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Using a Roth IRA as an Estate Planning Tool

A Roth IRA does not have to be used as just a retirement plan; it can also be a way to transfer assets tax-free to the next generation.

Unlike a traditional IRA, contributions to a Roth IRA are taxed, which means that the distributions are tax-free. Also, unlike a traditional IRA, you are also not required to take any distributions on a Roth IRA, regardless of your age. If you don’t need the money for retirement, you can leave all of it in the IRA to grow tax-free and eventually pass on to your heirs.

If your spouse is the beneficiary on your Roth IRA, your spouse can become the owner of the account. Your spouse can either put the IRA in his or her name or roll it over into a new IRA, and the IRS will treat the IRA as if your spouse had always owned it. Just like you, your spouse does not need to take any distributions from the IRA if they are not needed.

The rules for a child or grandchild (or other non-spouse) who inherits an IRA are different than those for a spouse. They must withdraw all of the assets in the inherited account within 10 years. There are no required distributions during those 10 years, but it must all be distributed by the 10th year.

Certain non-spouse beneficiaries are treated like spouses, which means they can treat the IRA as their own:

  • Disabled or chronically ill individuals
  • Individuals who are not more than 10 years younger than the account owner
  • Minor children. Once the child reaches the age of majority, he or she has 10 years to withdraw the money from the account.

The benefit of a Roth IRA for your heirs is that the assets will be distributed tax-free. As long as you opened and began making contributions to the Roth IRA more than five years before you died, the distributions will not be taxed when the beneficiary takes distributions.

Another consideration is that money you leave your heirs in a Roth IRA does not go through the probate process. This can make it easier for your beneficiaries to access the funds quickly. But make sure that you name a beneficiary on your account. If no beneficiary is named, the account will go to your estate and will then have to go through probate. Also, be sure to regularly check that your beneficiary designations are up to date.

Leaving your heirs a tax-free Roth IRA may not always be the best plan. In figuring out the best type of IRA to leave to your beneficiaries, you need to consider whether your beneficiary’s tax rate will be higher or lower than your tax rate when you fund the IRA. In general, if your beneficiary’s tax rate is higher than your tax rate, then you should leave your beneficiary a Roth IRA. Because the funds in a Roth IRA are taxed before they are put into the IRA, it makes sense to fund it when your tax rate is lower. On the other hand, if your beneficiary’s tax rate is lower than your tax rate, a traditional IRA might make more sense. That way, you won’t pay the taxes at your higher rate; instead, your beneficiary will pay at their lower tax rate.

To determine if a Roth IRA should be a part of your estate plan, consult with your attorney.

Can My Family Inherit My Season Tickets?

Sports fans with season tickets may want their families to enjoy the tickets after they are gone, but passing on these tickets may not be simple.

Getting season tickets to your favorite sport is not always an easy task. Season tickets for some teams can cost a lot of money and require time on a waitlist. It makes sense that you may want family or friends to be able to take advantage of tickets that are still usable after you pass away. However, most teams place limits on how you can transfer the tickets both before and after death.

A season ticket is a contract between the purchaser and the team, so the team can put any restrictions it wishes in the contract. This includes setting limits on when and how the tickets can be transferred to someone else. Teams may explicitly state that the tickets cannot be transferred by will or trust, allow transfers only to a spouse or close family members, or require that ticket holders follow certain procedures in order to transfer the tickets.

For example, some teams have a form that you will need to fill out, designating a beneficiary to inherit your tickets. Other teams state that only a spouse can use a deceased fan’s season tickets. Still others allow transfers only to a parent, spouse, child, or sibling. If there is no surviving family member who can take over the tickets, the tickets go back to the team.

Note that some teams require fans to purchase a seat license before buying season tickets. This means the fan pays a large fee to buy a license for particular seats and then has the right to buy season tickets for those seats. A seat license, unlike season tickets, is transferable via a will or trust.

If you own season tickets, be sure to include them in your estate planning. Your attorney can determine the best way to transfer the tickets.

Why Small Business Owners Need an Estate Plan

Running a small business can keep you busy, but it should not keep you from creating an estate plan. Not having a plan in place can cause problems for your business and your family after you are gone.

While an estate plan is important for everyone, it is especially important for small business owners. Planning allows you to dictate what will happen with your business after you die or are no longer able to manage it. It can help you avoid excess taxes and debts and facilitate your business’s continued success.

Before sitting down to start the estate planning process, you should think about your goals for the business. What do you want to have happen if you die or become incapacitated? Should the business continue with current partners or be sold to new owners? Should your family take over? Should the business be shut down? Consider your family dynamics when thinking about these questions. Once you have come up with your goals, you can create a plan to meet them.

The basic building blocks of any estate plan include a will, power of attorney, and medical directives. The will allows you to direct who will receive your property at your death while the power of attorney and medical directives dictate who can act in your place for financial and health care purposes.

Following are some additional things a small business owner should consider as part of an estate plan:

  • Tax Planning. If your business is not a separate entity, you may want to consider ways to minimize estate taxes. The current estate tax exemption ($12.06 million in 2022) is so high that most estates do not pay any estate tax. However, a small business could put an estate over the limit. Also, the fact that the estate tax exemption is set to be cut in half in 2026 and that states have their own estate taxes means that tax planning is important. You may want to put your business assets into a trust or a separate business entity like a limited liability company to lower your estate tax burden.
  • Trust. A trust can be useful not only to reduce estate taxes, but also to ensure the continued running of your business if you die or become incapacitated. Because a trust passes outside of probate, the assets in the trust can be transferred immediately to the person you want to run the business without waiting for the whole estate to go through probate. In addition, if you become incapacitated, the trustee can continue to run your business without court involvement.
  • Buy-Sell Agreement. If you own your business with others, a buy-sell agreement can be very useful. Buy-sell agreements are used if one of the owners dies, leaves the company, or becomes incapacitated. It specifies who can buy an owner’s share of the business, under what conditions, and for what price.
  • Life Insurance. When you own a business, life insurance takes on new importance. A life insurance policy can ensure that your family continues to receive an income in the event of your death. It can also provide funds to keep the business running and be used to fund a buy-sell agreement.

Your estate planning attorney can help you come up with a plan to meet the needs of your business.

Estate Planning for a Single Person

If you are single, you may not think you need to plan your estate, but single people are in as much need of a plan as anyone else. Estate planning not only involves determining where your assets will go when you die — it also helps you plan for what will happen should you become incapacitated, perhaps as the result of a stroke, dementia, or injury. If you don’t make a plan, you will have no say in what happens to you or your assets.

Without a properly executed will in place when you die, your estate will be distributed according to state law. If you are single, most states provide that your estate will go to your children, parents, or other living relatives. If you have absolutely no living relatives, then your estate will go to the state. This may not be what you want to have happen to your assets. You may have charities, close friends, or particular relatives that you want to provide for after your death.

If you become incapacitated without any planning, a court will have to determine who will have the authority to handle your finances and make health care decisions for you. The court may not choose the person you would have chosen. In addition, going to court to set up a guardianship is time-consuming and expensive. With proper planning, you can execute a power of attorney and a health care proxy, which gives the people you choose the authority to act on your behalf, as well as an advance directive giving instructions on what type of care you would like. The power of attorney can also dictate exactly what powers the individual has.

Single individuals who are divorced need to make especially certain that the beneficiary designations on their IRAs, life insurance policies, and relevant bank accounts are up to date. If you don’t, your ex-spouse could get the funds. And for single people of means, opportunities to avoid state or federal estate taxes can be more limited than for married couples, although advance planning can close the gap.

In short, proper planning is a good idea for everyone. Contact your attorney to help you create an estate plan.

What Is a Fiduciary and What Are Its Obligations?

When you need someone else to care for money or property on your behalf, that person (or organization) is called a fiduciary.  A fiduciary is a person or entity entrusted with the power to act for someone else, and this power comes with the legal obligation to act for the benefit of that other person.

Many types of positions involve being a fiduciary, including that of broker, trustee, agent under a power of attorney, guardian, executor and representative payee. An individual becomes a fiduciary by entering into an agreement to do so or by being appointed by a court or by a legal document.

Being a fiduciary calls for the highest standard of care under the law. For example, a trustee must pay even more attention to the trust investments and disbursements than for his or her own accounts. No matter what their role is or how they are appointed, all fiduciaries owe four special duties to the people for whom they are managing money or resources. A fiduciary’s duties are:

  • to act only in the interest of the person they are helping;
  • to manage that person’s money or property carefully;
  • to keep that person’s money and property separate from their own; and
  • to keep good records and report them as required. Any agent appointed by a court or government agency, for example, must report regularly to that court or agency.

Remember, your fiduciary exists to protect you and your interests. If your fiduciary fails to perform any of those four duties or generally mismanages your money or affairs, you can take legal action. The fiduciary will probably be required to compensate you for any loss you suffered because of their mismanagement.

Don’t Just Hope for an Inheritance; Get It in Writing

A Massachusetts case demonstrates the importance of getting any agreements about inheritance in writing. The Massachusetts Appeals Court ruled that rendering services to someone in the hope or expectation that it will result in payment from an estate is not sufficient to entitle an individual to a portion of the estate.

Suzanne M. Cheney performed many services for her stepfather, Anthony R. Turco, expecting to receive a share of his estate. However, to her great disappointment, upon his passing he left her nothing. Ms. Cheney subsequently sued James F. Flood, Jr., who was both her stepfather’s lawyer and administrator of her stepfather’s estate, alleging legal malpractice and that she was entitled to recovery from the estate for the reasonable value of the services she and her family performed for Mr. Turco during the last years of his life.

The trial court judge dismissed the legal malpractice claim because Ms. Cheney and Mr. Flood had no attorney-client relationship.  The judge then dismissed the claim that there had been an implied promise of payment for services, called quantum meruit under the law, because Ms. Cheney failed to allege that she performed services for Mr. Turco with the expectation that she would be paid for them.

Ms. Cheney appealed the decision regarding the quantum meruit claim, arguing that while there was no express agreement between her and Mr. Turco that she would provide services to him in exchange for being listed in his will as beneficiary, she had always hoped that he would pay her through his estate. Unfortunately for Ms. Cheney, the court found that this gave her no legal basis for payment without an underlying contract or agreement between the parties.  The court ruled that Ms. Cheney’s hope or expectation, even though well founded, is not equivalent to entitling her to reasonable value of services under the legal concept of quantum meruit.

It seems that Ms. Cheney’s mistake was relying on a hope or expectation of receiving an inheritance under her stepfather’s estate and neither discussing it with him nor documenting a contract or agreement between the two.

Using a Minority Valuation Discount to Reduce Estate Taxes

While the current estate tax exemption is quite high, a closely held family business may put your estate over the limit. Careful planning is necessary to lower or completely avoid the tax, and minority valuation discounts are one strategy.

Families that want to pass on their business may run into the estate tax. Estates valued at more than $11.7 million (in 2021) are subject to federal estate taxation. If you decide to give your business away before you die, you need to consider the gift tax. The lifetime federal gift tax exclusion – the amount you can give away without incurring a tax – is also $11.7 million (in 2021). You can also give any number of other people $15,000 each per year (in 2021) without the gifts counting against the lifetime limit.

One estate planning strategy for reducing estate taxes is to gift some or all of a company’s ownership to your children. When you transfer a minority interest in a company, that stake is not as valuable because the minority owner doesn’t have the right to make all the decisions or vote on important issues relevant to the company. This is called a “minority discount.” So, for example, if a company is worth $10 million, a 10 percent interest in the company would be discounted to less than $1 million. The amount of the discount depends on each individual case, but usually ranges between 10 to 40 percent of the undiscounted value.

By using discounts, you can reduce the value of your company for estate tax purposes while at the same time gift your children a percentage of the company at a reduced rate. These discounts apply even if everyone who owns a stake in the company is a family member.

In 2016, federal regulations were introduced to eliminate this type of discounting. The regulations were withdrawn in 2017, but under the new administration it is possible that they will come back.

To find out if a minority valuation discount is the right strategy for your family business, contact your attorney.

Be Careful Not to Name Minors as Your Beneficiaries

Most people want to pass their assets to their children or grandchildren, but naming a minor as a beneficiary can have unintended consequences. It is important to make a plan that doesn’t involve leaving assets directly to a minor.

There are two main problems with naming a minor as the beneficiary of your estate plan, life insurance policy, or retirement account. The first is that a large sum of money cannot be left directly to a minor. Instead, a court will likely have to appoint a conservator to hold and manage the money. The court proceedings will cost your estate, and the conservator may not be someone you want to oversee your children’s money. Depending on the state, the conservator may have to file annual accountings with the court, generating more costs and fees.

The other problem with naming a minor as a beneficiary is that the minor will be entitled to the funds from the conservator when he or she reaches age 18 or 21, depending on state law. There are no limitations on what the money can be used for, so while you may have wanted the money to go toward college or a down payment on a house, the child may have other ideas.

The way to get around these problems is to create a trust and name the minor as beneficiary of the trust. A trust ensures that the funds are protected by the trustee until a time when it makes sense to distribute them. Trusts are also flexible in terms of how they are drafted. The trust can state any number of specifics on who receives property and when, including allowing you to distribute the funds at a specific age or based on a specific event, such as graduating from college. You can also spread out distributions over time to children and grandchildren.

If you do create a trust, remember to name the trust as beneficiary of any life insurance or retirement plans. If you forget to take that step, the money will be distributed directly to the minor, negating the work of creating the trust.

To create a trust, consult with your attorney.

Saying Medicaid Estate Recovery Keeps Families in Poverty, Advocacy Groups Call for Abolishing It

To qualify for Medicaid coverage of long-term care, you must satisfy very complicated financial eligibility rules—rules that often can be traps for the unwary. One of the most significant traps is Medicaid’s right to recover its expenses from your estate after you die – a practice known as “estate recovery.”

Under current Medicaid law, states are required to attempt to recoup Medicaid spending for long-term care services. Since about the only asset you’re allowed to own and still get Medicaid coverage is your home, this right of estate recovery is the state’s claim against your home. In other words, if you own a home, Medicaid is really a loan. It will pay for your care, but your house will have to be sold when you die to repay the state for the services it provided.

Now, five elder advocacy groups are calling on Congress to eliminate Medicaid estate recovery after a congressional advisory commission concluded that the practice recoups only a tiny percentage of Medicaid spending while contributing to generational poverty and wealth inequity.

“The burden of estate claims falls disproportionately on economically oppressed families and communities of color, preventing families from building wealth through home ownership, which has been historically denied to communities of color through discriminatory public policy,” the five groups – Justice in Aging, the National Academy of Elder Law Attorneys, the National Health Law Program, California Advocates for Nursing Home Reform, and the Western Center on Law & Poverty – wrote in a jointly authored Issue Brief, Medicaid Estate Claims: Perpetuating Poverty & Inequality for a Minimal Return. “Congress should amend Federal law to eliminate Medicaid estate claims. Alternatively, the law should be amended so that states have the choice of whether to use Medicaid estate claims, as recommended in a recent report to Congress by the Medicaid and CHIP Payment and Access Commission (MACPAC).”

In its March 2021 report to Congress, MACPAC recommended that Congress amend Medicaid law to make estate recovery optional for states, rather than required as it is now. The group, a non-partisan legislative branch agency that provides analysis and recommendations to Congress, the U.S. Department of Health and Human Services (HHS) and the states, also recommends that HHS set minimum standards for hardship waivers under the Medicaid estate recovery program.  Currently, it’s up to the states to decide what qualifies as “hardship.”

Pointing out that estate recovery recoups only about 0.55 percent of total fee-for-service long-term care spending, MACPAC recommends that states not be allowed to pursue recovery against any asset that is “the sole income-producing asset of survivors,” homes of “modest value,” or any estate valued under a certain dollar figure.

In their Issue Brief, the five advocacy groups go a step further. Noting that “no other public benefit program requires that correctly paid benefits be recouped from deceased recipients’ family members,” they call for the elimination of estate recovery “so that low-income families are better able to retain wealth and pass it on to future generations. Or, at a minimum, federal law should be amended to make estate claims voluntary.”

The Issue Brief details how Medicaid estate recovery keeps families in poverty, exacerbates racial wealth gaps, and runs counter to efforts to create more affordable housing.

Non-Borrowing Spouses of Reverse Mortgage Holders Receive Expanded Protections

The federal government has expanded access to protections for spouses of reverse mortgage holders who are not named in the loan document, allowing more such spouses the ability to stay in their home if the borrowing spouse dies or moves to a care facility.

A reverse mortgage allows homeowners to use the equity in their home to take out a loan, but borrowers must be 62 years or older to qualify for this type of mortgage. Up until 2014, if one spouse was under age 62, the younger spouse had to be left off the loan in order for the couple to qualify for a reverse mortgage. But couples often did this without realizing the potentially catastrophic implications. If only one spouse’s name was on the mortgage and that spouse died, the surviving spouse would be required to either repay the loan in full or face eviction.

In 2014, the Department of Housing and Urban Development developed a rule that better protected at least some surviving spouses. Under the rule, if a couple with one spouse under age 62 wants to take out a reverse mortgage, they may list the underage spouse as a “non-borrowing spouse.” If the older spouse dies, the non-borrowing spouse may remain in the home, provided that the surviving spouse establishes within 90 days that he or she has a legal right to stay in the home (this could, for example, be an ownership document, a lease, or a court order). The surviving spouse also must continue to meet the other requirements of a reverse mortgage holder, such as paying property taxes and insurance premiums.

While this rule was beneficial to many non-borrowing spouses, it left some out: It applied only to loans taken out after the law became effective in 2014 and did not cover spouses of borrowers who had to leave the home due to medical reasons. In May 2021, the Federal Housing Authority issued a new rule that addresses these issues and expands the protection to the following spouses:

  • All non-borrowing spouses, not just ones whose loans began after 2014
  • Non-borrowing spouses of borrowers who had to move to a health care facility for more than 12 consecutive months
  • Spouses who were in a committed relationship with the borrower at the time of the loan, but were prevented from marrying the borrower due to their genders, provided they eventually married before the borrower’s death

The new rule also eliminates the requirement that non-borrowing spouses demonstrate that he or she has a marketable title or the legal right to remain in the home.

This rule still does not cover spouses who were not married to the borrower at the time of the loan (except in the case of same-sex marriages that were prohibited at the time). Additionally, the non-borrowing surviving spouse still cannot access the remaining loan balance.

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