Estate planning attorneys help couples prepare wills and trust agreements to minimize estate taxes. They create a plan, called an AB plan, for married couples to use two unified credits and shelter up to $1,300,000 after both spouses pass away. The attorney also helps the couple retitle their assets and designate beneficiaries for their retirement assets. If the couple’s retirement assets exceed twice the unified credit, the beneficiary designation is less important. Otherwise, it’s more important. The article discusses estate planning for couples with assets that exceed one unified credit, including qualified retirement assets. It also talks about estate and income tax issues related to these assets and proposes the best way to designate beneficiaries for maximum tax planning. A disclaimer is also explained as a tool used to redirect property after someone dies. It must be made within nine months of the death and the person making the disclaimer cannot have received any benefits from the property before making the disclaimer. If done properly, the property will go to the next beneficiary. Jim and Sally Smith want to plan their estate to make sure their kids get an equal share. They own a house, some stocks, and have retirement accounts. They are working with a lawyer to set up a plan. They need to talk about who should get the money from their retirement accounts. They also want to minimize the taxes their kids will have to pay. The Smithsâ assets create a challenge for estate planning. When one spouse dies, their retirement savings must be used to cover taxes. The attorney must decide if the surviving spouse or a trust should be named as the main beneficiary. If the spouse is named, they must decide if the children or trust should be the backup beneficiary. When you have retirement savings like a 401k or IRA, you have to start taking out some of the money once you reach age 70 1/2. There are different ways to do this, like taking out a fixed amount each year or recalculating the amount based on how long you’re expected to live. It’s important to follow the rules for taking out this money to avoid extra taxes. If your spouse is your beneficiary, you’ll use both your ages to figure out how long your money needs to last. If your beneficiary is not your spouse, they’ll be considered to be no more than 10 years younger than you. If you have multiple beneficiaries, the one with the shortest life expectancy will be used. If a beneficiary dies and a new one is chosen, the new one can’t make the joint life expectancy longer, but it can make it shorter. These rules also determine the amount you have to take out each year. When someone with a 401k or 403b account dies, the person they chose as the main recipient will own the account. If it’s their spouse, the spouse can either take out all the money and pay taxes, transfer the account to their own IRA, or keep taking out the money like the original owner was doing. If it’s someone else, they can take out the money and pay taxes, or take it out gradually based on their age and the number of years the original owner was getting money.
An estate planning advisor suggested that Jim and Sally make each other the main recipient of their accounts, with their kids as the backup. This means that when one of them dies, the other one can decide what to do with the account. Also, if the surviving spouse decides to transfer the account to their own IRA, it might increase the taxes their family has to pay later. But, the surviving spouse can also give up part of the account to the kids, which can lower the future taxes. The Smiths were deciding who to name as the beneficiary of their retirement accounts. If they named their trust as the main beneficiary, they could use a special tax benefit, but they wouldn’t be able to roll over any extra money from the account. The estate planning attorney recommended they name each other as the main beneficiary and their trust as the backup. This way, they could still use the tax benefit and have more flexibility with the money after one of them passes away. A trust is a way to manage money and assets for someone else. The trust has to pay taxes on any income it earns, but it can also pass that income on to the people it’s meant for so they can pay taxes instead. If the people in the trust are in a lower tax bracket than the trust, it’s better for the trust to give them the money so they can pay less in taxes.
When it comes to retirement savings in a trust, the money from the retirement account is seen as income for tax purposes. This can create a problem because the trust needs to balance keeping the retirement savings intact and giving money to the person it’s meant for to lower their taxes. If one of the spouses dies, their retirement savings can be put into a special trust for their children. This can help reduce taxes and make sure the children get the money. It’s important to plan carefully and think about how it will affect taxes and the surviving spouse. A tax lawyer explained some tax laws related to inherited assets and retirement accounts. He mentioned that there are specific rules for disclaimers of inherited assets and the taxation of retirement accounts. He also mentioned that the tax laws can be complicated and it’s important to have a lawyer who understands them well. This column is written by the Tax Section of The Florida Bar. It aims to teach its members about their duty to serve the public, improve how justice is carried out, and advance the study of law. The leaders of the Tax Section are David E. Bowers, chair, and Michael D. Miller and Lester B. Law, editors.
Source: https://www.floridabar.org/the-florida-bar-journal/the-use-of-disclaimers-for-flexibility-in-planning-for-qualified-retirement-assets/
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