Let’s talk money. This is such an important topic. Not only can money make you more comfortable, at least in some respects, right. Money is more than not at the root of all disputes. Either you have it or you don’t or someone is trying to get it from you. When you die the worst scenario is having everyone fighting over what you’ve left behind. I hope to offer some wisdom when it comes to money – and planning – (1) different kinds of assets – pass differently at your death – this is important to know. (2) talk about some simple things you can do to plan for that (3) expenses you can make now that will help you later in life, (4) what NOT to do with your money; and (5) touch on some brand new rules from the IRS as to inherited IRAs. This is news you need to know.
First, I want to talk about the variations in different kinds of assets from an estate planning purpose. This is important and you will see why in this episode.
Assets are different, they are known as tangible or intangible or real and personal property.
Real property can pass in a number of ways depending on how it is titled at the person’s death. If its held between spouses – then it should pass automatically to the surviving spouse without any action. If it is held as joint owners with rights of survivorship, then same thing. One joint tenant dies, then the survivor inherits the interest. There are different ways to hold real property. You can hold it in trust – if that’s the case it will pass according to the trust agreement, and you can be creative in that. You can hold property with individuals as Tenants in Common, and those are separate shares or interests that would then vest in your estate or your heirs at law at your death.
If you are the sole owner that is a bit more interesting – Tennessee law provides that real estate should vest in your heirs at law at your death, if you do not otherwise provide for your property in a Last Will and Testament. Even so, it will require some doing to get it conveyed to the heirs or sold mainly because of all the fraud today. Then if you are the sole owner and provide for it to be disposed of in your Will, it will be directed that way – either sold or vested as provided. You will likely need an affidavit of heirship as part of the sale.
When working on estate planning, I always ask for an inventory – because I want to know what the character of your assets looks like. Used to be that folks would hold money in a number of different banks. That’s not as popular anymore, but I still see it. Assets can also go missing because of this – there may be a random account that isn’t used much and is just forgotten.
Let’s talk life insurance policies – these are usually beneficiary driven, and they are contracts, so essentially there is an individual or individuals listed as the beneficiary on the policy and once it becomes ripe for a claim, i.e. when someone passes, a claim is filed by that person, usually requiring a certified copy of a death certificate. The result, a check will be sent to that individual from the insurance company. It does not typically require any Court or probate administration. Now, if there is no beneficiary or say the beneficiary is deceased and died before the owner of the policy, then that policy will be paid into the Estate. This can create issues, especially if the person did not have a Will – it’s possible that rather than it being paid to one person, it will then be split between all of the surviving lineal descendants after first being subject to the claims of creditors.
Bank accounts – this is a hybrid of some of the things I have already mentioned. Like real estate, if you have a jointly held bank account, then in Tennessee it will vest automatically or by operation of law in the survivor at the other’s death. That means if a spouse dies and the other survives, the account will vest in the survivor and there will be no need for further action.
Bank accounts can also have POD or TOD designations on them which are similar to beneficiary designations. That essentially means that the balance of the account is Payable Upon the Death of Transferred on the Death of the owner. This should be a simple way to vest this interest.
Word of warning – do not put one child as a POD or TOD designations or joint ownership on accounts at the exclusion of others. That can cause big problems because of what I just talked about. Upon your death the account and whatever is in it will become that one child’s property. That puts them in a awkward position of trying to figure out how to gift or otherwise transfer monies to their other siblings.
Vehicles – This is an interesting one. Vehicles can be tricky. Typically, you do not need Court administration to transfer title to a vehicle. If you go to the title office, they will ask you for a death certificate and Letters Testamentary which is what you get when you file probate. So it’s a little more difficult, if there is a lienholder. You will either need to satisfy the lien or move to sell the car and pay off the remaining indebtedness as part of the sale. If the vehicle is free and clear and there is a title, then that should be simpler.
Trusts: Transferring property to a trust can be something that gets missed when creating a trust so you will want to watch out for this. This is something I spend specific time with my clients on but on the reverse side, I have seen people come in to me with an existing trust, or a trust after someone has died. Problem happens as the trust is not funded in other words – the assets didn’t get put in the trust. You essentially have an empty trust but the trust and the other estate planning documents provide for everything to go into the trust. You will have to probate a will in Court AND then fund the trust, then conduct trust administration. That is not the objective when that was done.
I also want to talk about a new rule that just came out from the IRS – Internal Revenue Service and this is very important information. It relates to those retirement accounts – IRA’s. Chances are you have one and/or maybe you inherited one from a loved one or a share of an IRA from a loved one. Well, you will want to listen up. This is exactly the stuff that we deal with in estate planning and the reason that so much of the time I am also involving a client’s financial advisor in some of these conversations.
So bottom line the IRS has finally made a ruling as to RMD Regulations. If you’re older you know what that means – RMD (Required Minimum Distributions). This is the minimum amount of money that they require you to withdraw from these accounts every year once you turn a certain age – usually around 72 years old. Those distributions start annually thereafter and are considered income and subject to income tax. They were tax deferred when you originally put them in the IRA and now as you withdraw them, they are subject to tax. That is very basic information as to how these retirement account’s function. Well, a few years back the Congress passed something known as the Secure Act and it was followed by another version of the same law known as Secure Act 2.0. This law essentially put new guidelines in place when it came to inheritances of IRA accounts when someone passed away.
In other words, say your father had an IRA and was making distributions from that account over the years since he was 72 years old. He passed away at 82, so there were 10 years of distributions. The balance of what’s left comes to you as his beneficiary. That’s very specific as well – confirm who the beneficiaries are on these accounts and make sure to have contingent beneficiaries. The default is your estate. That can cost you money. Under that Secure Act – a recipient of an inherited IRA – say whatever was left in your father’s IRA at his death passed to you, that account then can be rolled over into an inherited IRA. You have an option to liquidate that account. If you do, you pay taxes on that money. You also have an option to Stretch that account over 10 years as a beneficiary which can reduce the tax and help you plan better in terms of your overall income.
So these new regulations from the IRS incorporate the rules from both the original Secure Act and Secure Act 2.0. Reminder that Roth IRA’s are not subject to this RMD requirements.
So these regulations confirm that the annual RMD requirement applies to these beneficiaries. Further, the 10-year deadline is not extended. Therefore, a 10-year beneficiary who inherited a retirement account in 2020, for instance, must ensure that the account is fully distributed no later than 2030, whether or not they took RMDs for the waived years.
The Reason for the Annual RMD Requirement
If a participant dies on or after their RBD, their beneficiary is subject to the “at least as rapidly,” or ALAR, rule. beneficiaries must continue taking annual RMDs. These annual RMDs for beneficiaries would be calculated using the Single Life Expectancy Table, the language in the Secure Act led many to believe that beneficiaries subject to the 10-year rule would not be subject to the ALAR rule.
The proposed RMD regulations clarified that all beneficiaries, including 10-year beneficiaries, are subject to the ALAR rule. Therefore, if the account owner dies on or after their RBD, their designated beneficiary must take annual RMDs over their single life expectancy beginning the year following the participant’s death and continuing for every year after up to the 10th year
when the account must be fully distributed.
If you are a 10-year beneficiary, you must take your 2025 RMD in 2025. If you want to take any RMDs you did not take before 2025, you may do so, but that is optional. When deciding, consider that the 10 years are not extended and consult your tax advisor regarding how to proceed for tax-efficiency purposes.
Older Beneficiaries Are No Longer Penalized
Under the ALAR rule, eligible designated beneficiaries must take annual RMDs over the longer of the beneficiary’s single life expectancy or the remaining single life expectancy of the decedent. However, the proposed regulations penalized beneficiaries older than the decedent by requiring such a beneficiary to fully distribute the account when the beneficiary’s life expectancy ends. The final regulations removed this requirement, which means that a beneficiary who is older than the participant may take distributions over the full life expectancy of the participant.
For example, John died in 2020 at age 75, after his RBD. Therefore, the ALAR rule applies to his beneficiary. John’s beneficiary is his 80-year-old sister, Kim. Kim is an eligible designated beneficiary because she is “not more than 10 years younger” than John. Therefore, she must take distribution over her single life expectancy or John’s single life expectancy, whichever is longer. In this case, John’s life expectancy is longer.
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