IRAs, Annuities and Guardianship: Providing for Your Minor Children after You Die

 

Deciding on a guardian for your minor children may very well be the most vexing decision you’ll make regarding your estate planning. Not only must you trust the appointed guardian to raise your children as you’d want them raised, but you also need that person to be financially responsible with your children’s inheritance. For example, if you have an IRA or an annuity that you wish to pass to your minor children, how can you ensure those funds will be used properly—especially if the person you trust most to raise your kids isn’t necessarily the best with finances?

 

This question is multifaceted, so let’s unravel one aspect at a time.

 

The Question of Guardianship

Here’s the good news: The person who raises your minor children and the person who handles their inheritance don’t have to be the same person. If necessary, you can appoint one guardian to serve each function, naming one as the guardian of the person and another as the guardian of the estate. In this arrangement, you entrust one person with your children’s assets and another with their care, while enabling each to interact with the other. This dual guardianship model gives many parents peace of mind—knowing they don’t necessarily have to risk their children’s inheritance while ensuring that they are raised according to the family’s values.

 

Although guardianship of the estate is an option, for many families the best strategy for financially providing for the children is to use a trust. In that case, a trustee fulfills the responsibility that would otherwise belong to the guardian of the estate. The trust assets can be released to the children or the caregiver incrementally according to age and needs. For example, the trustee could distribute money for the children’s needs until age 18 and then manage for the money until the child is a financially mature adult. Your trustee may also exercise discretion in investing and distributing the funds for the children’s support, education, etc., coordinating with their physical guardian to ensure the children’s needs are met until they come of age. This can ensure that the assets are there when they’re needed for your family.

 

Passing an Annuity to the Children

Annuities pay out regular income—which can make them convenient vehicles to cover ongoing expenses for minor children. If you have set up an annuity for yourself or a spouse, you can name the children as beneficiaries, or you can also name a trust for the benefit of your children. If you are still paying into the annuity at the time of death, your children may receive the balance, or you may give a trustee the option of rolling the balance into another annuity to be paid out to the children at a later maturity date. If you are already receiving annuity payments yourself, the children may simply continue receiving these payments for the remainder of the term. Depending on your annuity contract, payouts may also be made lump sum. Annuities are a very flexible financial product with many different options. If you have annuity now, or if you are considering purchasing one, bring it up with us as we work on your estate plan so we can make sure it meshes with your will or trust seamlessly.

 

Transferring an IRA to the Children

Individual Retirement Accounts (IRAs) are also excellent vehicles to pass along wealth for minor children’s welfare—because, unlike most annuities, they have the ability to grow over time and can provide a lifetime of financial benefit to your children.

 

When you name the next generation as beneficiaries on an IRA, you effectively extend the IRA’s life expectancy. While the required minimum distribution payments to the children will be smaller than they would have been for you (since, according to the IRS’s rules, they have a longer life expectancy), the account balance can remain invested for growth over time. Your financial and tax advisor can evaluate your situation to help you decide which type of IRA (Roth or traditional) is the best option for your goals. And we can work with you to make sure that the IRA is fully protected against creditors, predators, and bad financial decision making with an IRA trust.

 

Planning for the welfare of minor children after your death is neither simple nor pleasant to consider, but it’s absolutely necessary for peace of mind. Determining the right person(s) to be the guardian of your children requires careful thought, but you don’t have to sacrifice your children’s inheritance for their proper care. With the right financial plan, you can manage both facets successfully. As always, we’re here to provide assistance and explain your options. Call our offices for an appointment today.

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Where Does Your Annuity Fit Into Your Estate Plan

Selecting the right type of annuity for yourself is no small feat. Of course, you’ve put in the research and planned with your financial advisors. But, you might still be wondering what happens to those annuity payments upon your death.

 

In addition to their benefits as a financial tool for your goals, annuities can have a positive impact on your beneficiaries after you’re gone — but only if you take smart estate planning steps to make sure your wealth ends up in the right hands.

 

Types of annuities

Your annuity type affects how things pan out after your death. In some cases, annuities end with the death of the annuitant. In other cases, the annuity payments continue to be distributed to a named beneficiary. If you haven’t already named your beneficiaries, it’s crucial that you don’t wait any longer. Make sure to work with your estate planning attorney when naming your beneficiaries because you’ll want them to be coordinated with your will or trust.

 

  • Immediate vs deferred: You may have chosen an immediate annuity, which begins paying out as soon as your initial investment is made. This is a common choice for those nearing retirement or those looking to secure long-term income after a windfall like an inheritance or the sale of a business. However, many people opt for a deferred annuity and don’t begin receiving payments for some time. Deferred simply means that it begins paying out at some point after the initial investment.

 

  • Fixed-period or lifetime: A fixed-period annuity only lasts for a predetermined amount of time (such as 20 years). A lifetime annuity pays out during the annuitant’s life, and these are commonly purchased for the lives of both spouses.

 

  • Fixed-sum or variable: Within both immediate and deferred annuities, you’ve likely selected either a fixed-sum payment schedule or fluctuating payments depending on the performance of your investments in the market.

 

  • VA/Medicaid Compliant: This special type of annuity allows you to keep your assets and not lose them to the nursing home when you apply for Medicaid. It can make you immediately eligible and you won’t have to spend-down assets.  A similar product exists to allow you to become eligible for Veteran’s benefits.

 

Why you need to name your beneficiaries explicitly

It’s easy to think that including your loved ones in your will or trust is enough to cover your annuities as well. But if you want your children, spouse, or other individuals to receive your annuities when you’re gone, you need to fill out paperwork (in consultation with your estate planning attorney) that names those people as beneficiaries. Otherwise, your annuity sums could end up going to people you don’t want to leave your legacy to.

 

Annuity death benefits

There are a few different ways you can build death benefits into your annuity plan so that your wealth is passed on to your beneficiaries once you’re gone.

 

  • Standard death benefit: The value of the annuity at the time of your death is passed to your beneficiary.

 

  • Return of premium death benefit: Either the current value or the amount of the initial premium (whichever is greater) is distributed to your beneficiary.

 

  • Stepped-up death benefit: The highest anniversary value is distributed to your beneficiary.

 

In each of these cases, your beneficiary can decide if they’d like to receive this payment as a lump sum or over a period of time. With so many options, it’s a good idea to discuss an annuity with your estate planning attorney before you sign up for one. Your financial advisor works with you to make sure the annuity fits your financial goals and we can work with you to make sure it works with your estate planning goals. If you already have an annuity, it’s important to work with your estate planner to make sure it’s taken into account with the rest of your estate plan.

 

Annuity taxation

It’s rarely uplifting to consider how much of your annuity value will be lost to taxation before being handed over to your beneficiary, but taxes are a fact of life (and estate planning). Your annuity will either be taxed as part of your estate (as an estate tax if you have a large enough estate) or as a disbursement to your beneficiary upon your death (as an income tax). However, in most cases, your spouse can continue to receive annuity benefits or inherit your annuity with little to no tax burdens.

 

How your estate planning attorney can help

As with many estate planning and financial issues, choices you make about your annuity can make a big difference for your loved ones. You want to make sure you’re setting your beneficiaries up with the right kind of death benefits with as little loss to taxation as possible. Give us a call today so we can review your current annuities and explore ways to get more out of them for you and your family in the long run.

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How Does an IRA Fit Into Your Estate Plan?

 

When you think of IRAs, you probably think of retirement. But what happens to your IRA money after you’re gone? The answer depends on how you go about creating your estate plan and selecting beneficiaries, and you might be surprised to find out that your money could end up with the wrong people or cause an unexpected tax bill if you don’t take action ahead of time.

 

What your IRA means for your estate plan

Individual retirement accounts (IRAs) are often one of the biggest financial accounts you invest in over the course of your lifetime. When you’re working on your trust, will, and other documents contained in your estate plan, you have to consider all the “big stuff” like your IRA, your house, and your small business, to name a few. But unlike the way we may use some trusts for your family, IRAs have limited lifetime planning opportunities.

 

IRAs are also subject to income tax (yes – even one you inherit), even though the estate tax or death tax only applies to large estates over $5.49 million. Leaving your IRA to a spouse is a common choice, but you can’t assume that your IRA will automatically be distributed to your surviving spouse. Your spouse must be explicitly named as its beneficiary through a proper beneficiary form.

 

Common IRA mistakes

One of the most common mistakes people make is letting their IRA beneficiary forms become out of date after a divorce, the birth of a child or grandchild, or another major life event that would alter their choice of beneficiary.

 

Another misstep to avoid is naming your own estate as the beneficiary of your IRA. If you name a beneficiary such as your spouse or child, they’ll be in the position to make that money grow into even more wealth over time by using the so-called “stretch out” feature of these accounts. If your own estate is the beneficiary, the money will be passed onto your loved ones in as little as five years (and possibly even faster), resulting in greatly accelerated (and often higher) taxation and a halt to the IRA’s potential growth over time. A bad result all around.

 

If you decide to leave your IRA to your minor children, you can cause a less-than-ideal situation by forgetting to appoint a guardian to oversee the IRA until your kids are old enough to inherit the IRA. Without a guardian, IRAs left to underage children can end up going to exes or other people you might not wish to share your wealth with. Better than a guardian, you can create an IRA trust to receive the IRA distributions, providing long-term financial support for your children or grandchildren and protection against meddlesome exes or others you don’t want to be involved in your children’s inheritance.

 

IRAs and estate and income taxes

It’s important to sit down with an estate planning attorney to determine how your IRA will be taxed and plan accordingly. For those with large estates, a life insurance policy and life insurance trust could be taken out to offset the cost of those estate taxes for your beneficiary. Remember, in addition to estate taxes for those with a large estate, your IRA distribution will also trigger an income tax for your recipient, regardless of the size of your estate. Roth IRAs are an exception to the income tax for beneficiaries. Whether a Roth IRA makes sense is something you can explore with us, your tax advisor, and your financial planner. Like many legal, tax, and financial strategies there are no one-size-fits-all solutions.

 

Because of the estate and income taxes that occur when IRAs are passed on to beneficiaries, they’re an excellent way to include some charitable giving as part of your estate plan. If you donate your IRA value to a charity, you’ll have a charitable contribution deduction as well as the ability to bypass loss of the IRAs value through income tax. If you are interested in benefiting your church or another charitable goal, it’s always an excellent idea to bring this up with us as your estate planning attorney and with your financial advisor as well, so we can help you build a plan that lets you give back.

 

Turning even a modest IRA into a huge advantage for your family

One way to make the most of an inherited IRA is to take a stretch-out approach. This strategy lets your beneficiary stretch the length of time over which they’ll be collecting money from the IRA, giving it more time to accrue growth without income taxes eating away at it. When this is paired with a retirement trust, the result can be a huge, long-term inheritance for your family, even if your IRA is only a modest amount. This is just one of several ways you can work with estate planning attorneys to make sure your loved ones get the most out of your hard-earned wealth for years to come.

 

Even though passing your IRA to your spouse or onto the next generation may seem relatively straightforward, there are plenty of pitfalls along the way without the guidance of an expert. Get in touch today, and we’ll review your current IRA beneficiary forms to make sure everything is up to date and works to achieve your goals.

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New Baby? Time to Create Your Estate Plan

 

Estate planning is often one item that gets pushed back on nearly everyone’s to-do list. The reasons you might be delaying vary: lack of time, not thinking you have enough assets, not knowing how to start, or fear of contemplating death. Whatever the reason for not putting an estate plan together, it is important to understand that if you just had a baby – now is the time to meet with an estate planning attorney to implement a plan.

 

In general terms, an estate plan is a set of legal documents that outline your wishes on how your assets should be distributed and who is responsible for your dependents, in the event of your death or legal incapacity. An estate plan should be developed with a qualified estate planning attorney to ensure that it will work as intended and fully protect your family.  Here’s how an estate plan can you protect the newest addition to your family.

 

Protect Your Children

Perhaps to top reason to put together an estate plan is to dictate who will care for your children in the event you and your spouse die early or become legally incapacitated and therefore unable to care for your kids. Your estate plan can designate someone you trust and who shares your values as a guardian of your minor children. – This is the person who will essentially be a surrogate parent and raise the children through adulthood. When selecting a guardian, it is important to choose people who will be willing participants in your estate plan, who share your values and parenting philosophy, and who you trust to raise your children.

 

Distribute Your Things

While some assets have purely financial value, others have deep emotional attachments. Not only will a trust-based estate plan speed up – and, possibly, eliminate – the probate process, but it will save your heirs bickering, time, and money. As you may already know, probate is the court-supervised process of wrapping up a deceased person’s affairs. This consists of multiple steps, including presenting a deceased’s last will and testament (if they had one – otherwise the probate court uses the government’s default plan known as intestacy), gathering assets, paying off debts, and distributing what’s left over to the deceased’s heirs. Using a trust to provide specific instructions on distribution of assets can help ward off fights among surviving relatives. Additionally, special features in your trust, sometimes called lifetime trusts, also allow you provide long-term financial stability and support for your children. These lifetime trusts can prevent a financially immature young child from using up their inheritance.

 

Provide for Your Loved Ones

Beyond your children, creating an estate plan will inform your loved ones what final health care decisions should be made on your behalf in the event you become incapacitated and are unable to make decisions. Serving as healthcare proxy is an enormous responsibility for the person you name, but you can help lessen the burden by communicating your wishes about medical decisions. One significant advantage of properly planning is that your intentions can be clearly stated so that your surviving family members do not have to guess what your desires are.

 

Find an Estate Planning Attorney

If you have experienced a recent life-event – such as a new baby, a work promotion, purchasing a home, moving to a new state, or any other milestone – you should discuss your situation with an estate planning lawyer. If you already have a will or trust in place, it may make sense to update it to ensure it provides for your family and loved ones. To learn how estate planning can protect you, your newborn, and the rest of your family, contact us today.

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How A Living Trust Helps Your Family

There are several parts to an estate plan, one of them being a living trust. Common factors that prompt someone to create a trust include privacy, tax benefits, avoiding probate, and caring for family members with special needs. Estate planning also lets you dictate how your assets will pass on to future generations after your death.

Avoiding Probate

One of the primary reasons for creating an estate plan is to avoid probate. Unlike a will, a fully funded living trust will avoid probate, typically a lengthy and costly court-supervised process. Probate includes locating and determining the value of the deceased’s assets, paying off any outstanding bills and taxes, and then distributing the remaining value of the estate to the deceased’s rightful beneficiaries or heirs. Avoiding probate is often a top reason for estate planning, and there is no surprise as to why. First, probate can be a costly way to transfer your assets upon death. Second, it is very time-consuming for your family. It can take from six to nine months (or even longer) to complete the probate process. Complications, such as a contested will or an inability to find clear records of all of the deceased’s assets and debts, can extend this timeline. Finally, probate proceedings are a matter of public record so when your estate goes through this process, there is no privacy.

Reducing Taxes

While a living trust can help you avoid probate, it can also provide you with tax savings, especially if your estate is subject to death taxes (also known as estate and gift taxes). Of course, there are many types of trusts. One way to think about the variety is to consider a toolbox. For example, there are numerous kinds of screwdrivers, hammers, power tools, and so on. Each tool has an intended use. Trusts are no different. When you work with us, we’ll make sure to align the type of trust with the tax-saving needs and other goals of your family.

Seek Professional Help

It is important to understand that a trust only controls assets that are in the trust. In other words, you must place these assets in the trust – commonly referred to as “funding” the trust. Moreover, because our lives are always changing (marriage, childbirth, home purchase, etc.) and so are tax laws, it is essential to continually update and monitor the funding of your trust over your lifetime. For these reasons, you will want to work closely with your estate planning attorney to make sure your assets are properly aligned with your trust. This will not only help you get organized, but it will also make things easier for your heirs when you pass away. You don’t have to go it alone. We are here to help you and your family.

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Can a creditor take your Annuity?

Can a creditor take your annuity?

Can a creditor take your annuity?  Annuities are not fully protected from creditors in Minnesota. Many people buy Annuities in order to have a regular income stream for life. In Minnesota, Annuities are treated the same as IRAs for protection outside of bankruptcy. The same can be said for pensions, IRAs, and other Non-ERISA plans. Minn. Stat. § 550.37 subd. 24 governs annuities and other retirement types of assets.

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Estate Planning For the Newly Married

Now is the perfect time to start working on an estate plan—because, as newlyweds, you may not have a list of your accounts, but you’ve effectively just done a working inventory of your possessions—as you’ve figured out how to consolidate two households into one. You’ve already been working on the new banking and shared responsibility of bills and taxes and so forth.

 

Use that all time and energy and work as a leapfrog into planning for your future—so you’ll be that much more prepared for the house, the kids, and the next stages of your new life together.

 

Why Think About Estate Planning at this Point?

Even if you have few assets, as we just talked about, you have more than you think. Still, putting together a will or a trust probably is very straightforward at this point, since you just did that accounting of your collective assets.

 

You may have heard of state laws that give your property to a spouse, if you don’t have a will. These laws—known as intestacy laws—vary by state and can sometimes have results you wouldn’t expect. And, intestacy requires your estate going to probate—a court proceeding that can take months, even years, to resolve. So a basic estate plan should give you some peace of mind—knowing loved ones are taken care of, if anything should happen.

 

You can even plan for property you don’t yet own (a house you may buy some day) and provide for children whenever they arrive on the scene. And once you have that initial plan in place, you can easily update it as your circumstances and needs change.

 

Furthermore, if you already have a sizable amount of assets then estate planning may lead to tax benefits, now and in the future.

 

Who Can Make Decisions for Me, If I Can’t?

In the U.S., a power of attorney (POA) is a legal document that designates someone else (often a spouse) to make financial and other decisions on your behalf. In the financial realm, a POA can sign contracts, file lawsuits on your behalf, and more. Depending on the exact language, you can grant the POA broad powers, or something more limited to an issue or situation.

 

One specific form of POA is in effect only if you are unable to make decisions on your own—such as an emergency or illness. And you can have that type of POA for both the financial side of things, as well as one relating to your medical care.

 

What Kind of Care Would I Want?

An advanced directive (also known as a living will) is a document that makes clear the kinds of medical interventions you’d prefer if you’re unable to make decisions for yourself. In some ways, think of this as an emotional insurance policy: You make decisions now, so the people you love won’t have to. This can also make it easier for your spouse to make decisions if necessary, as long as you name them as a medical decision maker.

 

Who Will Look After the Kids?

If you don’t yet have kids but want them someday, realize that an estate plan is essential for families with children. The state statute providing assets for a spouse will probably also include some inheritance for children.  However, when it comes to guardianship, you need a will to designate caregivers for the children, should something happen to both parents. Without a will, the court decides on the children’s caregiver, and the court may select someone you don’t want.

 

As you start your new life together, one of the best ways to begin is by planning for the future, and whatever it may bring. We’ve been helping families of all ages and kinds for decades, and we’d be delighted to help you, so contact our professionals today.

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Kids Going Away To College? Why You Should Include Estate Planning in the Preparation

 

You may have been running around for weeks, getting your new college student off to school. It’s exhilarating, and your heart likely is bursting at the seams. You’re probably prouder than you can say, but you’re a little afraid, too. How can you make sure your kid is going to be safe at school, so far away from home? A new Bed Bath and Beyond matching sheet set for the dorm sounds great, but it just doesn’t seem like quite enough, does it? So what else can you do?

 

Actually, there is something, probably not yet on your to-do list, that absolutely can make all the difference. Bring your child to a local estate planning attorney.

 

You’ve probably focused on the fact that, having graduated from high school, your kid’s an adult now—meaning that your child’s going to spread her wings. But what is essential to remember: At 18, a college student may still want her mom and dad her side if she gets sick, but legally, decisions for medical care are hers alone. If she were say, unconscious from a serious car accident, a parent couldn’t authorize medical care without first going to court. And it would be up to a judge, if her parent would be considered an appropriate guardian.

 

We don’t want to worry you, but the unfortunate reality is that, every year, some quarter of a million people between 18 and 25 wind up in the nation’s hospitals, according to Forbes, and their parents are often locked out of critical decisions.

 

Therefore, experts recommend that everyone over the age of 18 have a basic estate plan that includes a will or trust, a power of attorney, and medical directives that would allow someone they trust to take act on their behalf, if they aren’t able to.

 

Here are some things to take care of before you send your kid away to college:

 

  • A FERPA Release: The Family Educational Rights and Privacy Act is designed to protect college student’s privacy, but it can leave parents locked out in an emergency. A properly worded release allows school officials to talk with you and release your child’s records to you.
  • A HIPAA Authorization: The Health Insurance Portability and Accountability Act was designed protect a patient’s privacy. Consider having your child signing an authorization so that—just in case—any necessary doctors can talk to you about your child’s condition, care, and treatment.
  • A Durable Financial Power of Attorney: This is a legal document that allows you to take care of your child’s checking or savings accounts, pay bills, etc., if the child’s unable to—whether due to illness or even just location (for example, if the school is on the other side of the country).
  • A Durable Power of Attorney for Healthcare: Like the financial version, this allows you to handle medical decisions for your child, if your child is unable to do so.
  • A Will: At first glance, this may seem a little silly for the average broke college kid. But there could be a lot of hidden complexities: The average American has some 90 online accounts, for instance. Does your child have thoughts about who should manage and close down those social media accounts? Monitor emails? Who should get the Xbox or a bank account? It’s also a great time in your young adult’s life to instill responsibility by encouraging them to think about this early in life.

 

We’ve been helping families attain peace of mind for years. Reach out to us today to protect your new college student and your family.

 

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