RJG Legal

Can I Leave My IRA to My Minor Child?

“There are many ways to give assets to those for whom you wish to leave a legacy. You can leave tangible assets such as cars, houses or other belongings, or liquid assets such as cash or securities. However, the age of the person to whom you leave these assets, will often determine the form of, and conditions under which, they receive the property.”

Investopedia’s article, “Designating A Minor As An IRA Beneficiary,” explains that one special case to ponder is the ramification of leaving one or more of your IRAs to a minor. Let’s look at some of the advantages and disadvantages of this strategy.

There are a few reasons why someone might want to leave an IRA to a beneficiary, who’s not yet reached the age of majority. It is obvious that with a minor child, IRAs can allow much greater flexibility and potential for long-term growth than something like a savings bond. IRAs don’t have to be used for higher education or any other specific purpose to avoid taxation. Young beneficiaries also receive the benefit of a lower required minimum distribution (RMD) over their lives, because the life expectancy of the beneficiary is used when calculating their RMDs.

However, minors can’t own legal property of any kind in their name. Instead, a guardian must be appointed to manage the property for the child, until they reach the age of majority. If the owner of the IRA doesn’t appoint one, a judge will do it. That guardian may have very different ideas about how the account should be handled.

There are some other options you can have your guardian implement, once your beneficiary receives the IRA. He can place the distributions in a custodial account, pursuant to the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA). However, this could have adverse tax consequences for whoever claims the minor as a dependent on their tax return. If the minor's income is above a certain level, then the parent or guardian must pay tax on the excess at their top marginal tax rate. This option also gives the minor sole custody of the property at the age of majority, when she may not be ready to handle a large sum of money.

A second option is to put the money into a 529 plan. This account lets the assets grow tax-free, until they’re used to pay for higher education expenses. However, if the beneficiary doesn’t pursue a college education, the plan can also backfire.

Another answer may be to substitute a carefully drafted revocable living trust as the “designated beneficiary” for the IRA and make the minor child the beneficiary of the trust. The guardian would be appointed as the trustee. A trust allows the creator to provide specific directions on how you want the guardian to handle the IRA distributions for the minor.

Consider these alternatives, if you want to leave your IRA to a minor beneficiary. Talk to your IRA custodian about beneficiary requirements, and then speak with an experienced estate planning attorney.

Reference: Investopedia (2018) “Designating A Minor As An IRA Beneficiary”

Washington Post Publisher’s Estate Sells Beachfront Home

“A large portion of a Martha’s Vineyard estate formerly owned by the late Washington Post publisher Katharine Graham, is coming on the market for $39.5 million.”

A trust tied to the family of the late Washington Post publisher Katharine Graham, is reportedly selling a large portion of her Martha’s Vineyard beachfront property.

The Wall Street Journal reports in the recent article, “On the Market: Katharine Graham’s Summer Estate for $39.5 Million,” that the expansive 186-acre beachfront property overlooks James Pond, Buzzards Bay and the Elizabeth Islands. There are meadows, stone walls and a brook that runs through the land, according to listing agents Gerret C. Conover and Thomas E. LeClair of LandVest, an affiliate of Christie’s International Real Estate.

Graham led the Washington Post through its ground-breaking reporting of the Watergate scandal and the 1971 publishing of the Pentagon Papers. The period was depicted in the 2017 movie “The Post.”

Graham purchased the property in the early 1970s, in an effort to keep it from developers, according to LandVest.

In her memoir, “To the New Owners,” journalist and author Madeleine Blais said the property “felt like the set of a Katharine Hepburn movie, one in which the heroine shows verbal spunk and athletic grace in equal measure.”

Katharine Graham died in 2001. In her will, she bequeathed a large part of the original property to her son William, a lawyer and philanthropist, according to the listing agents. He passed away last year. The property is now owned by several limited companies, linked to trustees and executors for William Graham’s estate. The proceeds of the sale reportedly will be donated to charity, according to the listing agents.

The house on the property is about 5,000 square feet with eight bedrooms. It has a large covered deck for dining with views of the Atlantic Ocean and a large kitchen for entertaining.

Graham’s property also includes a three-car garage with an apartment, a two-story caretaker’s home, and barn and a one-bedroom private beach house.

The home where Katharine Graham lived was called “Mohu.” That house is on a separate parcel and is not part of the sale.

Reference: The Wall Street Journal (August 1, 2018) “On the Market: Katharine Graham’s Summer Estate for $39.5 Million”

How Does Cash Value Grow in a Life Insurance Policy?

“So, how exactly does cash value accumulate in your permanent life insurance policy? The details vary, depending on the type of policy you have and each individual life insurance company.”

Cash-value life insurance, also called “permanent life insurance,” has a death benefit, as well as cash value accumulation. While variable life, whole life, and universal life insurance each have built-in cash value, term life doesn’t. When the cash value has accumulated to some size, you can use the funds to:

• Pay your policy premium;
• Take out a loan at a lower rate than banks offer;
• Create an investment portfolio that maintains and accumulates wealth; or
• Supplement your retirement income.

Investopedia’s recent article, “How Cash Value Builds in a Life Insurance Policy,” explains how the process typically works.

When you pay the premium on a cash-value life insurance policy, part of the payment goes to the policy’s death benefit (based on your age, health and other underwriting factors). Another portion covers the insurance company’s operating costs and profits. The remainder of the payment is attributed toward your policy’s cash value. The life insurance company will invest this money in a conservative-yield investment. As you continue to pay premiums on the policy and earn more interest, the cash value increases.

With a cash-value life insurance, you generally pay a level premium. In the early years of the policy, a higher percentage of the premium goes toward the cash value. However, with time, the amount earmarked to cash value decreases.

Each year as you get older, the cost of insuring your life gets more expensive for the life insurance company. That’s why the older you are, the more it costs to purchase a term life policy. When it comes to cash-value insurance, the insurance company will add in these increasing costs.

The cash value accumulation will vary, based on the type of policy you have. Whole life policies provide “guaranteed” cash value accounts that grow according to a formula determined by the insurance company. Universal life policies accumulate cash value based on current interest rates. Variable life policies invest funds in subaccounts, which operate like mutual funds. The cash value grows or falls, based on the performance of these subaccounts.

Talk to your insurance adviser to see how to calculate potential cash value accumulation of your permanent life insurance policy. Remember not to let it go to waste: the cash value left in your policy at your death returns to the insurance company－not to your heirs.

Reference: Investopedia (April 30, 2018) “How Cash Value Builds in a Life Insurance Policy”

Where Should You Retire?

“There are many choices that are available to us. We have the freedom to move anywhere we like – or nowhere at all. How should you make this huge decision?”

Forbes’ recent article asks, “Where Will You Live In Retirement?” The answer? There’s no one right answer, when it comes to where to retire. It’s going to be totally up to you. However, make sure that you put in some serious thought, discussion and preparation. If you are married, there’s going to be more than one opinion that matters.

There are several important considerations in deciding where to live. One of the most critical is your finances. Try to understand how much you should be allocating to housing. If you have some equity in your current home, that could play a part in your future financial viability. You should also consider how you want to spend your time in the next few decades of your life, such as traveling or continuing to work and staying active in your community. This will have an effect on where you may want to stay geographically, or whether you downsize.

Where you family is located, is also a factor. Many seniors like to be close to their grandkids. Some also like the active 55+ communities in warm weather climates. However, if you choose this option, be sure do a thorough check before you make a commitment.

Speaking of warm weather, if you move somewhere for the climate, check out the destination in all seasons for an extended length of time.

Another important factor in making a move is friendship. The relationships you have and those you choose to develop, will be helpful in any change of residences.

If you’re considering a move, don’t delay. You should move while you’re still healthy and able to weather the change and enjoy your new home.

Reference: Forbes (July 30, 2018) “Where Will You Live In Retirement?”

Suggested Key Terms: Retirement Planning

 

 

How Does Cash Value Grow in a Life Insurance Policy?

“So, how exactly does cash value accumulate in your permanent life insurance policy? The details vary, depending on the type of policy you have and each individual life insurance company.”

Cash-value life insurance, also called “permanent life insurance,” has a death benefit, as well as cash value accumulation. While variable life, whole life, and universal life insurance each have built-in cash value, term life doesn’t. When the cash value has accumulated to some size, you can use the funds to:

• Pay your policy premium;
• Take out a loan at a lower rate than banks offer;
• Create an investment portfolio that maintains and accumulates wealth; or
• Supplement your retirement income.

Investopedia’s recent article, “How Cash Value Builds in a Life Insurance Policy,” explains how the process typically works.

When you pay the premium on a cash-value life insurance policy, part of the payment goes to the policy’s death benefit (based on your age, health and other underwriting factors). Another portion covers the insurance company’s operating costs and profits. The remainder of the payment is attributed toward your policy’s cash value. The life insurance company will invest this money in a conservative-yield investment. As you continue to pay premiums on the policy and earn more interest, the cash value increases.

With a cash-value life insurance, you generally pay a level premium. In the early years of the policy, a higher percentage of the premium goes toward the cash value. However, with time, the amount earmarked to cash value decreases.

Each year as you get older, the cost of insuring your life gets more expensive for the life insurance company. That’s why the older you are, the more it costs to purchase a term life policy. When it comes to cash-value insurance, the insurance company will add in these increasing costs.

The cash value accumulation will vary, based on the type of policy you have. Whole life policies provide “guaranteed” cash value accounts that grow according to a formula determined by the insurance company. Universal life policies accumulate cash value based on current interest rates. Variable life policies invest funds in subaccounts, which operate like mutual funds. The cash value grows or falls, based on the performance of these subaccounts.

Talk to your insurance adviser to see how to calculate potential cash value accumulation of your permanent life insurance policy. Remember not to let it go to waste: the cash value left in your policy at your death returns to the insurance company－not to your heirs.

Reference: Investopedia (April 30, 2018) “How Cash Value Builds in a Life Insurance Policy”

Glen Campbell’s Kids Can Challenge His Will, Judge Says

“A Nashville judge has ruled that three children of the late Glen Campbell have a right to contest the validity of two wills that cut them off from any inheritance from the late singer.”

Davidson County, Tennessee Probate Judge David Randy Kennedy recently held that three of Glen Campbell’s children, who were disinherited from the singer’s estate, have the legal standing to contest wills dated September 1, 2006 and January 7, 2001.

The Tennessean reported it its recent article, “Glen Campbell's children have right to contest wills that cut them off inheritance”, that Travis, Kelli and Wesley Campbell petitioned the court to certify that a will contest existed. The three were the only children of Campbell who were left out of both wills.

Anyone who may have a potential interest from the will, can challenge a will. The most successful challengers are usually spouses. The most successful grounds for a will contest are that the decedent lacked testamentary capacity or that the person was unduly influenced to draft the will to benefit a certain person.

Judge Kennedy noted in his decision that, in this case, the three Campbell children intended to contest their father's capacity to agree to the wills and also that he was subject to undue influence. Campbell suffered from Alzheimer's disease for a few years, before he died on August 7, 2017.

The 2006 will was filed by Kimberly Campbell, Glen’s widow, who was also named executor of his estate. She recently filed notice that she wouldn’t challenge the right of the three children to contest the will. Judge Kennedy said in his decision, that there was no opposition to the certification request.

The 2006 will names Kimberly and Glen’s five other children as beneficiaries. A fourth Campbell child, Debbie Campbell-Cloyd, has raised questions about the actions of a former publicist and manager for the singer, Stanley B. Schneider, who has been acting as a temporary administrator of the estate.

Debbie asked the probate judge to order Schneider to provide a full accounting of payments made from the estate and a bank account into which Glen Campbell's royalties have been deposited. She argued that the royalties should have been deposited into an estate account. However, even after Campbell's death, the money was deposited into an account controlled by Kimberly and Glen Campbell. Schneider, according to court filings, had power of attorney over the account.

Reference: The Tennessean (July 25, 2018) “Glen Campbell's children have right to contest wills that cut them off inheritance”

Estate Planning for Married Women

“About nine in 10 women will have to go it alone, financially, at some point in their lives. When that happens, they need to be ready.”

It’s common for women to be devastated by the loss of their husband or the end of their marriage. While the emotional impact of no longer having their lifelong mate is difficult enough, their mental anguish is often exacerbated by fear and the stress of the financial unknown.

Kiplinger’s recent article,“3 Things Married Women Need to Know About Their Money,” explains that the women who struggle the most right away, usually haven’t been involved in their family finances. As a result, they don’t know how much they have available to live on for the rest of their lives. When they know the amount, they may not have the confidence to know whether it’s enough. In fact, according to a recent Gender Gap in Financial Literacy study, “the reality is that 90% of women will be solely responsible for their finances at some point in their lives, due to the death of a spouse or divorce.”

Women must have a basic knowledge of how much they have and how it is allocated. A 2014 study by Prudential found that 27% of married women say they “take control” of financial and retirement planning and manage it themselves. That means that 73% of married women do not. With this gap in knowledge, here are the three basic financial measures that all married women should know about their money:

Research Your Annual Household Income. Determine how much you and your husband earn together. Review your income from investment accounts, jobs, rental real estate, pensions, Social Security and business investments. If there’s a divorce, the lists of assets and income are an important part of the property settlement. Review your tax returns from the past two years and keep a copy of each tax return going forward.

Understand Your Assets and Debts. At least once a year, make a list of everything you own. Don’t forget checking and savings accounts, 401(k) retirement plans, life insurance and real estate. It’s important to know your net worth, so next to each asset, make a note about any corresponding loans. An annual review also helps make sure couples don’t forget about any investments they may have made years ago, like a stock that may not be performing well. It is also important to determine ownership in each asset. This will be important, if your spouse passes away and could affect the income tax you pay each year.

Do You Have an Estate Plan? If you and your spouse don’t have a will, talk to a qualified estate planning attorney and bring the household balance sheet to the meeting. If you’ve made a will, review it and make certain you know which assets you’ll inherit if your husband passes away. You should also determine how much income will be available from life insurance and other sources to support you for the rest of your life. If your attorney only provides an electronic copy of the will, print out a copy and keep it in a safe and accessible spot.

Women with knowledge of their household income and assets, and those with a will, can minimize some stress and surprises, if their spouse passes away or their marital situation changes. It’s difficult enough dealing with the loss of a spouse, so prepare now to make certain you have the financial knowledge to handle any unforeseen events.

Reference: Kiplinger (March 13, 2018) “3 Things Married Women Need to Know About Their Money”

Meatball Maven’s Kids Want Celebrity Chef Removed as Executor

“Rocco has dragged his feet probating the will and racked up needless expenses that are draining the already meager estate”

The siblings of celebrity chef Rocco DiSpirito want to oust him as the executor of their mother’s estate. They claim that he’s made off with the rents from a Brooklyn apartment building she owned and failed to pay the property taxes.

The New York Post’s recent article, “Siblings of celebrity chef want him out of late mother’s estate,” reports that the 87-year-old Nicolina DiSpirito made hundreds of meatballs a day on DiSpirito’s 2003 reality show, “The Restaurant.” She became a personality in her own right and a celebrity who would frequently walk the red carpets with her TV-star son.

Nicolina passed away in 2013. She named Rocco as her executor and left half her estate to him. She split the other half between her other son Michael and daughter Maria.

Rocco has delayed the probate process and has accumulated needless expenses that are draining the estimated $1.5 million estate, his siblings charge. The unpaid taxes and water bills for his mother’s Pacific Street building, which has six units and a storefront, have reached more than $23,000, according to court papers. Rocco won’t sell the building, even though the family could get about $800,000 for it, Michael and Maria claim. Rather than dividing up their mom’s personal belongings, as she instructed in her will, Rocco’s incurred tens of thousands in unpaid bills to store what his siblings estimate is less than $20,000 worth of personal property.

“Rocco DiSpirito’s neglect, waste, inaction and misconduct accomplishes nothing other than increased expenses and legal fees for the estate,” the siblings wrote in court papers seeking Rocco’s removal as executor.

There is a specific procedure to remove an executor from a will, after the death of the testator: an interested person must file for a court proceeding. An “interested person” is defined as an individual or business that has a stake in the estate assets.

There are several reasons why a probate court may decide to remove an executor from an estate. A judge will typically only remove an executor, if it can be shown that he or she is incapable of performing the necessary duties, is unsuitable for the position or has become disqualified since the deceased appointed him or her. The executor must act in good faith and with the best interests of the beneficiaries in mind. If an executor does a poor or careless job of managing the estate, it can be grounds for removal.

Reference: New York Post (July 7, 2018) “Siblings of celebrity chef want him out of late mother’s estate”

What’s the Difference Between Dementia and Alzheimer’s?

“’To be called dementia, the disorder must be severe enough to interfere with your daily life,’ says Constantine George Lyketsos, M.D., director of the Johns Hopkins Memory and Alzheimer’s Treatment Center in Baltimore.”

The terms “dementia” and “Alzheimer’s” have been around for more than 100 years. That means people probably have been getting the two terms confused for a century.

However, understanding the difference between dementia vs. Alzheimer’s is important. AARP explains this in its June article, “Dementia vs. Alzheimer’s: Which Is It?” While Alzheimer’s disease is the most common form of dementia (accounting for an estimated 60 to 80% of cases), there are several other types. The second most common form is called vascular dementia. This form has a very different cause, which is high blood pressure. Other types of dementia include alcohol-related dementia, Parkinson’s dementia and frontotemporal dementia. Each type also has different causes. In addition, certain medical conditions can cause serious memory problems that resemble dementia.

The right diagnosis means the proper medicines, remedies and support. Correctly identifying Alzheimer’s, instead of another type of dementia, may result in a prescription for a cognition-enhancing drug rather than an antidepressant. A patient may also be eligible to participate in a clinical trial for Alzheimer’s, if he or she has been specifically diagnosed with the disease.

Dementia is a nonreversible decline in mental function. It’s a catchall phrase that encompasses several disorders that cause chronic memory loss, personality changes or impaired reasoning. Alzheimer’s disease is just one of them.

Alzheimer's is a specific disease that slowly and irreversibly destroys memory and thinking skills. There’s no cure. However, researchers have identified biological evidence of the disease: amyloid plaques and tangles in the brain. They can be seen microscopically, or more recently, using a PET scan that employs a newly discovered tracer that binds to the proteins. The presence of these proteins can also be detected in cerebral spinal fluid, but this method isn’t used often in the U.S.

Dementia is diagnosed by a doctor who must find that you have two or three cognitive areas in decline. These areas include disorientation, disorganization, language impairment and memory loss. To make that diagnosis, a doctor or neurologist will administer several mental-skill challenges.

There’s no definitive test for Alzheimer's. Physicians usually rely on observation and ruling out other possibilities. This guessing game is still used today in diagnosing the disease. It’s accurate between 85 and 90% of the time. The new PET scan may be 95% accurate, but it’s usually only recommended to identify Alzheimer’s in patients who have atypical symptoms.

Reference: AARP (June 25, 2018) “Dementia vs. Alzheimer’s: Which Is It?”

How Do I Know When My Kids Should Get Their Inheritance?

“Regardless of whether or not you are subject to the estate tax, it is essential to have a current will and related documents.”

A common question in estate planning is determining the appropriate time for children to have access to their inheritance.

Wealth Advisor’s article asks, “When Should Children Have Access To Their Inheritances?” The article looks primarily at distributions from trusts created by a will (testamentary trusts). However, these considerations also apply to trusts created during your lifetime, which are called inter-vivos trusts.

One big difference between your will and lifetime irrevocable trusts, is that during your lifetime, your will can be updated and changed. However, amending or changing, a lifetime irrevocable trust is much more difficult. Usually it requires a statutory solution (decanting) or permission from the courts.

Distributions can be discretionary, mandatory or event-driven. A common distribution structure includes mandatory distributions at specified ages, such as at 25, 30, and 35. A third of the principle is distributed at age 25, with half of the balance doled out at age 30, and the remaining balance distributed at age 35.

In addition to mandatory distributions, a trust can provide that the trustee has the authority to make either fully discretionary distributions or distributions under some “ascertainable standard,” such as for the beneficiary’s health, education, maintenance, and support. However, detailing only mandatory distributions or event-based distributions significantly reduces the fiduciary’s flexibility.

A trust should be created with the help of an experienced estate planning attorney. He or she will help guide your decisions about trust distributions, that include both the principal and the income generated by that principal.

In many situations, when an estate plan is designed, you may not be sure of the ultimate size of your children’s inheritance. In that case, your attorney can help you plan for an income stream in today’s dollars, as well as a cost of living adjustment to account for inflation. This will eliminate any mandatory income distributions that may mean large distributions to children at relatively young ages.

Another way to go is to leave the income distributions to the discretion of the trustee. With more flexibility for the fiduciary, distributions can be made based on what your heirs need at that time.

Reference: Wealth Advisor (July 30, 2018) “When Should Children Have Access To Their Inheritances?”

Why Do We Need a Prenuptial Agreement?

“Prenuptial agreements allow individuals to protect themselves financially with a prearranged, legally binding agreement between spouses. It can designate certain current and future assets as individually owned (i.e. separate), rather than marital property that can be subject to division upon divorce.”

While most couples are optimistic about their marriage, statistics show that about half of all marriages in the U.S. end in divorce.

Forbes’ recent article, “Pre-Nuptial Agreements: A Hedge For Happily Ever After,” notes that for young couples, the financial future may be uncertain. Without significant family money, young couples may be more hesitant to have this type of discussion.

Although there are two types of laws dealing with the ownership of marital property (common law and community property), typically if one spouse enters a marriage with significant assets and would like to keep these assets separate, a prenuptial agreement can provide him or her with protection, if the marriage ends in divorce.

For example, although inherited assets have traditionally been considered separate assets, these assets can easily become marital property. It’s possible for these inherited assets to remain as separate property through careful segregation. It’s also common for a couple to unintentionally comingle these assets, making them marital assets.

Depositing inherited assets into a joint account or using separate assets to purchase a jointly owned residence that benefits both spouses, are frequently seen examples of comingling that can create marital property. Even when a couple attempts to keep assets separate, depending on state law, an inheritance (or the appreciation) may still become marital property.

In some instances, a trust with a prenuptial agreement may give a person the best protection against the inadvertent conversion of separate property into marital property.

Prenuptial agreements can be quite important to protect children in high-net worth families. These agreements create a clear structure that will help to avoid uncertainty of a divorce settlement and make certain that the intended beneficiaries receive the appropriate family assets.

While the subject of prenuptial agreements isn’t romantic, having the conversation may be necessary and pragmatic.

In cases of family or personal wealth and children from prior marriages, the conversation may be critically important.

Reference: Forbes (July 30, 2018) “Pre-Nuptial Agreements: A Hedge For Happily Ever After”