What happens when the person who inherits an IRA dies after inheriting the IRA, but before they reach any potential 10 year payout limit or decide what to do with the money? That sounds confusing, but it’s not as tough as you think. First off, before answering the question, I do think I need to clarify some terms since we are dealing with multiple levels of beneficiaries. The person who succeeds the person who originally inherited the IRA is known as a “successor beneficiary.” Just wanted to clear that up so you can follow along. We will also be focusing on the rules under the SECURE Act passed last year as it is the rule-of-thumb moving forward. Okay. What happens with that inherited IRA after the inheritor dies will be determined by the status of the successor beneficiary. If the successor beneficiary is the spouse of the inheritor, then there are a few different options. They can roll it over to their own IRA, they can set up a separate inherited IRA, they can also do nothing and continue receiving required minimum distributions (RMDs) based on either the dead spouse’s life expectancy or their own. Now, things aren’t so simple for non-spousal successor beneficiaries (i.e. friends, children, etc.). Non-spousal successor beneficiaries must drain the inherited IRA within 10 years of inheriting it. They can do that however they see fit, just as long as they don’t leave anything in there at the 10 year mark. Now, what happens if the inheritor dies and then the successor beneficiary dies before either hitting the 10 year payout limit or deciding what to do with the money? Well, the person who inherits the inherited inherited IRA (yea, that’s confusing) then would work with the remaining time on the successor beneficiary’s watch. I don’t even want to think about what happens if the person inheriting from the inheritor of successor beneficiary. That’s just too many hoops to jump through. Alright, that’s a lot. My advice would be to have a plan and act on it as soon as you inherit such an IRA. It will save a lot of time and hassle.
It’s been a while since I’ve written a post about the importance of making sure your paperwork is correct and up-to-date. I was reading an article over the weekend that had two stories of what can go wrong when your paperwork is not correct. I won’t go into the details, but one story involved thousands of dollars in costs to correct an outdated address and the other involved a painful court battle for a deceased account owner’s family. Both stories re-instilled the importance of having your paperwork in order. Remember, retirement accounts cannot be passed on through a will or similar instrument. The account custodians will follow the paperwork they have and send information to the account addresses they have. And yes, the courts will side with them the vast majority of the time. You can prevent this, though, by informing the account custodian of any address changes and any major life changes (i.e. a child birth, marriage, divorce, etc.). These simple updates–most of the forms can be found online and are fairly easy to fill out–can prevent a world of hurt in the future, both for yourself and for your family and friends. Ideally, you should be checking your paperwork at least once or twice a year and should save a copy of the forms each time you submit new ones. If you have questions about whether you need to update your forms, you should speak with your retirement account custodian.
I’ve talked about it from time to time over the past few months, but now that there are only a few short days left in 2019, it’s a good time to review your retirement savings accounts. Over the past year: Where you able to save as much as you wanted to or intended to? Did your beneficiaries change? Did you open any new accounts? Did things change personally or professionally that would impact your retirement savings? These are important questions that you should be asking yourself at least once or twice a year. Regardless, the end of the year is a good time to think about whether you need to make changes to your retirement accounts or plans. You don’t need to act on changes right away, but if you find you need to make a change to, for example, a beneficiary form, you should do that in the first few weeks of the new year. The end of the year is also a good time to think about any changes that may be coming your way over the next 365 days. Will there be a major life change? Will you be retiring in 2020? If you answered yes to either of those questions, then you will definitely need to reconfigure the information associated with your retirement accounts as well as your retirement plans and goals. Furthermore, these changes might be big, so they may require some lengthy conversations with you and your financial planner or wealth manager. So, what might 2020 have in store for your retirement plans or savings?
There’s a good chance that you have a will, especially if you have assets that you want to share once you have passed on. If you don’t have many assets or few family and friends to share them with, then you can get by with a simple will (i.e. maybe a page or two long saying who gets what). However, if you have young children–or grandchildren–a simple, boilerplate will probably won’t cut it. Furthermore, if you find that your will may end up leaving a large inheritance to a child or young adult, you will want to consider guidelines and limitations on how the money can be used and when it can be used. This is where a trust comes into play. Since there is a whole section of law devoted to trusts (usually combined with wills and estates), I am not going to get into the legal mumbo-jumbo of the different types of trusts and how they all work. In a nutshell, though, a trust is a legal vehicle that allows for the distribution of money or assets, as overseen by a trustee, to a beneficiary. The trustee may have certain guidelines and rules that he or she must follow when distributing the assets within the trust, which are defined by the settlor–the person who is looking to have his or her assets or money distributed. There are multiple types of trusts out there and each have different ways that they are created and can be used. Why am I talking about trusts? Well, if you have children (or grandchildren), particularly ones that are young, a trust can be an effective way to make sure that they don’t blow through any inheritance they receive. For example, you can instruct the trustee to not distribute the assets or money in the fund before the beneficiary reaches a certain age or that is can only be used for certain purposes. This can protect both the assets you place in the trust as well as the beneficiary and prevent the beneficiary from becoming to reliant on an inheritance. Despite the simplistic approach of this blog post, trusts can be complex. Thus, you will need to speak with an attorney, particularly one specializing in estates or trusts, if you decide you want to set one up as they can legally do so and will ensure that it is done properly.
Do you have a plan in place should you find yourself in a situation in which you don’t have the ability the make decisions for yourself? Illnesses such as Alzheimer’s Disease and Dementia can rob one of the ability to make financial and medical decisions for themselves. However, there are steps you can take to ensure that you can have some control over your health and finances even if you aren’t competent to make such decisions on your own. Depending on what state you live in, you may want to research whether you can appoint a healthcare proxy or designate someone with the power of attorney who can make decisions regarding your health. If you do designate someone with a general power of attorney, that person may also be able to make decisions regarding your finances and any business transactions you are involved in. Of course, you will want to speak with an attorney–look for one specializing in elder law or estate planning–about how to go about properly designating a power of attorney or healthcare proxy. Along with naming a healthcare proxy or power of attorney, you may also want to consider a living will. A living will sets forth your wishes in the event that your are incapacitated (i.e. in a coma) and decisions need to be made regarding your long-term care. In regards to your finances, instruments such as a trust can be an effective and efficient tool in retaining control of your finances. There is more than one type of trust and each type has different purposes and rules. Again, you will want to speak with an attorney about the type of trust that is best for you and your goals and desires. Having an updated will is also important as such a document represents your final wishes and ensures that your assets and money go to those who you feel deserve them. I’ll admit that it can sometimes be difficult to think about your mortality or finding yourself in a situation in which you have no control over your life, but it’s an important consideration. Furthermore, keep in mind that without your guidance, your family and friends may have to make difficult decisions regarding your health and finances. Wouldn’t you want to make that easier for them? Designating a power of attorney or putting your finances in a trust can make those difficult decisions must less painful for those people closest to you and allow you to age having the peace of mind that you are still in control of your healthcare and finances.
As you’ve gone through life and progressed towards retirement age, you’ve probably accumulated a number of financial accounts. These may include investment accounts, retirement accounts, bank accounts, as well as other accounts that hold your assets. You’ve probably also created various usernames and passwords to access those accounts online too. That can be a lot of information to remember, especially if your passwords and usernames are unique to each account. That’s why it’s important that you organize your account information. An easy way to do that is to create a binder of your financial information, which you can easily access and keep information pertaining to each account. I would suggest giving each account it’s own page in the binder with each page containing the URL for each account, any passwords and usernames associated with it, a listing of any and all account beneficiaries, and contact information for the account custodian or your financial planner. You may also want to include information regarding life insurance policies in this binder as well. Not only will this binder help you to keep track of your accounts, but it can also be helpful to friends and family after you have passed away. It will provide them with information regarding who is the custodian of what accounts, how to access them, and how those accounts will be divided. You should ideally keep this binder in a safe place, such as a fireproof box or a place where you keep valuables, and you may want to inform a few people you are close with–such as a spouse or your children–as to its existence, so that they know it’s out there. As you put the binder together, also take some time to review your information and make sure it’s up-to-date and reflects what your wishes and desires. Taking the time to organize this information now can save you a potential headache in the future.
When major life changes happen, you should take the time to make sure the beneficiary forms are updated on your insurance policies, retirement funds, and any other accounts you intend to have passed on to others. Not updating these forms can lead to infighting among relatives and create long-lasting rifts in relationships between those you hold dear. Outdated beneficiary forms can also potentially leave your money open to ending up in the wrong hands–such as an ex-spouse or a family member you had a falling out with. In fact, there are many stories out there about ex-spouses making claims on insurance policies and taking those claims to court because of outdated beneficiary forms. Furthermore, it’s important that you understand how state laws where you live may affect beneficiary forms. For example, some states, such as Texas, have a revocation-on-divorce statute that automatically revokes an ex-spouse’s beneficiary designation upon divorce. This can cause problems if you intend to keep an ex-spouse as a beneficiary (we won’t get into reasons why you’d want to do that here). The work around to that is to just file a new beneficiary form after the divorce with your ex-spouse on it. However, many people forget to make such an update. Another common story with outdated beneficiary forms is that people don’t update the forms but update their will thinking that it will override such forms. Guess what, that doesn’t work and the information in a will that directs who should get your accounts is useless against a beneficiary form. So take this post as a reminder to update your beneficiary forms. If you haven’t had a major life event, you don’t have to wait, you can always review your beneficiary information and most updates are done by simply filling out a one-page form.
Are you considering leaving your IRA and its assets to your estate? This may seem like a tempting move for people who are planning on remaining single for the rest of their lives and who may not have any dependents to list on a beneficiary form. Some people are plan to leave their IRA to their estate and then divide the estate, which may contain other assets, among beneficiaries. Sounds like a good idea, right? Wrong. First off, an estate cannot be named as a designated beneficiary as it does not have a defined lifespan. Next, it makes more sense to name actually people (i.e. family members) as your IRA beneficiaries as doing so will also give them more control over what they can do with the money they inherit and will be much more efficient. Most IRA plans allow you to designate certain amounts to certain people, so you can still control how much you leave to certain beneficiaries. You can also still divide up your estate as you planned as well. In the end, keeping your IRA and estate separate when it comes to beneficiaries is more efficient and will better serve the people you want to inherit from you when you pass. Keep in mind that estate planning isn’t easy. It is quite complex as there are many laws and rules that govern how your estate can be divided and what roles particular instruments can play within the process, which is why you really need to speak with an attorney–preferably one specializing in estate planning–when setting any plans regarding your estate.