Thursday, July 23, 2015

Understanding the Unique Taxation Standards Applicable to IRA Distributions

I have most of my every-day checking and savings accounts titled in the name of my revocable trust. Should I take the same steps with my 401(k) and retirement investments? 

For clients with a single or joint revocable trust, retitling assets into the name of the trust not only accomplishes the goal of its creation, but ensures the seamless and effortless transition of personal and real property to beneficiaries when the time comes. However, trust creators (known as grantors) are highly cautioned to speak to an elder law attorney prior to retitling retirement accounts or transferring those assets into trust, as a hefty and unexpected tax bill may follow. 

Tax implications of retitling a retirement account

401(k) accounts and IRA’s can reap significant tax savings if withdrawn correctly and at the right time. By contrast, account holders can expect a massive tax penalty for withdrawing too early – or even inadvertently. 

Under current IRS rules, retitling a 401(k), 403(b), or Individual Retirement Account will be treated as an outright withdrawal of funds, even if the actual funds in the account are never actually spent. Therefore, the retitle will trigger a tax penalty congruent to the amount in the account for the transfer tax year, which can be especially significant for accountholder with high account balances. 

Safe ways to ensure the proper transfer of IRA assets

When it comes to leaving retirement account assets to a beneficiary, the easiest, simplest, and safest way to accomplish this task is to change the beneficiary designation on the account. This is accomplished by simply contacting the bank or investment firm and filling out a Change of Beneficiary form. Many accountholders choose an alternative beneficiary in the event the primary beneficiary predeceases the accountholder, but this is not always necessary. Then, when it comes time to distribute the assets upon the death of the accountholder, the funds will not only pass outside of probate, but will transfer directly to the beneficiary tax-free. 

If you have questions about proper estate planning or beneficiary designations, please do not hesitate to contact Andrew Byers, serving Auburn Hills, Rochester Hills and Troy, Michigan, by calling (248)301-1511. 

Sunday, December 07, 2014

Year End Gifts

Year End Gifts

If you’re like most people, you want to make sure you and your loved ones pay the least amount of tax possible. Many use year-end gift giving as a way to transfer wealth to younger generations and also reduce the overall potential estate tax that will be due upon their death. Below are some steps you can take to make gifts to your heirs without triggering any gift tax liability. Some of these techniques may also reduce your own income tax liability.

A combination of estate and gift tax exemptions can be used to significantly reduce the overall tax liability of your estate. Upon your death, federal estate tax may be owed. A portion of your estate is exempt from the tax. That exemption amount is set by Congress and can change from year to year. 

Many taxpayers make annual gifts to loved ones during their lifetimes, to reduce the overall value of the estate so that it does not exceed the exemption amount in effect at the time of death. It is important to consider that gifts made during your lifetime are subject to a gift tax (equal to the estate tax). However, certain gifts or transfers are not subject to the gift tax, enabling you to make tax-free gifts that benefit your loved ones and reduce the overall taxable value of your estate upon your death.

The annual gift tax exclusion allows each individual to make annual gifts of up to $14,000 to each recipient. There is no limit to the number of recipients who may each receive up to $14,000 totally tax-free. Married couples may gift up to $28,000 to each recipient without triggering any tax liability. This annual exclusion expires on December 31 of each year, and larger gifts may be made by splitting it up into two payments. By making a payment in December and one the following January, you can take advantage of the gift tax exclusion for both years. Keeping annual gifts below $14,000 per recipient ensures that no gift tax return must be filed, and that there is no reduction in the estate tax exemption amount available upon your death.

Annual gifts may also be made in the form of contributions to a §529 College Savings Plan. These, too, are subject to the $14,000 annual gift tax exclusion. Additionally, such contributions may afford the giver with a state tax deduction.

Payment of a beneficiary’s medical expenses is also excluded from the gift tax. There is no limit to the amount of medical expense payments that may be excluded from tax. To qualify, the payment must be made directly to the health care provider and must be the type of expenses that would qualify for an income tax deduction.

If you have a large estate that may be subject to taxes upon your death, making annual gifts during your lifetime can be a simple way to reduce the size of your estate while avoiding negative tax consequences.

Friday, November 07, 2014

Issues to Consider When Gifting to Grandchildren

Issues to Consider When Gifting to Grandchildren

Many grandparents who are financially stable love the idea of making gifts to their grandchildren. However, they are usually not aware of the myriad of issues that surround what they may consider to be a simple gift. If you are considering making a significant gift to a grandchild, you should consult with a qualified attorney to guide you through the myriad of legal and tax issues that are involved in making such gifts.

Making a Lifetime Gift or a Bequest:  Before making a gift, you should consider whether you want to make the gift during your lifetime or leave the gift in your will. If you make the gift as a bequest in your will, you will not experience the joy of seeing your grandchild’s appreciation and use of the gift. However, there’s always the possibility that you will need the money to live on during your lifetime, and in reality, once a gift is made it cannot be taken back. Also, if you anticipate needing Medicaid or other government programs to pay for a nursing home or other benefits at some point in your life, any gifts you make in the prior five years may result in a period of ineligibility for Medicaid benefits.

What Form Gift Should Take:  You may consider making a gift outright to a grandchild. However, once such a gift is made, you give up control over how the funds can be used. If your grandchild decides to purchase a brand-new sports car or take an extravagant vacation, you will have no legal right to stop the grandchild. The grandchild’s parents could also in some cases access the money without your approval.

You could consider making a gift under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA), depending on which state you live in. The accounts are easy to open, but once the grandchild reaches the age of majority, he or she will have unfettered access to the funds. You could also consider depositing money into a 529 plan, which is specifically designed for education purposes. Finally, you could consider establishing a trust with an estate planning attorney, which can be more expensive to set up, but can be customized to fit your needs. Such a trust can provide for spendthrift, divorce and creditor protection while allowing for more flexibility for expenditures such as education or purchase of a first home.

Tax Consequences: If you have a large estate, giving gifts to grandchildren may be a great way to get money out of your estate in order to reduce your future estate tax liability. In addition, a person can give $14,000 in 2014 to any number of individuals without incurring any gift taxes. A grandparent with 10 grandchildren could give $140,000 per year to all grandchildren (and a married couple could give $280,000), thereby removing that property from his or her estate.  However, as noted above if though such gifts are excluded from gift taxes they would still result in a period of disqualification for Medicaid if made within 5 years of applying for Medicaid.

Sunday, December 15, 2013

Should you withdraw your Social Security benefits early?

Should you withdraw your Social Security benefits early?

You don’t have to be retired to dip into your Social Security benefits which are available to you as early as age 62.  But is the early withdrawal worth the costs?

A quick visit to the U.S. Social Security Administration Retirement Planner website can help you figure out just how much money you’ll receive if you withdraw early. The benefits you will collect before reaching the full retirement age of 66 will be less than your full potential amount.

The reduction of benefits in early withdrawal is based upon the amount of time you currently are from full retirement age. If you withdraw at the earliest point of age 62, you will receive 25% less than your full benefits.  If you were born after 1960, that amount is 30%. At 63, the reduction is around 20%, and it continues to decrease as you approach the age of 66.

Withdrawing early also presents a risk if you think there is a chance you may go back to work. Excess earnings may be cause for the Social Security Administration to withhold some benefits. Though a special rule is in existence that withholding cannot be applied for one year during retired months, regardless of yearly earnings, extended working periods can result in decreased benefits. The withheld benefits, however, will be taken into consideration and recalculated once you reach full retirement age.

If you are considering withdrawing early from your retirement accounts, it is important to consider both age and your particular benefits. If you are unsure of how much you will receive, you can look to your yearly statement from Social Security. Social Security Statements are sent out to everyone over the age of 25 once a year, and should come in the mail about three months before your birthday. You can also request a copy of the form by phone or the web, or calculate your benefits yourself through programs that are available online at

The more you know about your benefits, the easier it will be to make a well-educated decision about when to withdraw. If you can afford to, it’s often worth it to wait. Ideally, if you have enough savings from other sources of income to put off withdrawing until after age 66, you will be rewarded with your full eligible benefits.

Wednesday, September 25, 2013

Common Estate Planning Mistakes Regarding Individual Retirement Accounts (IRAs)


Common Estate Planning Mistakes Regarding Individual Retirement Accounts (IRAs)

For many people, retirement savings accounts are among the largest assets they have to bequeath to their children and grandchildren in their estate plans.  Sadly, without professional and personally tailored advice about how best to include IRAs in one’s estate plan, there may be a failure to take advantage of techniques that will maximize the amount of assets that will be available for future generations.

Failure to Update Contingent Beneficiaries

Assets in an IRA account usually transfer automatically to the named beneficiaries upon the death of the account holder, outside of the probate process.  If the account holder’s desired beneficiaries change, due to marriage, divorce, or other major life events, it is critically important to update the named beneficiaries as quickly as possible to prevent the asset from passing to an outdated beneficiary.  When updating beneficiaries, account holders should not neglect contingent beneficiaries – those individuals named to receive the asset if the primary named beneficiary is already deceased when the account holder dies.

Example:  Sarah’s IRA documents name her husband, Harold, as the primary beneficiary of her IRA.  The contingent beneficiary is Harold’s son, George, from Harold’s first marriage.  Sarah and Harold divorce.  Harold dies.  If Sarah dies before changing her IRA beneficiaries, George will receive the IRA.  This may no longer be the result Sarah would have wanted.

Failure to Consider a Trust as the Contingent Beneficiary of an IRA

There are three main advantages of naming a trust as the contingent beneficiary of your IRA: 

  1. It avoids the problem described above of having incorrect contingent beneficiaries named at death.
  2. It protects the IRA if the desired beneficiary is a minor, has debt or marital troubles, or is irresponsible with money.
  3. It protects the IRA from intentional or unintentional withdrawal.

Since 2005, the IRS has allowed a type of trust created specifically to be the beneficiary of an IRA.  The IRA Beneficiary Trust is also known as an IRA trust, an IRA stretch trust, an IRA protection trust, or a standalone IRA trust.

The main advantage of using an IRA Beneficiary Trust instead of a standard revocable living trust is that the IRA trust can restrict distributions to ensure compliance with tax rules and minimum distribution requirements – thus maximizing the amount of tax-free growth of the investments.

Another advantage is that the IRA stretch trust has a framework that allows it to be structured in a way that guarantees protection of the distributions from the IRA as well as protection of the principal of the IRA.  When you first establish the IRA protection trust, you structure the trust as either a conduit trust or an accumulation trust.  A conduit trust will pass the required minimum distributions directly to your named beneficiaries, maximizing the tax deferral benefits.  An accumulation trust passes the required minimum distributions into another trust over which a named trustee has discretion to accumulate the funds, resulting in greater asset protection for the benefit of the beneficiary.

During your lifetime, the IRS allows you to switch between the conduit trust and accumulation trust for each of your beneficiaries, as circumstances change.  Furthermore, you may name a “trust protector” who may change the type of trust one last time after your death.  This change may be made on a beneficiary-by-beneficiary basis, so that some of your intended heirs have accumulation trusts for their portion of the IRA and others have conduit trusts.

IRA Beneficiary Trusts are complicated legal documents with intricate IRS rules and tremendous implications for your family’s wealth accumulation for future generations.  It is wise to seek advice specific to your family’s unique circumstances when considering the establishment of this powerful type of trust.

Andrew Byers assists his clients with IRA beneficairy and IRA trust planning as part of his estate planning practice.

Sunday, January 06, 2013

The New Estate Tax Law

I have been practicing law since 1996 and there have been a lot of changes in that time.  One of the biggest changes has been in the federal estate tax.  When I was a new lawyer, the estate tax applied to estates over $600,000.  

Read more . . .

Sunday, August 14, 2011

Changes to Michigan's Income Taxation of Retirement Income

Governor Snyder signed a tax reform bill into law on May 26, 2011, that will result in the income taxation of certain retirement income, reducing the favorable exemption from taxation previously afforded to most retirement income under Michigan law. Though the change is technically a reduction in an exemption, for many people the end result is the same as a tax increase.

Changes of interest to seniors and other older people regarding the new Michigan income tax law include the following.

The individual income tax rate is set at 4.35% until January 1, 2013. Then, it will be set at 4.25 %.

In regards to retirement income, there is a three-tiered approach under the new law, the application of which will determine whether or not retirement income is taxed.

First, people born prior to 1946 (age 67 or older as of December 31, 2011) will continue to receive the current retirement income exemptions, the personal exemption, Social Security exemption and the exemption for dividends, interest, and capital gains.

Second, individuals born between 1946 and 1952 (age 60 to 66 as of December 31, 2011) will have a $20,000 single and $40,000 married joint retirement income exemption, which is in addition to the personal exemption and Social Security exemption until age 67. At age 67 and after, they will receive a $20,000 single and $40,000 married joint senior exemption against all income, in addition to the personal and Social Security exemptions.

Third, taxpayers born after 1952 (age 59 or younger as of December 31, 2011) will receive the personal exemption and Social Security exemption until they turn age 67. At age 67 and after, they will have a choice of either (1) a $20,000 single and $40,000 married joint senior exemption against all income, or (2) the personal and Social Security exemptions.

This is quite a negative change for the last group. During the sustained recession in Michigan in the last 10 years, many people in their fifties were forced to take an early retirement due to their employer downsizing. Due to the early retirement, they will receive less in retirement benefits then if they had been able to continue to keep working until age 65 where they and their employer could have continued to contribute to their retirement plans. Now, under the new law, more of their retirement income will be subject to income tax.


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