Mar 21, 2017

Posted in Blog - "Altman Speaks"

Costly & Irreversible Beneficiary Mistakes (That Are 100% Avoidable w/ Estate Planning)

Costly & Irreversible Beneficiary Mistakes (That Are 100% Avoidable w/ Estate Planning)

Over the years, I have invested a great deal of time fostering relationships with the financial planning community. I give seminars to financial institutions and associations, educating their employees and members on various estate planning topics. I do this because I want financial advisors and their clients to understand the critical connection between financial planning and estate planning. I believe that the more information I can give them, the better off their clients will be.

A recent case in New York supports that logic.

In this case, the client died, leaving his residuary estate to charity, but leaving his IRA to his spouse. Because of these designations, the spouse will lose almost ½ of the IRA in future income taxes. Had the gentleman left the IRA to the charity instead, the charity would not have paid any income tax on it and the residuary estate could have been left to the spouse without any inherent income tax liability, due to the stepped-up basis rules.  The estate tried to convince a Court to change the estate plan and the beneficiary designation after death.  The Court refused.

The lesson is that IRA designations are part of an estate plan.  When a client wants to do charitable planning, the first assets that should go to the charity are generally IRA and other retirement accounts for the very reason that charities do not normally pay any income taxes!

These examples further illustrate the point:

Example A:

In her Will, Mrs. Jones leaves her entire estate – her house and some stocks, valued at $500,000 – to her favorite charity.  Mrs. Jones, however, leaves her $500,000 IRA to her daughter.  While the daughter could “stretch” the IRA minimum distributions over her lifetime, if she decides to withdraw the entire IRA in the year after her mother dies, she has to pay about $200,000 of income taxes, leaving her with only $300,000.  The charity sells the house and stocks and ends up with $500,000.

Example B:

Mrs. Jones, with the advice of an estate planning attorney, decides to leave her $500,000 IRA to charity, and changes her Will to leave her entire estate – her house and some stocks, valued at $500,000 – to her daughter.  The charity gets the IRA, pays no income taxes, and ends up with $500,000.   The daughter sells the house and stocks, pays no capital gains or income taxes because of the stepped-up basis rule, and gets $500,000. Mrs. Jones’s daughter  has received $200,000 more because of good planning.

The Bottom Line:

Assets, whether cash, real estate, retirement accounts or otherwise, require estate planning.  Financial planners may be familiar with basic estate planning principles, however, they are not experts in estate law. This is why communication and collaboration between a financial advisor, a client and a seasoned estate planning attorney is key.

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