Estate planning
by JessAB
Being wealthy is a good thing but also means that there are some kinds of planning to do. Just wanted to jot down some points to consider as the whole planning can be quite confusing sometimes.
1. Revocable trust:
- The major advantage of creating a revocable trust is to avoid probate which can be time consuming and costly. So the beneficiary can receive assets without the need to wait for a probate court order and also preserve the privacy.
- The grantor (eg. Parent) can also be the beneficiary (as initial beneficiary) but gives the beneficiary control of the assets to the child upon death.
- When the grantor dies, the beneficiary (as successor beneficiary) receives inheritance based on how the trust instructs the assets to be distributed like outright or in different stages etc.
- However, the trust does not save estate and income taxes.
- It is a pain to transfer and retitle assets to fund the trust.
- Assets with named beneficiaries, such as Pay-on Death bank accounts, Transfer on Death, 401K, IRA and life insurance, will usually pass directly to beneficiaries without going through probate.
2. Irrevocable trust:
- Once the grantor transfers the assets to the irrevocable trust, he loses all the ownerships of assets meaning those assets are no longer his. This is a useful way to reduce the estate tax if the assets are much larger than $ 11 million.
- While irrevocable trusts can reduce estate taxes, income and capital-gains taxes can be costly because today, income generated from an irrevocable trust is generally taxed at a higher rate than a trust maker’s personal income-tax rate.
3. Roth IRA:
- Unlike 401K and traditional IRA, contribution to Roth IRA is after-tax and its investment earnings grow tax-free.
- Roth IRA is not subject to RMD during the lifetime of the owner. However, it is subject to RMD rules after the death of the owner. If you don’t take RMDs after inherit the IRA, you may have to pay a 50% IRS penalty on the RMD amount.
- There are Beneficiary RMD Calculators to estimate RMD amount.
4. Inherited Roth IRA by a surviving spouse:
- The surviving spouse can roll over the inherited Roth IRA to her own Roth IRA just as her own
- So the assets can grow tax-free.
- She can designate her own beneficiary.
- She does not have to take RMDs.
5. Inherited Roth IRA by an adult child:
- The child can transfer the inherited Roth IRA to his Inherited Roth IRA account held in his name.
- The assets can grow tax-free
- He can designate his own beneficiary(ies).
- His life expectancy may be used to calculate RMDs.
- The distribution is not considered as his taxable income.
- RMDs must begin by December 31 following the year of the original account holder’s death,
- Or he can delay distributions until December 31 of the fifth year after the year of the account holder’s death, at which point all assets must be distributed.
6. Convert 401K/traditional IRA to Roth IRA during retirement
7. Inherited real estate:
- When a beneficiary inherits a real estate property, the asset receives a step-up in cost basis to its value on the date of decedent’s death.
8. Estate tax and inheritance tax:
- This topic was previously posted on 12/8/2018.
9. How to Distribute a Decedent's Assets to Beneficiaries:
- see the following two links.
https://m.wikihow.com/Distribute-a-Decedent%27s-Assets-to-Beneficiaries
https://info.legalzoom.com/distribute-assets-living-trust-after-death-20613.html
In summary, here are some easy and effective ways to skip the probate process, including:
- naming POD or TOD beneficiaries for financial accounts
- owning property jointly
- leaving real estate with transfer-on-death deeds
- using a living trust
- naming the right beneficiaries for IRAs, 401(k)s and other retirement accounts.
