If you own a traditional IRA, it may be one of your more important estate assets. Your IRA will pass to whomever you have named as its beneficiary. When it’s a substantial sum, there is the opportunity for continued tax deferral, as well as a source of income for many years and, perhaps, for more than one generation, through a technique known as IRA “stretching.”
The first step in the process is to limit what you take from your IRA to the required minimum every year; withdrawals are required after you reach 70½. After your death the stretch options depend upon whom you have chosen as your beneficiary and what your beneficiary decides to do.

When your spouse is your beneficiary
Your spouse has several choices when he or she inherits your IRA. If he or she withdraws everything in your IRA, or a portion of it, regular income tax is paid on the amount withdrawn. Taking everything ends any further “stretch.”
Other choices will extend the life of the IRA and could provide the potential for a substantial legacy for your children or grandchildren.
• Transferring the assets to the spouse’s own IRA (or a new one). If otherwise eligible, your spouse can make contributions to this IRA, boosting the balance even higher for future beneficiaries. He or she needn’t make annual withdrawals until after age 70½, and the withdrawals will be based on his or her life expectancy.
• Remaining a beneficiary. Your spouse’s name is added to yours as the owner of the account. Although contributions are not permitted, there’s an advantage when your spouse is younger than age 59½. Should he or she need IRA funds before then, there’s no 10% early withdrawal penalty. The distribution rules are more complicated, however. If you die before reaching age 70½, your spouse must start distributions when you would have turned age 70½, and they must be based upon his or her life expectancy. If you had started making the required distributions before your death, your spouse can continue to receive them, over your life expectancy or your spouse’s, whichever results in larger distributions.
• Disclaiming (refusing) the IRA. If your spouse has sufficient assets of his or her own, he or she may disclaim your IRA within nine months of your death. The IRA then will pass to an alternate beneficiary whom you have named, without paying gift tax and, perhaps, with the opportunity to stretch the IRA over the lifetime of a younger beneficiary, such as a child or grandchild. Consult your advisors to discuss this option further.

Other beneficiaries, multiple beneficiaries
If anyone other than your spouse is the beneficiary of your IRA, he or she cannot treat the IRA as his or her own. And if your beneficiary wants to withdraw all the money from the IRA, it must be done by December 31 of the fifth year after your death.
If your beneficiary doesn’t withdraw the funds from your IRA soon after your death, distributions must begin no later than December 31 of the year after your death. The best scenario is when a beneficiary is young, and you had not yet begun receiving required distributions at the time of your death, because a beneficiary is entitled to stretch out distributions over his or her lifetime. There’s a very good chance that the required distributions will be less than the investment return of the account, so the IRA can keep growing. If you already had begun receiving required distributions from your IRA, your beneficiary can keep receiving them, calculated over your life expectancy or the beneficiary’s, whichever yields the larger annual distribution. In this case, having a young beneficiary offers no added benefit, because withdrawals will be based upon what was your shorter life expectancy.
If you plan to leave your IRA to more than one person—for instance, to more than one of your children—the annual distributions must be calculated over the life expectancy of the oldest beneficiary. This result yields the largest distributions and the fastest exhaustion of the IRA’s assets. You can avoid this situation by dividing the assets in your IRA into separate IRAs for each beneficiary. Distributions from each IRA will be based upon the life expectancy of the beneficiary of that IRA. This arrangement must be completed by December 31 of the year after your death.

A trust as your beneficiary
Naming a trust as the beneficiary of your IRA may provide an extra layer of protection and a degree of control over the assets in your IRA.
An IRA trust works like this: The trust’s beneficiary is considered the beneficiary of your IRA, and the required distributions must be calculated over his or her life expectancy; if more than one beneficiary, over the life expectancy of the oldest beneficiary. When the IRA beneficiary dies, assets pass as you have directed in the trust agreement.
There are significant benefits to naming a trust as your IRA beneficiary:
• The trustee is given the authority to pay only the required distributions to an IRA beneficiary, maximizing the IRA’s life.
• You, not your IRA beneficiary, control to whom your IRA passes at your beneficiary’s death.
• Because your IRA is in a trust, its assets are less likely to be lost to a beneficiary’s poor investment management skills, divorce or creditors’ claims.
An IRA trust must be set up following a specific set of requirements established by the IRS in order to achieve the desired benefits and to avoid negative income tax consequences. Consult one of our trust professionals for more information.

The Roth IRA alternative
Amounts that you contribute to a Roth IRA aren’t tax deductible. However, presuming that the requirements are met, distributions will be completely tax free. In addition, minimum distributions are not required for the account owner (though they are required for a surviving beneficiary).
The good news is that, if your beneficiaries inherit your Roth IRA, they won’t pay tax on the distributions, and they escape the 10% penalty as well. The distribution rules, however, remain the same.

An invitation
Are you interested in exploring how to make your IRA a legacy for your loved ones? We would be glad to discuss your options with you and help you to integrate a bequest of your IRA with the rest of your trust and estate planning.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

Edie Windsor and Thea Spyer entered into a committed relationship in 1963. In 1993 they registered as domestic partners in New York City, when that option became available. They married in 2007, in Canada, which then permitted gays and lesbians to marry. Spyer died in February 2009. Although the estate passed to Windsor, the marital deduction was not available, and a $363,053 estate tax was paid. Windsor sued for recovery of the estate taxes, arguing that her marriage must be respected for estate tax purposes under the equal protection clause of the U.S. Constitution. In addition, she argued that the definition of “marriage” under the Defense of Marriage Act (DOMA) must be unconstitutional.
Windsor won on all counts, in all courts, most importantly in the U.S. Supreme Court in June. The Court announced that the definition of marriage is purely a state matter, and whatever definition a state adopts must be respected by federal law. Accordingly, Windsor is entitled to a full refund of estate taxes paid, with interest, because the marital deduction should have been available to Spyer’s estate.
When a statute is declared unconstitutional, it is void from enactment. That means Windsor’s victory isn’t just for herself and future same-sex married couples, it applies retroactively to any married couple that was denied a marital deduction. As a practical matter, the statute of limitations will cut off relief after three years in most cases.

Estate planning implications

The expansion of the amount exempt from federal estate tax to $5 million (inflation-adjusted to $5.34 million in 2014) has made planning for the federal estate tax irrelevant for the vast majority of estates. In part that is because, for married couples, the amount excluded from tax goes to at least $10.68 million with the portability of the marital deduction. Still, that doubling effect could be important to wealthy same-sex married couples, and it is now available to them if they reside in one of the states that recognize gay marriage.
What happens if a gay couple is legally married but later moves to a state that doesn’t recognize their marriage? Regulatory guidance will be needed from the IRS. Some observers expect the IRS to take an expansive view; that is, once a marriage is recognized for federal tax purposes it always will remain recognized. But that is not yet certain.
A trust for an adult child routinely may give the child the power to appoint trust property to the child’s spouse, or it may give a spouse an interest in the trust. Such a provision may be interpreted to include same-sex spouses in relevant jurisdictions. The trust grantor may want to clarify that this is the intended result, if it is, in fact, so intended.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

The importance of having a will cannot be overemphasized. It’s not simply the way that you direct the distribution of your financial and personal assets. Your will also enables you to designate an executor (or personal representative) who will act in your stead to meet your obligations and steer your assets through the probate process. If you have minor children, your will allows you to name a guardian who will see to their upbringing if you and your spouse should die with the task unfinished.
Of course, no will is final until its author dies, or is otherwise unable to change it. As circumstances change, provisions of an existing will can become hopelessly out-of-date. In any case, it is wise to review your will from time to time to see whether adjustments may be in order. Nevertheless, certain categories of family and financial changes make a prompt will review a top priority.

Personal status
Naturally, when you marry, divorce or remarry, changes in the provisions of your will are called for. At the same time, you’ll want to review beneficiary designations in retirement plans and life insurance policies as well.
A move to a new state, or simply acquiring assets in a different state, means that at least some of your property will be subject to a different set of laws from those under which your will was drafted originally. Thus, it should be reviewed and revised by an advisor versed in the workings of the new state’s inheritance laws.
When you have named specific assets in your will, such as a block of XYZ Corp. stock or a vacation home, you’ll need to make revisions when you dispose of the named property. You also may wish to make adjustments when a given asset changes substantially in value.
Retirement, a time of sharp change in your sources of support, is also a time for will review to ensure that it is based on your current resources.

Children
As mentioned above, your will is the place to provide for the guardianship of your offspring. You’ll probably want to name an alternative guardian as well, in case your first choice is unable or unwilling to serve.
If you’ll be leaving a substantial sum to provide for your children’s care, you may wish to set up a trust for that purpose in your will. That course may be advisable because in some states guardians are under strict court supervision as to the investment and expenditure of a child’s inheritance.
Other appropriate changes to your will would be in order when your children reach major¬ity, marry, become disabled, or experience other major changes in their personal or financial situation. Certainly, the birth or adoption of a grandchild is an event worthy of consideration.

Your financial status
If your net worth has increased significantly since you wrote your current will, revisions undoubtedly will be in order. Your larger estate gives you more opportunities to provide for family, friends and favored charitable causes. So you’ll want to be certain that assets are managed and distributed as you think best.
Estates that grow in value naturally grow in complexity as well. As a result, you may need to add special instructions for dealing with a business interest, an art collection, copyrights or other not-so-simple assets.
Also, as your wealth expands, so does your exposure to gift and estate taxes. A simple everything-to-my-spouse will can bring on hundreds of thousands of dollars of needless estate taxes.

Legal developments
Federal and state tax laws are subject to change at any time. Thus it’s important for you and your financial advisors to stay on top of these developments and make adjustments to your estate plans as required.
You will note that these arrangements rapidly become too complex to be placed in the hands of an untrained individual. The executor or personal representative named in your will needs to have the time and know-how to protect estate assets, collect debts, settle claims, manage investments, keep records and minimize tax exposure. To avoid burdening a family member or friend, you might choose to designate us to handle the settlement of your estate and provide long-term management as trustee. We’d also be happy to act as coexecutor with a family member to ease his or her burden.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.

If you are new to our state, or someone among your family or friends has just relocated here, we say, “Welcome!” Your move was certain to have been hectic (isn’t everyone’s?), and you still must have a million things to do. Even so, we’d like to make some suggestions regarding your financial and estate planning that, even though they may take some time and effort to put into effect, are, nonetheless, very important. What’s more, even if your relocation dates back a bit, it’s still a good idea to make sure that you have done the following:

1. Reviewed your will. Different states have different formalities regarding the drafting and execution of a will. If, for some reason, the will that you drafted in your former state doesn’t comply with our state law, it could be declared invalid. In that case your assets will pass as if you had no will, with our state’s intestacy laws dictating who will receive your assets. The key point to remember is that the beneficiaries chosen by the state’s intestacy laws may not be the ones to whom you made bequests in your now-invalidated will.
When you review your will, be sure to look closely at guardianship designations for your minor children to see if they still are logical in light of your relocation. The same goes for your executor designation. If you’ve named an individual or institution no longer nearby, consider naming us to serve as your executor. There are many good reasons to do so. We’ll be glad to tell you about them.

2. Moved a trust. If you already have established a trust in your former state of residence, we can help you determine whether it might be beneficial from a tax perspective to change the situs of that trust. You also may want to consider a change of trustee. By naming us to serve as the trustee of your relocated trust, you’ll have somebody close at hand with whom to discuss your concerns and to keep you informed. Of course, by doing so, you will also enjoy the wide variety of valuable services that we offer our trust clients.

3. Transferred your retirement assets. Are you entitled to a lump sum distribution from a former employer that you plan to roll over into an IRA? If you are, be sure to arrange for a direct transfer of your account balance from the company plan in order to avoid unpleasant tax surprises, rather than receive the money in hand. We will be glad to help arrange for a smooth transition of your retirement plan balance from the plan trustee to the IRA established with us.
Have you already set up a rollover IRA? If you have, we can help arrange for a
tax-free transfer of the funds in your current out-of-state IRA to an IRA with us.
In either case (or even if you did not roll over all of your account balance and seek investment guidance with regard to the money), we would be glad to meet with you and tell you about the wide range of investment choices that we offer.

4. Avoided unnecessary taxation. Have you severed all ties with your former state? If not, there may be all sorts of tax issues that you may need to address. Understanding the concept of domicile is important in order to avoid potential tax traps. A critical point: A person has only one domicile—your “home” state—yet you may be considered a resident of two states during the year. But nothing stops more than one state from claiming that you were “domiciled” there and that you should pay income on your earnings as if you were a resident, rather than a nonresident.
In the extreme, you could even face the possibility of overlapping state death taxes. Again, two states may put forth the claim that you were domiciled there and attempt to levy estate or inheritance taxes.
Other issues may arise as well. Property that you still own in your former state may be subject to tax in that state. A home that is not owned in joint name will be subject to the probate laws of that state.
Therefore, if you maintain connections to more than one state, you’ll want to find out about the steps that can be taken to minimize the possibility of multiple taxation. Consultation with a legal or tax advisor can help ensure that you have only one domicile for tax purposes.
If you have questions or concerns about your estate planning in light of your relocation, we would be glad to meet with you to discuss them.

© 2014 M.A. Co. All rights reserved.
Any developments occurring after January 1, 2014, are not reflected in this article.