Posts Tagged ‘Amos Goodall’

Estate Planning With Individual Retirement Account Trusts

JULY 18, 2016 VOLUME 23 NUMBER 27
One of the great things about our area of law practice is that the community of practitioners is just that — a community. Take, for instance, our good friend Amos Goodall from State College, Pennsylvania: he’s one of the leading elder law attorneys in the country. Amos is not just nationally-known, either — he’s also an excellent communicator. This week he tackles a topic of considerable interest to our clients: estate planning for people who have Individual Retirement Accounts or other retirement savings. Here is his plain-language explanation:

Many folk have large retirement accounts. According to the Investment Company Institute 2016 Yearbook, in 2015, members of 60% of US households had invested $24 trillion in retirement market assets, including IRA’s, 401k’s, 403b’s, Simple IRAs, and others. This article discusses IRA’s, and someone with any of the other types of accounts should consult with knowledgeable legal and financial advisors. In fact, every single general rule stated in this article is subject to exceptions, and there may also be specific situations where these rules should be purposefully ignored. This article should be considered simply a guide for asking questions of your advisor (and better understanding the answers), rather than a roadmap for do-it-yourself action.

The typical estate plan for a married couple with IRAs is naming the surviving spouse as the first (or primary) successor owner. There are special tax benefits for a surviving spouse that do not apply to any other possible successor owners.  There are other options, but these should not be pursued without specialized advice.

Classically, they name their children as the contingent or remainder successor owners who will receive the accounts upon the second of their parents’ deaths. Single IRA owners may name their children as primary successor owners, and those without children typically name other family members to receive these accounts. Again, there are other options (including some charitable ones) that should be considered after appropriate advice.

Most IRA owners want to keep IRA assets invested as long as possible. Since growth is not taxed until the funds are withdrawn, they will grow faster. Thus, the longer they are invested, the greater they will be. This is called “stretching” the IRA.

One of the benefits to naming a surviving spouse as the first successor owner is that the spouse is permitted to “roll” the IRA into his or her own name as one of the available options.  No one else has this option, and everyone else must begin withdrawing funds (and paying taxes) as soon as the IRA becomes theirs, called the “minimum required distribution” (or MRD). For younger successors, the MRD is not great; an eight year old successor owner will need to withdraw a little over 1% (roughly one-seventy-fifth) as his or her MRD in the first year after the original owner’s death. In contrast, a sixty-five year old successor would have an MRD of almost 5%, and the MRD for a seventy-one year old spouse would be just over 6%.

Thus, it makes sense to name as young a beneficiary as possible so as to lengthen the process and thereby to maximize the effect of compounded tax-deferred growth. For example, if a seventy year old widow leaves an IRA with $100,000 to an eight year old great-grandchild (assuming there are no generation-skipping tax considerations), and the IRA grows at 3%, then at age 65, the great-grandchild will have withdrawn over $207,000 from the account and it will still be worth over $130,000–quite a positive result for a $100,000 IRA. (At a higher rate of growth, say 6%, that same $100,000 IRA would be worth $700,000 at age 65, and MRD withdrawals would be as high as $40,000/year).

Most IRAs don’t last this long, and it would not surprise anyone that when our eight year old turns eighteen, he or she will find a reason to withdraw much of this inherited wealth. One way to be certain that MRD withdrawals are made and to limit extra withdrawals to actual needs, is naming a trust as successor owner. IRS regulations do not allow many traditional trusts to stretch. However, if the trustee is required to withdraw and pay out at least the MRD each year, the IRS will allow the trustee to use the great grandchild’s life expectancy. This is called a “conduit” trust.  Another IRA trust is called an “accumulation” trust, but this are fairly complicated to set up. Describing any IRA trust as “simple” might be stating an oxymoron, but compared to an accumulation trust, a conduit trust is straightforward for knowledgeable counsel.

The trustee of a conduit trust may make larger withdrawals if necessary (like helping with medical expenses or college) but the beneficiary will need to convince the trustee that other withdrawals are truly necessary. The trustee might say “I agree you need a new car, but look for a good used Chevrolet rather than the new Tesla you want”. Several institutions offer “Trusteed IRA”  plans for a fee, and this has the added benefit of having professionals invest the IRA funds (which may result closer to 6% than 3% growth, as in the example above); it also provides continuity in trust management. Other investors opt for family members as trustees, which may save money in fees but might impose a burden on family members.

With good planning, it is possible to provide a great gift to descendants; a trust makes it more likely they will receive it.

Changes in Social Security Claiming Strategies Arrive Next Month

MARCH 14, 2016 VOLUME 23 NUMBER 10

Our good friend Amos Goodall, a nationally-known elder law attorney in State College, Pennsylvania, wrote our newsletter for this week. Amos explains a particularly confusing and complicated issue.

The Social Security retirement program basically gives back, with some small interest, funds you and your employer have deposited into the system during your working career. There are several strategies which can increase your overall rate of return from the Social Security Administration. Recent changes to the law eliminate two of these, for folks who have not used them before April 29. One of the options ending is called “file and suspend”. The second is called “claim now; claim more later”. It is important to reiterate that the changes are not “grandfathered’, so claimants should consider whether to use these as soon as possible.

Social Security benefits are classically based on a wagearner’s history of compensation, using the highest thirty-five years of employment. The monthly benefit is based on the age of retirement factored into this average. A person who delays retirement until age 70 receives almost double the benefits of someone who files a claim early, at age 62. A chart showing the effect of delayed and early claims for retirement benefits may be found on the Social Security website.

Under current rules, if one member of a married couple has significantly higher earnings than the other, it is possible for the lower-earning of the two to get spousal benefits, which are set at up to half the higher wagearner’s amount. Thus, if on a particular couple’s earning’s record, one spouse had worked steadily in a profession and the other had interrupted her professional development to raise children, the spouse with higher earnings might qualify for $2,000/month benefits, while the other might be limited to $500, based on her earnings record. She may apply for spousal benefits and receive $1,000/month spousal benefits.

There are other situations where a claimant who has had little or no earnings may qualify for benefits based on someone else’s earning record; for example, persons who became disabled while children can qualify for benefits based on their parents’ earnings records. However, an element of these other benefits is that the parent has died or is drawing benefits himself or herself.

What if the higher wagearner is still working and wants to continue until age 70 to qualify for the higher benefit? Under current rules, a strategy called File and Suspend, the higher wagearner of a married couple can file a retirement claim at age 66 and then suspend the benefit. He or she will not be drawing social security, and delayed retirement credits will continue to accrue. Under current rules, if the higher wagearner’s claim has been suspended, the lower wagearner can still file a claim for spousal benefits.

Beginning April 29, if a couple has not already used this strategy, the right to do so will be lost. Under the new rules, with some limited exceptions, spouses and dependents cannot claim benefits if the primary worker has suspended his or her benefit.

One exception allows divorced spouses (who have not remarried) to file claims on their former spouse’s earnings record. Even if the former spouse suspends, the unremarried, divorced former spouse can still move forward with a claim for spousal benefits. This requires the couple to have been married at least ten years before the divorce.

A second strategy, called Claim Now; Claim More Later is also affected by the change. Under this strategy, if a spouse files only for spousal benefits, he or she may continue to work and obtain delayed retirement credits on his or her own earnings record. Then, at age 70, he can retire and obtain enhanced benefits due to a late retirement age. Under the changes effective April 29th, a claim filed is deemed to be requesting both spousal and direct benefits, so as to prevent this strategy.

Social Security benefits are complicated, and there are various retirement strategies available. This article covers only the general situation discussed, and there are other factors which may apply. If you think the old rules might apply, it is important to take action while you still can. Seek qualified professional advice as soon as possible, to beat the April 29 deadline.

Amos Goodall is a partner in the law firm of Goodall & Yurchak. He practices elder law and special needs planning; you can read more about Amos and his firm at the Goodall & Yurchak website, which contains links to a number of articles and resources you might find useful. Thanks, Amos!

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