. Otherwise, minimum distributions to all will be based on the life expectancy of the oldest beneficiary, which may cost the younger beneficiaries years of tax-favored returns. With separate IRAs, each beneficiary can use his or her own life expectancy.

4. Prepare to take required minimum distributions (RMDs). Beneficiaries of IRAs must begin taking RMDs in the year after that of the IRA owner’s death. RMDs are also required from inherited Roth IRAs. You are also responsible for calculating the RMD; consult with an advisor for assistance. A 50% penalty applies to RMDs that are not taken in time.

5. Heed deadlines and records. Inherited IRAs must be established and split by December 31 of the year after that of the owner’s death. Also, check the records of the deceased IRA owner to see if an inherited Traditional IRA contained non-deducted contributions, which provide tax-free distributions. And be sure to designate beneficiaries of your own to the inherited IRA that you establish.

Prior to taking any action, you should consult with a qualified financial adviser. If you have more questions about your unique situation, click here to contact the office nearest you.

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Planning for a Disclaimer

While it may seem unlikely, there are situations where beneficiaries decide to turn down an inheritance. Whether it’s to avoid the taxes associated with the assets, or to pass them along to another beneficiary, a disclaimer can help a beneficiary with the option to refuse an inheritance.

Executing a disclaimer, however, is not a simple task, and for it to work properly, a proactive plan should be put into place. Several steps should be taken, including naming contingent beneficiaries and consulting with a qualified professional.

Click here to download “Planning for a Disclaimer in 5 Easy Steps”

Have questions about disclaimers or options for inherited accounts? We are here to help! Click here to contact the office nearest you.

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Examining Qualifying Longevity Annuity Contracts in 5 Easy Steps

What is a QLAC (Qualifying Longevity Annuity Contract)?

A QLAC is a type of fixed income annuity that has special attributes and is held in a retirement account.

#1 - RMD (required minimum distribution) exclusion. The fair market value of your QLAC is excluded from your RMD calcuations. What’s the benefit? You can keep a greater portion of your IRA (or other retirement account) intact longer while enhancing the income stream the annuity will provide in the future.

#2 - The distribution deadline. You don’t have to start taking distributions from your QLACs at age 70 1/2, but you can’t delay them indefinitely. QLAC distributions must begin no later than the first day of the month after you turn age 85.

#3 - Your investment threshold. You will be limited as to how much of your retirement savings you can invest in a QLAC. The limit will be the lesser of $125,000 or 25% of your applicable retirement account assets. The 25% limit applies on a per account basis except for IRAs, BUT the $125,000 is a cumulative limit for all QLACs in all retirement accounts. For IRAs, the 25% limit will apply to the prior year-end total of all IRAs (not including Roth IRAs).

#4 - Facts to keep in mind. QLACs cannot be variable or equity-indexed annuity contracts, though insurance companies may offer contracts with cost-of-living adjustments. QLACs cannot offer any cash surrender value. So if you buy one, just be sure you won’t be needing that lump-sum of money anytime soon! 

#5 - The death benefit. QLACs can offer two death benefit options: a life annuity (the rules can vary depending on a number of factors) and a return-of-premium option. These, of course, are the potential death benefit options allowed by the tax code, but that doesn’t mean that every QLAC contract will offer all of these options.

Have questions? Click here to contact us. 

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