CURRENT ISSUES IN THE AREAS OF ESTATE, TAX
AND PERSONAL AND BUSINESS PLANNING
The information that follows summarizes some of the current issues in the areas of estate, tax and personal and business planning which may be of interest to you. Although this information is accurate and authoritative, it is general in nature and not intended to constitute specific professional advice. For professional advice or more specific information, please contact my office.
Watch For IRA Changes. Congress is considering several alternative pieces of legislation that would change the rules relating to IRAs and other benefit plans. The various bills are similar but distinctive. In general, the trend is to shorten the period of time during which designated beneficiaries would be allowed to withdraw retirement plan benefits. One of the bills would change the minimum distribution rules to require that they be distributed within five years of the employee’s or IRA owner’s death except in the case of a surviving spouse, a minor child, a disabled or chronically ill individual, or an individual who is not more than ten years younger than the employee or IRA owner. Those beneficiaries could continue to withdraw benefits over his or her life expectancy. Some of the bills have palliative effects, such as delaying the time when a participant must begin taking benefits (the mandatory distribution age is now 70½, and there is a push to increase the age to 72). There is also an impetus toward allowing contributions to a traditional IRA by a person who has reached 70½ by the end of the year (there is now a prohibition on contributions to a traditional IRA by a person who has attained age 70½). There appears to be broad support for changing the pension rules. Readers should be alert to possible changes. Rest assured that the end result would be a more complicated set of rules for IRAs and other benefit plans.
Protecting Your Original Will. It is very important for people to preserve and protect their original wills. In most instances people will be advised to keep the original last will and testament in a sealed envelope and in a safe place, such as a safe deposit box or a safe. Family members or others who will be involved in the estate settlement process should be aware of the location of the will and should have a means of access. A will does not need to be kept inside a sealed envelope, but it is a good idea to do so as a means of emphasizing the importance of preserving and protecting the original will and to prevent what I have seen some people do, which is to write notes in the margins or to delete or interlineate provisions or write in changes. That process will not be legally effective. I always provide a conformed copy of the will, which is a document that shows that the will was executed and indicates the names of the witnesses as well as the date that the original will was signed, and I encourage people to keep the conformed copy in an accessible area. If a person wants to review the will, then it is the conformed copy that should be reviewed while the original is left in the secure location. It is possible to probate (i.e., to “prove” and have admitted to probate) a copy of a missing will, but the process is more difficult. An original will that has been executed with a “self proof” certification can be admitted to probate without testimony from a witness to the will. Probating a will is a perfunctory process which, in Indiana, can be accomplished online without even a filing fee and with no formal hearing being required. Some attorneys will allow a client to execute multiple original counterparts of a will, but I do not. There technically can only be one original last will and testament, since if two or more original wills are signed more or less simultaneously, each later signed document will effectively revoke the previous one. There legally can only be one original last will and testament, and I feel that it is better if clients execute only one document, which should be preserved and protected.
Tax Liabilities Associated With Death. For most individuals, the tax consequences of dying will be insignificant or nil. The federal estate tax will only arise if an individual’s estate exceeds $11.4 million, which means that in the case of a husband and wife, with proper planning, the federal estate tax can be avoided on a total of $22.8 million. Of course, even when a person’s “estate” for federal estate tax purposes is significantly less than that, there are still planning options available that can help to avoid or can reduce income and capital gain taxes because of the overlap which exists between a person’s estate for federal estate tax purposes, even if there is no tax, and the income tax rules applicable to a decedent’s beneficiaries. One tax that a decedent’s estate obviously must face is final income taxes that will be due in the year of a decedent’s death, and of course there can be fiduciary income taxes due during the course of administration of the decedent’s estate or trust. In the case of the typical decedent, however, with a moderately-sized estate, particularly since the elimination of the Indiana inheritance tax, the tax consequences of dying are relatively insignificant. One set of taxes that many people fail to anticipate, however, are the taxes that will be incurred in conjunction with an inherited IRA. If a person dies having a sizeable IRA, distributions from the IRA to the decedent’s beneficiaries will be taxable. While distributions can be spread out with a proper beneficiary designation over the beneficiary’s life expectancy, there are minimum required distributions that must be taken each year, and all such distributions will be taxable (except in the case of a Roth IRA). As noted in the previous item in this newsletter, there is an impetus toward reducing the period of time during which such distributions can be taken by certain IRA beneficiaries. Even in this era of relatively minimal tax consequences for most decedents, there are still a number of tax traps that should be anticipated and that can be avoided or lessened through implementation of a proper estate and asset protection strategy. Today, with the high cost of long term care, asset protection planning is significantly more important for most individuals than estate planning for tax minimization and probate avoidance. A good planning strategy will address all of these issues – every person should be aware of the planning options which are available.
Additional Information. Future issues of this Newsletter will address other issues of current interest. Please contact my office with any questions that you might have.