What Rules Apply?

The rules on how rapidly withdrawals must be taken from an inherited IRA differ depending on who or what the beneficiary is. There are a series of questions that guide that determination.

Question Number One – Can the Account Be Divided into a Separate Account for Each Beneficiary?

If, under the beneficiary designation, before December 31 of the year following that of the participant/owner’s death a separate account can be and is established for each beneficiary, a separate determination will be made for each account. If, however, the separation cannot be made, the distribution rule that applies to the whole account is the one that would be applicable to the least privileged beneficiary.

Question Number Two – Is There a “Designated Beneficiary”?

The least stretch opportunity is afforded to the beneficiary that is or the class of beneficiaries that contains a beneficiary that is other than a “designated beneficiary.”

A “designated beneficiary” is a beneficiary who is:

• named as a beneficiary under the terms of the plan or by an affirmative election by the
• owner/participant; and
• an individual who is alive on the owner/participant’s date of death.

A “designated beneficiary”:

• need not be specified by name, but must be identifiable on the owner/participant’s date of death;
• may be a member of a class of beneficiaries capable of expansion or contraction (e.g., my children or grandchildren) so long as the members of the class may be determined on the owner/participant’s date of death; and
• may be an individual among those named as beneficiaries of a “qualifying trust.”

To be a “qualifying trust,” a trust must meet four simple requirements:

1. It must be valid under state law;
2. It must be irrevocable upon death of owner;
3. All beneficiaries of the trust must be identifiable from the trust instrument; and
4. The Trustee must provide a copy of the trust to the plan or IRA custodian by October 31 of the year following the participant/owner’s death.

Examples of named beneficiaries that cause the “designated beneficiary” question to be answered in thenegative are the owner/participant’s estate, a charity, an entity (e.g., a corporation, partnership, or LLC), and an individual who was not alive at the death of the participant.

The “designated beneficiary” determination has to be made by December 31 of the year following that of the participant/owner’s death. If there is a designated beneficiary then the Life Expectancy Rule applies. If not, then the Five Year Rule applies.

Life Expectancy Rule

If the Life Expectancy Rule applies, the beneficiary’s RMD in the year following the owner/participant’s death will be an amount equal to the account balance on the December 31 following the owner/participant’s death divided by the beneficiary’s actuarial life expectancy, as determined by the IRS Single Life Table, at the time of the owner/participant’s death. The first RMD withdrawal must be taken by the December 31 following the first anniversary of the owner/participant’s death.

In each subsequent year, the beneficiary’s RMD will be the account balance as of the prior December 31 divided by a number that is one less than the previous year’s divisor.

Five Year Rule

If the Five Year Rule applies, every penny of the account must be withdrawn by the December 31 following the 5th anniversary of the owner/participant’s death. Withdrawals can be made at any time in the period so long as the account is emptied by that date.

I attended a session on Veteran’s Benefits. One of the things I learned was that a claim for Veteran’s Benefits can be filed where the claimant lives or where a responsible party lives. This will give us more flexibility in where we file. Part of the session was on responding to a Demand for Overpayment. A Veteran can send a Request for Forgiveness of Debt within 180 days of when a decision is made. This will work if there are not any assets and there was no fraud or misrepresentation. Another part of the session was on Veteran’s Disability Compensation. I learned that there are several presumptive conditions, where if you served during a particular time and have these conditions it is presumed that the Veteran has a service connected disability. ALS, MS and TB from any period of service are presumptive conditions. The list for Agent Orange is expanded every year. The instructor also told us it is worth filing a claim for an illness or disability that is not currently covered, because if it is ever covered in the future, then the Veteran will be covered back to the date of the original claim.

James, Brad and Matthew got to come up and we went on a mini-vacation after the conference. Seattle was a place I always wanted to go. I had seen pictures of how beautiful the area was and it surpassed my expectations. There was a beautiful waterfall on the side of the road in Canada. We hiked to it in the rain. We got to see resident and transient Orca whales on a whale watching tour out of Friday Harbor.

The Fox Guarding the Hen House

A second major problem in planning for qualified plans and IRAs is the “found money” syndrome.

Those who put the money in IRAs and qualified plans are often loath to take out even the required minimum distributions. Their beneficiaries often do not share that inhibition. Instead, they view their inherited IRA or qualified plan account as found money to be withdrawn and spent. Too often that spending is for the unwise and imprudent satisfaction of material desires and whims.

The symptom of this syndrome that the advisor typically sees is the rapid loss of assets under management. The good news is that the “found money” syndrome can be prevented.

The Retirement Plan Trust

Can you asset protect your beneficiaries’ inherited IRAs and qualified plan accounts and ensure that your beneficiaries receive the maximum stretch out benefit of tax-free compounded growth? The answer is a resounding, “YES!” The Retirement Plan Trust can do just that.

The Retirement Plan Trust is designed to weave carefully through the many pitfalls that exist in the law.

Withdrawals after the Owner’s Death

After the owner/participant’s death, when RMDs must begin and how much they must be is determined by different sets of rules. Those rules can be established in the qualified plan document as long as they are no more lenient than those established by the IRS for IRAs. Historically, many qualified plans did not offer inheritors the option to stretch their withdrawals out over their actuarially determined life spans. Employers, finding no benefit in administering accounts for beneficiaries of deceased employees, often required inherited benefits to be immediately distributed or taken within just a few years. To ensure that beneficiaries of qualified plan participants could take advantage of the maximum stretch opportunities allowed by the tax laws, Congress has now required that, effective January 1, 2010, all qualified plans must offer plan participants’ beneficiaries the option of rolling their inherited accounts over into an IRA or a Roth IRA. Therefore, we will discuss only the rules for distributions from inherited IRAs and inherited Roth IRAs (which are the same).

These areas really are a maze with trips and traps for the unwary. It takes an expert to help you navigate through the maze and make it out safely on the other side. Aid and Attendance is a benefit that a lot of veterans don’t realize that they qualify for. It requires 90 days in the military and 1 day during a war time period. It also requires a level of medical necessity. There is a maximum level of assets, but assets can be gifted away without a look back period. Gary showed us in the course how sometimes the veteran can afford to spend more on care with the help of Aid & Attendance without increasing the out of pocket amount for the veteran.

Gary also talked to us about the new TIERS (Texas Integrated Eligibility Redesign System) that is supposed to make filing applications more efficient. He talked about many of the traps in this area and how having someone who knows how the system works can help the application get processed in a timely manner. One of the examples he gave was someone from his company called to check on an application and was told by the case worker that they were so understaffed that they only worked on applications when someone called and asked about them.

If you need help with Medicaid, Aid, and Attendance or other long-term care issues, Gary and I can work together to help you.

Asset Protection of Qualified Plans and IRAs

Asset protection for an owner’s qualified retirement plan accounts is provided under federal law, while any that exists for IRAs are provided only under state law. ERISA (the Federal Employee Retirement Income Security Act of 1974) provides protection from creditors for all qualified plan assets while they remain inside the plan. ERISA’s asset protection for qualified plan distributions, however, depends upon whether the plan is a pension plan (complete protection) or a welfare benefit plan (no protection). Under ERISA, a “pension” retirement plan is any “plan, fund or program which…provides retirement income to employees.” Defined benefit pension, profit sharing, and 401(k) plans are all “Pension” plans under that definition. ERISA protections are the same both in bankruptcy court and outside of bankruptcy. ERISA’s protection also extends to an owner’s IRA assets that were rolled over from a qualified plan.

Non-Bankruptcy Protection for IRAs

ERISA does not govern IRAs and Roth IRAs. Any non-bankruptcy protection afforded for them comes under state law, which varies widely from state to state. That protection goes all the way from unlimited protection to protection of a specified amount to protection of a court-determined amount reasonably necessary for the debtor and any dependents. Also some state statutes may not protect Roth IRAs or IRAs converted to Roth IRAs.

Bankruptcy Protection for IRAs

Bankruptcy law only protects up to $1 Million of IRAs that were not created by rollover from a qualified plan. Do not combine an IRA rolled over from a qualified plan with one that was not, because doing so can jeopardize the client’s asset protection in bankruptcy.

Asset Protection of Inherited Retirement Plans Including IRAs

Texas courts have held that inherited IRAs have no asset protection, whether in or out of bankruptcy. Congress did not contemplate asset protection for anyone other than the worker (or the worker’s spouse after a spousal rollover); its goal was to ensure the availability of assets during the owner/participant’s retirement. Given this reasoning, it seems likely that more courts will find that inherited IRAs provide no asset protection.

Next month, I’ll cover different trust plans that can help you protect your inherited retirement.

Long-term care can be incredibly expensive. In Texas, care costs on average $3,000 a month for assisted living and $190 a day for a private room in a nursing home. Your medical insurance policy does not cover long-term care, so you will have to look into other options for paying for long-term care. Medicaid and Medicare both offer the potential for paying your long-term care costs. If you qualify for Medicaid, then most of your expenses will be covered. Medicare will help cover some expenses, but not all expenses you can incur at a nursing home or in a assisted living facility. As a result, many people pay for long-term care out of their pockets until they qualify for Medicaid.

Another option is long-term care insurance, which can help protect any significant assets you have against the high costs of long-term care. If you do not own significant assets and you have to stretch your income to pay for living expenses as it is, then it’s most likely best that you pay for care yourself until you qualify for Medicaid.

Reasons to consider long-term care

The following factors can contribute to whether you will possibly need long-term care in the future:

• Long life expectancy – The longer you live, the more likely you will need long-term care.
• Gender – Women have been consistently shown to live longer than men.
• Family – If you have family who can take care of you, you may not need to look into long-term care.
• Health history – If chronic or debilitating conditions run in your genes, then your risk for needing long-term care greatly increases.

Purchasing long-term care insurance

Before you look into purchasing long-term care insurance, you may want to go over your financial situation with an advisor first. Also, remember that the younger you are, the less expensive an insurance policy will be.

If your financial advisor agrees that an insurance policy is best for your interests, there are four different avenues you can take to purchase a long-term care policy.

• Individual policy – Most long-term care policies are sold to individuals, and these policies can vary in coverage from company to company.
• Group policy – Some employers offer a group long-term insurance policy or discounts on individual policies.
• Government policy – Federal and state government employees and retirees can apply for coverage through the Federal Long Term Care Insurance Program. Please note, however, that this does not mean that the government pays for your insurance premiums.
• Association policy – Like some employers, some associations offer policies to its members. Be sure to review the terms of the policy coverage before signing, just in case you need to leave the Association. Doing so can cancel your coverage.

Long-term care insurance coverage

Long-term care policies can cover several different types of care, including the following:

• Nursing home care
• Assisted living care
• Home health care (physical therapy or a care-giver)
• Adult day care
• Other services, such as hospice care, respite care, or care-giver training for family members

The amount of coverage depends on the type of service. Be sure to understand your policy limits so you and your family will know up front how much of your care will be covered.

Long-term care policies, however, often do not cover the following:

• Preexisting conditions
• Mental and nervous disorders
• Care-giving by family members

To get a list of registered long-term care insurance companies, call the Texas Department of Insurance (TDI) help line (800-252-2439) or visit their website.

This article examines the issues surrounding caring for pets after the disability or death of the pet’s owner. Given the feelings of many individuals towards their pets, and the costs of care and longevity of some types of pets, planning in this area can be of critical importance.

A good resource for pet owners is Providing for Your Pet’s Future Without You by the Humane Society of the United States (order a free kit by calling 202-452-1100 or e-mailing petsinwills@hsus.org). It includes a door/window sign for emergency workers, an emergency contacts sticker for inside of the door, emergency pet care instruction forms for neighbors/friends/family, wallet alert cards, and a detailed instruction sheet for caregivers.

Providing for Pets Upon the Owner’s Death

Outright Gifts

An individual cannot leave money outright to a pet. An individual may leave an outright gift of money to a caretaker with the request that the caretaker care for the individual’s pet for the rest of the pet’s life. However, because the caretaker received the gift outright, and not in trust, no one is responsible for ascertaining whether the pet is receiving the care requested by the pet owner.

Once the caretaker receives the gift and the pet’s owner is gone or incompetent, there is nothing to stop the caretaker from having the pet euthanized, throwing it out on the street, taking it to a local animal shelter, or using the assets in ways unrelated to the care of the pet. In addition, once in the caregiver’s hands, the assets are exposed to the caregiver’s creditors.

Pet Trusts

A pet owner can establish a trust for the benefit of the pet. The trust will designate a trustee and a caretaker. The pet’s current standard of care determines the endowment amount required to provide care for the pet. Factors include: the cost of daily care (food, treats, and daycare), veterinary care (yearly teeth cleaning, shots, nail trimming, and emergency care), grooming, boarding, travel expenses, and pet insurance. Additional factors may apply in particular cases.

Pet trusts allow the pet owner to provide detailed requirements as to how the caregiver must care for the pets upon the pet owner’s disability or death.

Pet Identification

To prevent the caregiver/beneficiary from replacing a pet that dies in order to continue receiving trust benefits, the pet owner should specify how the trustee can identify the pet. Micro-chipping the pet or having DNA samples preserved are two methods commonly used for verification.

Do not expect much from the holidays for at least a year.

Expect to feel completely numb, and then accept that it’s okay to feel that way. In many ways, numbness is the best coping mechanism for pushing through the holiday season. As such, don’t force yourself to do things that could bring you out of the numbness and stir up emotions. For example, stay away from serious Christmas music and restrict your playlist to whimsical Christmas music, such as “Here Comes Santa Claus” or “Up on the Housetop.” If necessary, avoid all Christmas music.

The same goes with decorations. If you want to put up decorations, great. If you don’t feel like it, then don’t. Forcing yourself to “get into the holiday spirit” will hinder the healing, not help.

However, this does not mean that you should hinder the holiday for others. If they want to listen to holiday music and you’re afraid it will upset you, just leave the room. If your family gives gifts to celebrate, don’t deny anyone this tradition.

It’s okay to cry.

Expect you or other family members to be struck by something that will bring on tears. If it feels uncontrollable or if you’re trying to be strong for others, it’s okay to escape to the bathroom for a few minutes of alone time. If your tears or someone else’s tears spur on tears from others, band together to comfort one another and don’t dwell on the fact that you all are crying. Most likely, the tears will end as quickly as they started.

Avoid alcohol.

Alcohol has the tendency to lower one’s inhibitions, which does include emotions, so you are far more likely to shed tears or become too emotional after a drink than without a drink. If you are the type who is a sad or gloomy drinker, then avoiding alcohol over the holidays is doubly important.

Avoid activities that you always shared with your loved one.

Don’t do the things that you and your loved one always did together. Don’t go to the traditional places either. If you can, keep things simple. Maybe try to arrange the holiday to be spent at a different house this year. You can always return to traditions the following year.

Don’t spend the days leading up to the holiday worrying about how to cope with them.

The worst anxiety is always the anxiety of how to deal with the upcoming anxiety. Obsessing over how to get through the holiday will not only make it seem far worse than it is, but it can make the days seem even longer. Treat all days leading up to the holiday as ordinary days and remember that the holiday lasts only 24 hours. Once it is over, make sure it is completely over so you can return to your regular routine and let time run its course.

To anyone who will go through the holidays this year with the loss of a loved one, remember that your loved one would want you to do whatever you need to do–within reason–to get through the day as smoothly as possible.

Image by © Robert Llewellyn/Corbis

When do you need your estate plan to work? The answer is when you die or become disabled. The problem is most estate plans are designed based on the circumstances when the plan is created and usually have language to cover some contingencies. I have just come back from a continuing education program that opened my eyes on a better way to make sure that the estate plan I design for you works when your family needs it the most. I would love to have an opportunity to discuss with you how we can better protect the two most important things in your life: everyone you love and everything you own.

In order to design a plan that will work when your family needs it, I’ll need to know the answer to the following questions:

• When you are going to die?
• What the laws will be when you die?
• What assets will you own when you die?
• What will your family situation be when you die?
• Will all your assets be in the trust when you die?

One of the major problems is there are still things I don’t know. Socrates is quoted as saying, “The more you learn, the more you realize how little you know.” I have been helping people protect those they love by designing estate plans for over 15 years, but I have realized there is a lot I cannot predict or control.

I have been trying to design plans that would work regardless of the answers to those questions, but I realized there are things that none of us can predict. When I first started creating trusts, I would give the clients instructions on how to get the assets into the trust and send them on their way and assume the trust would get funded. Then I had a client’s daughter come into me after her mother’s death and ask if all the assets were in the trust; I had to answer, “I don’t know.” So I tried to fix that problem in the future, by holding a funding meeting with the client where I made sure that all the assets were in the trust. Then I had a client’s son come in and ask 10 years after the trust was created and funded, “Are all the assets in the trust?” And again I had to say, “I don’t know, because I don’t know what your mother has done over the last 10 years.”

I have come up with a solution that I would love to discuss with you. Please call Tammy to schedule an appointment.

I have exercised more in the last week than I have over the last 15 years, because we just changed our health insurance  to one that included a membership to a local gym. I was naïve enough to think I could just start exercising at the same level as 15 years ago. I am realizing that my body is older than the last time I exercised. I keep telling myself that these aches and pains are my body building muscle. I always feel so much better when I am exercising, so I don’t understand why it is so hard to motivate myself to exercise. One motivating factor is when I ask my healthy clients, who are in their 80s and 90s how they stay healthy, the most common answer is exercise and staying active. So I am one week closer to be healthy in my 90s.