Don't Make Them Pay Taxes Too Quickly On Your Retirement Plan

Perhaps the best kept secret about qualified retirement plans, such as IRAs and 401(k)s, is the flexibility of their beneficiary designations.

Once an individual reaches age 70 1/2, he must begin withdrawing Required Minimum Distributions from his retirement plan. If he has not withdrawn all of the money from the retirement plan by the date of his death, the beneficiary designation form will determine not only who will receive the money. The beneficiary designation form will also determine how quickly the recipient will have to withdraw the money and thus how quickly the tax will be paid on the funds.

Depending on the circumstances, it may be possible to extend the period of time in which the beneficiary must withdraw Required Minimum Distributions by naming a much younger individual beneficiary. The effect of this decision is that the Required Minimum Distributions will be withdrawn at a much slower rate. Thus, taxes will become payable at a much slower rate. The net effect will likely be that the beneficiary receives a greater amount of money over the course of the distribution than had the beneficiary received the money in one lump sum upon the death of the owner of the retirement plan.

Every situation is unique. Excruciating attention to detail is required to arrive at the proper outcome. But with proper estate planning, an individual can help his beneficiaries take full advantage of his retirement plan.

Why IRAs are Fabulous!

Individual Retirement Arrangements (IRAs) are fabulous retirement strategies. But they are fabulous estate planning devices as well. This is the beginning of a series of blog posts regarding the benefits of having an IRA.

Perhaps the greatest benefit of having an IRA is the preferable tax treatment the IRA receives.

There are basically two types of IRAs: traditional and Roth. If it is a traditional IRA, then the money placed into the account is tax deferred. That means you don't pay taxes on such money until you take the money out. If you have a Roth IRA, you pay taxes on the money you place into the account, but the money grows "tax free"--you don't pay taxes when the money is taken out!

Because the stock market historically rises over time, when you allow your money to grow "tax deferred" or "tax free" in a traditional IRA or a Roth IRA for a substantial period of time, you are choosing a path that is quite likely to result in more money after Uncle Sam is "all said and done" with his slice of the pie.

This is primarily a retirement reason for investing with an IRA. But the estate planning strategies enter into the picture when you fill out your beneficiary designation form.

More on that in the next post.


A Nuance Regarding A Transfer on Death Deed

In the last post I generally discussed the attractiveness of a transfer on death deed. It is an efficient means by which to pass the house down to loved ones by avoiding probate. This post addresses an issue that arises when real property is held as joint tenants with right of survivorship.

Co-ownership in property can become a complex situation. Many individuals find themselves in a similar situation. One of these common situations occurs when co-owners of real property hold ownership as joint tenants with right of survivorship. This type of ownership involves a seemingly infinite number of implications. I will only address one today.

First, what happens when a joint tenant passes away? When a joint tenant passes away, the surviving joint tenant(s) retain(s) ownership of the entire property. For instance, if Alan and Bill own land as joint tenants with right of survivorship, and Alan dies, Bill would keep the land solely in his name. Nothing would pass through to Alan's heirs or devisees. Like the transfer on death deed, a result of holding property as joint tenants with right of survivorship is that the property passes outside of probate.

But, secondly, what happens if Bill, now having sole ownership of the land, wishes to execute a transfer on death deed so that the property avoids probate? He does not want to grant ownership in the house prior to his death, but he does not want his beneficiary to wait through the probate period to acquire an ownership interest in the land.

The second question is difficult because on the books of the recorder's office, the property may still be listed as owned together by Alan and Bill as joint tenants with right of survivorship.

An attorney should draft an affidavit of survivorship that lets the people at the courthouse know that Bill now is the sole owner of the property. This will allow Bill to execute the transfer on death deed, avoiding probate while retaining sole ownership in the property during his life.

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What is a Transfer on Death Deed?

The most valuable asset of many families is their house. Obviously, it is valuable from a monetary standpoint. But its role in families' lives is more than just the fair market value of the property. It is a place for families to bond, for parents to rest from a long day of work, and for children to play. Moreover, a family's house can secure financing for education, business opportunities, trips, etc. In a word, a family's house is the center of family life.

But what happens to the house when the parents pass away? You may have heard "through the grapevine" how complicated the probate process can get. You may wonder if there is any way to avoid the probate process.

One aspect of a  comprehensive estate plan is deciding how to transfer the house from the owner's hands to another's. This may be accomplished through a variety a means, so an informed Estate Planning attorney should guide you.

One way to transfer the house to the next generation is through a transfer on death (TOD) deed. Under Indiana law, a TOD deed allows a house to pass outside of probate, avoiding the complications of the probate period. In sum, the TOD deed may save lots of headaches if used properly in a total estate plan.