Boo! Don’t Get Caught Short October 31

When A Trust Is An IRA Beneficiary 

We recently posted a question to our fiduciary, attorney, tax advisors and others who recieve our informative emails.  Below is the question and some helpful responses.

Caveat: This poll is not statistically significant and neither the results nor opinions expressed by participants represent legal advice, tax advice, investment advice or any other type of advice. Instead, dear reader, we encourage you to research, consider and seek appropriate counsel for your particular situation.

 

Normally attorneys do not recommend designating your trust as the beneficiary of your IRA for a number of good reasons.  Occasionally a settlor may choose to designate the trust as the beneficiary on an IRA account to avoid giving it outright to spendthrift heirs or to provide for children from a previous marriage. For whatever reason, if you are handling an estate in which the named beneficiary of an IRA is a trust, it pays to know how to handle this. Since IRA accounts can be a sizeable asset in an estate, handling this in the wrong manner can have a significant impact.
 

Question

A fiduciary steps into the role of Trustee upon Sally's death. Assume Sally died on April 1, 2012. Her husband died prior and left an IRA that she rolled into her own IRA account (note: not always the best choice). She then completes the beneficiary designation form and names her trust as the death beneficiary. If you are the new Trustee, what do you do?

A - Trustee must accept IRA assets into the Trust for Sally's beneficiaries. 

B - Trustee may decide Sally made a mistake and distribute to heirs directly.

C - Other.

 

Crucial To Know Now

If you are Sally’s trustee in the example above, you must provide a copy of the trust to the IRA custodian by October 31. 

To make sure the IRA distributions can be stretched out for longer than the maximum of 5 years allowed by the IRS, the trustee must provide a copy of a valid trust instrument; which is irrevocable; and, which has identifiable beneficiaries to the IRA custodian by October 31 of the year immediately following the year the IRA owner dies.

Poll Results

Most of our respondents chose answer “A” - Accept IRA assets as designated on the beneficary form into the trust. Since people sometimes do choose to use a trust to control the final distribution of assets held in a retirement or IRA type of account, the successor trustee would be required to follow these wishes.  BUT, there is more to the answer when you receive an IRA account to be administered in a trust: determining beneficiaries and action dates.

 

This poll resulted is some very thoughtful answers such as this one from Dave Sylvester, an investment advisor - “First determine if Sally died before or after her required beginning date (April 1 after she reached 70 ½). Second determine if the trust is considered a look-through or non-qualified trust. These two will determine the trustee’s options. When the trust is a look-through trust the trustee could pull the IRA out of the trust and set up new inherited IRA accounts for each of the name beneficiaries.”

Or, this one from Robert Telles, a Walnut Creek attorney,  “It is what it is, and those instructions should be followed. I have a client who just set up an IRA doing that very thing. The money is to be available for his second wife, but following her death it will revert to his existing children. I'm not sure there is a better way to ensure this.”

Tax Advisor Feedback

“It's important for the trustee to pay attention to key dates (all of the following fall in the year following the year of death):  September 30^th – date to determine “designated beneficiaries”, which is an individual or a trust that meets certain IRA requirements; October 31^st – deadline to provide IRA custodian with trust documents, and December 31^st – deadline for beneficiary required minimum distributions (RMD) to begin and to create separate IRA accounts if there are multiple designated beneficiaries.

 

Even when there is a mix of designated and non-designated beneficiaries in the trust, e.g. a child and a charity, with proper planning and timing it may be possible to maintain the life expectancy option for the designated benefiary. If the dates are missed, the child may be forced to take the distribution at a faster rate than desired."  -  Tim Hintzoglou, EA, CFP with Walnut Creek based Tax & Financial Services.

Attorney Feedback

“We commonly have clients name the trust as a beneficiary of the IRA(s), after the non-employee spouse, and in the case of younger children (dole-out sub trusts created under the Trust).

 

We have found that the only disadvantages are (1) the stretch IRA benefit is based upon the actuarial life expectancy of the eldest of the beneficiares; and (2) the trust wil have to remain open pending the full distribution of the IRA assets." - Peter Sproul, Walnut Creek Attorney, Mullen & Sproul, LLP

Conclusion

The trustee is responsible for determining the life expectancy of the oldest living identifiable beneficiary as this will control the length of term on distribution. In addition, if the trust language mentions at least one unidentifiable beneficiary, for example the term “child’s issue” or one that does not have a life expectancy, such as a charity, then the trustee may need to take another step to stretch the IRA distribution past five years and more closely follow the settlor’s wishes. The successor trustee might need to seek a court order to “set” the beneficiaries for the IRA based upon the currently living children and grandchildren.

Tax issues are always a factor to take into consideration when handling a trust. A fiduciary must have a basic grasp of a wide array of areas; including tax, legal, and investment management, along with heath care matters.  In all areas, licensed professional fiduciaries are encouraged to know when to seek qualified professionals for specific advice. Licensed, professional fiduciaries make it their business to know reliable professionals.  Feel free to contact us to let us know more about your professional services or how we might serve you.

 

Cashing In The Chips

The email below from my dad, with the subject line: "Cashing In The Chips" arrived in my inbox after I had learned that he had suffered a major heart attack and died on Sunday, September 23, 2012.  He was only 76 years old and a kind-hearted, creative, one of a kind guy.  When someone you love passes away, there are scenes that replay in your mind you wish you could do again or share with the person who is gone.  You also want to tell people about them.  I want to use his last email as a way to warn you. Please read-on.

My dad was unusual during the “Leave It To Beaver” days of stay-at-home moms.  He was the “at-home” parent while my mom worked as I grew up.  He would often make me lunch of ham & cheese sandwich with Miracle Whip and Campbell’s Tomato Soup (now Miracle Whip never darkens my refrigerator door, but as a kid I liked it).

He always encouraged me to go outside to get some Vitamin D when I was sick.  He seemed to like unconventional cures over medicine. He thought he needed to encourage balance in my life so he told me he only wanted me to get “A” grades in Physical Education. All other subjects I did well, but I think he wanted me to remember to enjoy being alive.

I could share more (and no doubt will at his memorial service later this week).  For now, I want to share his last email to me.  I think his cholesterol was high for a number of years but he had lost weight and thought he had a clean bill of health just a few months prior.  This is how he felt the day before he died.  He had no other warnings or heart problems prior.  My dad was gone before the ambulance reached the hospital. 

IF YOU EXPERIENCE THESE TYPES OF SYMPTOMS – GO TO THE EMERGENCY ROOM IMMEDIATELY AND TELL THEM YOU THINK IT IS A HEART ATTACK!!!!

 

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Date: Sunday, September 23, 2012, 8:23 am

From: Bill Rogers

Subject Line: Cashing In The Chips

HI,

God REALLY ANSWERED OUR PRAYER LAST NIGHT...Saturday, 9/22. This kid almost cashed in his “chips”. How? It had been happening for about two days. I have/had high blood pressure. But I lost 22 lbs, and the blood pressure went down to normal. So, all was well and good. Then, I went to the grocery store, Friday, and some guy came up behind me in line talking about shooting birds, and his cat eating one a day.  I was feeling very angry at him and in myself. But, I said nothing to the guy.  I simply thought someone had wrapped my chest and arms in a very tight cloth.

 Then, yesterday, Saturday I started to get the same feeling in my chest. I took some aspirin, and a couple other pills, and it got worse. I went to bed but tossed and turned. Donna is SUCH a great helper. She knows exactly what to do. We tested my blood pressure and it was 195/ (something). WAAAAAY to high. I could not go to sleep. My chest and body kept aching. So, about 4 AM I got up and Donna found some blood-pressure pills that I had forgotten about. I took one and then did go to sleep. I awoke TIRED, but the blood pressure reading is now 130/87/96. I will rest today. We have to find out what caused it to zoom up. WHEW...DO NOT WANT THAT FEELING AGAIN!!!!

Talk with you later.

Love and hugs,

Why I Walk To The End

I am a finisher. I love to check things off my "To Do" list. Here's a secret. Sometimes, just for the fun of checking it off, I’ll put something on my list that I am just about to complete. A little "yeah, me!" It works to motivate me to keep up the effort. 

The idea that we can uncover a way to prevent or even reverse the symptoms of Alzheimer’s is so tantalizing, but not yet close enough to check off our list. For a finisher like me, advances in understanding or developing a cure for this disease makes me jump for joy.  Join our team to donate or walk together on October 6, 2012.

Why It's Personal

From my grandfather I learned to stash my candy hoard and to look for treasures in unlikely places. My grandfather must have started showing signs of early Alzheimer’s when I was a young child. He was in his early 60's and seemed to veer off into his own world a little bit more each time I would see him. I remember him to be a little bit grouchy. Sometimes he would tease me but mostly he kept to himself. As a child, I was intrigued when I learned he hid a stash of peanut brittle in his office of piled up books and papers. Of course, I had to sneak in to look for his stash. I only found it once and never again!

Both of my grandparents were professors at a small, Christian college in Texas: Abilene Christian University. When they retired, my grandmother taught in Puerto Rico while my grandfather sent letters and resumes for a job he would not find. Later, my grandmother was honored by the American Association of University Women. She gave a speech and the picture of her proud and happy smile is still with me. Later that same evening, my grandfather wandered off into downtown San Diego. Was he looking for his own past glory days? By that time, it was clear he could not be trusted to care for himself.

My grandmother cared for him while Parkinson’s and osteoporosis weighed her down with the effects of these disease. She put up with her husband’s outbursts, wanderings and "games" with little jokes and smoothing over his deficiencies. Her mind was sharp until the end. She loved him and did not want to live apart from him, even when their church asked her not to bring him as "he disturbed other people".

Watching him decline and the toll it took on my grandmother, my uncle, and our family, I wondered how someone with so much mental ability could not remember his own address. Now, as I work with clients who have lost brain function, I have a better understanding. We all have a primal need to both care for ourselves and to be cared for, even as mental capacity slowly slips away.

Living A Legacy

My grandfather lived inside a world of his own making but he had a supportive family around him, even if he did not remember who they were. When there is no suitable family nearby, wisdom says, search out someone trust worthy to handle what you cannot do for yourself any longer, while you still have the choice. This is one way to care for ourselves and protect the legacy we will leave behind.

Someday, there will be a cure or a way to halt the effects of Alzheimer’s Disease. We seem so close. Until then I will continue to Walk To The End. This is one way I am living my legacy; today for a future I may not see, but which I hope will be. 

Join our team. Let’s walk together in body or in spirit on October 6, 2012.

Joy Invites Practice: Practice Makes Perfect - (10)

Ok, I know they don’t use the simple 1through 10 score cards in the Olympics anymore, but it’s so much easier than the current system to convey a really great performance. What fun to watch the women’s USA gymnastics team do so well together and individually. Or, to watch the tenacious women’s USA beach volleyball team of Walsh & May-Treanor. Two mommies who would eat sand to secure a win. The joy of playing a sport often calls athletes to a higher level because they enjoy the practice!

Professional fiduciaries don’t have anything like Olympic events. We take on cases where there is no suitable family or friends or when someone plans a large gift to a charitable cause. Often the situations presented provide the barest details. We must weigh the risks and choose whether to take the plunge. Sometimes these situations include those like one a professional fiduciary described recently - if there was a Fiduciary Olympics, this would rate in the highest difficulty.

Fiduciary Olympics - Highest Difficulty Rating
The public guardian needed a professional fiduciary to step in when an elderly woman’s drug addicted son was accused of elder financial abuse and her bi-polar daughter lived far away. The professional fiduciary agreed to step in so the woman could be moved to an assisted living facility; the son moved out; and, the home cleaned and sold to care for the woman. The fiduciary described entering the home with goggles, breathing mask, gloves and removable booties to avoid infection from rat feces and old food found in the place.

The elderly woman needed help that neither the state nor her children could give her. Not all of our cases are so difficult, but when we are presented with a situation, it is our duty to ourselves and to the people we serve to determine if we can "go the distance". Do we have the same perseverance that the Olympic athletes have? Do we have adequate training, appropriate experience and the intestinal fortitude to do the work? Do fiduciaries receive extensive training, preparation and refining like athletes who train for a "Big Event".

Athletes don’t just learn about their game: they practice; they do warm-up drills; they watch other great athletes; they learn from each other; they have coaches that encourage or guide them; and they practice a lot.

Fiduciary Training
The State of California requires individuals seeking a license as a Professional Fiduciary to have a certain level of education and experience. The course of required education covers the laws, ethics, practical considerations, reporting & accounting requirements; and, asset management among many other topics. The purpose of these courses is to promote the level of knowledge required to evaluate and handle the many possible situations that arise when serving as a fiduciary.

In addition, professional fiduciaries are required to have a certain number of hours of continuing education each and every year. There are few better ways to receive this education than by joining the Professional Fiduciaries Association of California and attending the annual and regional education offered by this organization. This is much more education than a family member, friend or even a non-licensed CPA will have about closing out an estate. It’s probably more education than most people would ever dream is required by the situations we encounter.

Still, it seems like we can always use more training and preparation. Like the warm-up drills or the team practices of athletes, we can seek ways to regularly sharpen our skills. A professional fiduciary is brought in to evaluate, make decisions and take action. To do this we must exercise good judgement, informed by experts in their field of practice. We bring together many different professionals to get a job done right.

Since our "stock & trade" is making good decisions about difficult situations and properly communicating with the parties involved, it is helpful to regularly "try on" how we would handle a sticky situation before we are faced with the choice. This can be gleaned from informal conversations with professionals, such as attorneys or other experienced fiduciaries. While helpful, this method is a little bit like sitting in the passenger seat on the way to a destination, then being asked to drive back on the way home. Our attention is so much more acute when we are in the driver’s seat, isn’t it?

Warm-Up Drills
Another way to sharpen our decision-making abilities is to use quick mental warm-ups to stimulate our thinking. The ACE Fiduciary Group posts an occasional poll question to fiduciaries and other professionals engaged in this work. The poll question is like some of the on-line games that offer "increased mental acuity". The questions are designed to be simple, but the answers are rarely simplistic. We do this to sharpen our thinking about areas we commonly encounter but which have no obvious correct answer.

You can participate by clicking here. The current poll will close on August 16, 2012, although this link will always bring you to our current poll topic. If you are interested in the results and some feedback about this topic, sign-up for our emails as we will post the results to those who receive our occasional, informative email blasts.

Remember, fiduciaries cannot and do not give legal advice. We are doers rather than advisors.