estate tax, income tax, gift tax

Don’t Get Stuck With a Stupid Tax

Have you ever heard the phrase, “stupid tax”? I hate paying a stupid tax, because it’s always something that could have been avoided.

A few years ago my wife and I went with my parents to see an Illini basketball game in Champaign. After eating at the Ribeye on Neil Street (good food!), I ran through the snow to get the car. As I approached the car I had a sinking feeling.

I had forgotten the tickets. 

Thankfully, the box office was able to reissue forgotten season tickets, but I had to pay a stupid tax of $5 for every ticket being replaced!

We all get stuck paying a stupid tax every now and then. A few dollars isn’t bad as far as a stupid tax is concerned, but when it comes to estate planning, mistakes can be very costly. One of my primary goals is to help you and your family avoid paying any stupid taxes by thoroughly thinking through things and planning ahead.

Recently, a younger high profile celebrity died without thinking through what would happen to his estate if he suddenly passed away. His estate ended up paying a $12 million stupid tax. While most people won’t make that big of a mistake when it comes to planning, we see people all the time who did not properly plan, and therefore, end up owing a stupid tax. And the most frustrating part? It could have been avoided.

If you’re not sure whether your estate will be slapped with a stupid tax, we encourage you to give us a call at 217-726-9200 or attend an upcoming workshop on estate planning. Wills & Trusts: How to Get Started is a great way to learn more about effective planning.

david edwards estate planning elder law

Stop Thief! 10 Things That Can Steal From Your Estate

If you’ve ever been robbed like I have, you know that awful feeling of violation and loss of control. More than the material things that are stolen, the loss of peace of mind and sense of security can have lasting effects.

When I had just started practicing law, I came home one night and saw muddy footprints on the carpet. I thought, “When did I track in mud?” Then it hit me — someone had broken a window and robbed my apartment! They didn’t get much; I didn’t have much for them to take. When it comes to your estate, there is a lot at risk.

As estate planning attorneys, we can’t protect your home, but we will work to protect your wealth and your legacy — protect it from thieves who could steal it.

What Is Robbery?

Robbery is when something of value is taken. When talking about estate planning, you can be robbed of money, but also so much more. You can be robbed of peace of mind, relationships, or even memories. There is a lot at stake if you don’t plan ahead.

Ten Thieves That Can Rob Your Estate

When creating a plan, it’s important to keep in mind these ten things that can do real damage to your plan:

  1. The IRS — Will your heirs pay unnecessary taxes? Well qualified estate planning attorneys should make sure your assets are set up to avoid issues like double taxation.
  2. Lack of organization — If you don’t have a plan for your wealth, you can’t control what happens to it.
  3. A spouse’s remarriage — If your spouse marries again, what will happen to your children’s inheritance? If your spouse has more children, will your wealth be divided among them as well?
  4. Your kids not being ready for wealth — If you were to die tomorrow, would your children be able to manage their newfound wealth? A thorough plan includes how much your kids get and when.
  5. Your kid’s divorce later in life — Estate planning attorneys make sure your wealth goes where you want it to go, regardless of the marital status of your children.
  6. A lack of training and communication with your family about your plan — I knew of a woman in her 70’s who lived by herself. Her husband had passed away a few years earlier. She had a daughter and two sons. One day she fell, broke her hip and had a mild stroke. She could no longer care for herself. The daughter who lived in town began to help her out. This daughter was never very good with money, but the family thought it made sense to grant her the Power of Attorney because the other kids lived out of town. As the daughter continued to care for her mom, many items from the house disappeared. Her brothers thought she was taking the stuff, but she adamantly denied it. Unfortunately, after the mother’s death, the siblings never spoke again.
  7. A lack of professional guidance you can trust — A very blessed man had been married 30 years to the love of his life. She was never considered a “stepmother” but a truly loving mom to his children. He completed a “do-it-yourself” estate plan. When he passed away, the family found his plan vague, confusing and lacking detail. His wife remembered him saying, “You’ll never want for anything.” His kids remembered hearing, “You will be treated fairly.” As the plan unfolded, both his wife and his kids thought the other side was being greedy and not honoring his wishes. On the brink of court, after two years and lot of legal fees, they compromised and settled the dispute. Sadly, the stepmom and the step kids never spoke again.
  8. Future lawsuits or liability — If you own a business, is your liability insulated from the business’ liability? What happens if your beneficiaries are ever sued? Estate planning attorneys can provide answers and solutions for these types of issues.
  9. Nursing home costs — The skyrocketing costs of aging in America necessitate your plan include provisions for long-term care for you and/or your spouse.
  10. Outdated legal documents — Effective estate planning attorneys help you keep your plan current so it can do what you intend for it to when the time comes.

What Would You Do If You Knew a Thief Was Coming?

When my old apartment was robbed, I didn’t expect it. It just came out of the blue. I have a friend who was in a different situation a while back. She lived in a great neighborhood. It was always very safe and quiet. But there was a time when houses started getting burglarized. Week after week, it was someone else. Would her house be next? She couldn’t know for sure, but she took steps to protect herself by installing a security system.

Nobody likes to think about it, but Benjamin Franklin told us only death and taxes are certain in this life. You know the time will come eventually. What estate planning “security system” do you have in place? If something isn’t right with your plan, would you even know it? Effective estate planning attorneys create and review existing plans to protect all you’ve worked so hard for.

5 Estate Issues You and Your Family Should Plan For

“An ounce of prevention is worth a pound of cure.”

When it comes to estate planning, this quote from Benjamin Franklin could not be more true. Oftentimes, people don’t think of estate planning, or the issues related to it, until it is too late. As a firm who deals only with estate planning issues, we have seen our fair share of terrible problems that could have been prevented by planning ahead and creating an effective estate plan. Dave says it all the time, “Bad estate plans break up good families.”

Taking advantage of David’s unique perspective, in this post we’ll explore the most common problems he encounters every day — problems that could be avoided by just planning ahead. Here are 5 key issues you should consider as you create an effective estate plan:

“Assets? What assets?”

You might be surprised at how often those left behind have no idea about life insurance, stocks, bank accounts, etc. Discovering these “hidden” assets takes time, money, patience and a lot of detective work. And despite any dreams you once had of being Joe Friday, the last thing you want to do while mourning the loss of a loved one is play detective.

“Attorney? What attorney?”

Oftentimes those left behind have no idea if an attorney is needed, or if an attorney has already been consulted. Does looking in the phone book and calling the first attorney whose ad catches your fancy seem like the best way to handle your loved one’s estate after they’re gone? Many of our clients’ families meet us before they need us, ensuring that a trusting relationship is already in place and decreasing stress and anxiety when the time comes to execute the estate.

“Equal? What’s equal?”

Many people plan on just having their children split things equally upon their death. It seems like a beautifully simple and fair way to handle things, but when emotions run high and money or cherished possessions are at stake, things seldom go down the way you would expect. We often see conflicts between family members who have different ideas about how to handle things — conflict that could have been avoided with more in-depth preparation. We’ve also seen that seemingly good ideals like “equal” puts some adult kids at a disadvantage.

“Taxes? What taxes?”

Did you know your lack of planning could cost your family money? Without proper planning, they could end up paying extra income tax on IRAs or annuities (or pay them earlier than necessary). We see this quite often. To avoid this, you should get specific advice regarding your tax deferred accounts, both now and after death.

“Issues? What issues?”

There are a lot of unique circumstances that arise when dealing with minors or even young adult children. Are your kids prepared to responsibly handle what you’re leaving them? Have you distributed the wealth in such a way that the younger children will have adequate care for the proper amount of time? As experienced estate planning attorneys, we see the ramifications of families not being fully prepared all the time. We hate seeing this and don’t want any family to have to go through it. Our firm is experienced in thinking through every issue your family needs to consider when creating an effective plan.

So what do you imagine for your family after you’re gone? Do you imagine them having no idea what or where your assets are? Do you imagine them knowing exactly who to call or struggling to figure out who your attorney is? Do you imagine great stress and distress in the middle of their grief as they scramble to figure out what needs to be done? Surely not. Planning ahead is not being morbid or pessimistic. It is protecting and caring for those you love. (Get our free checklist, What to Do When a Loved One Dies, here.)

Find out more about effective estate planning by attending our free workshop, Wills & Trusts: How to Get Started. If, after attending the workshop, you decide to set an Initial Meeting, you’ll receive $200 off the fee.

3 Things That Can Ruin Your Estate Plan

Don’t be caught with an out of date Will. Keep the 3 L’s of estate planning in mind.

You’ve finally finished creating your Will with your attorney – congratulations! It’s a big undertaking. You’re probably thinking it’s time to stash it in a safe place and forget about it. As long as your attorney has a copy, you’re okay right?

Wrong.

It’s important to update your Will at least every three to five years (sometimes more often as laws or circumstances change). Taking the time to update your Will can ensure that your legacy gets passed on according to your wishes and can also eliminate family disputes upon death. If you’re not sure whether your Will needs to be updated, it’s best to follow the 3 L’s of estate planning. Many of the changes any estate plan faces can be summed up by examining the following 3 things: life, law and learning.

Life

What has changed in your family, your health, your job status or your finances since your last Will was created? Have you purchased property or a business? Have you sold a business or property? Have you purchased a new car, boat or art? A lot can happen in 3 to 5 years, especially as we age. A great example would be if a divorce or remarriage happens within the family. This can impact family members emotionally and can restructure family organization. A timely update to your Will can help you avoid family conflict and lengthy court time for your family after you have passed away. Life changes warrant an updated Will. (When it comes to life changes, don’t forget your beneficiary designations on things like life insurance!)

Law

What legal or tax changes have occurred in federal or state law since your Will was drafted? Have your federal tax laws changed? Have your inheritance or death tax laws changed? These are all questions to consider as your Will ages. Changes in federal or state law can directly impact your Will. Changes in the law warrant an updated Will.

Learning

What have you learned since your last Will about your family and how they handle money? Perhaps you’ve learned that your beneficiaries mishandle their own money and tend to overspend. Or maybe they’ve gotten a big promotion at work and seem too busy to allot time to executing your Will. What legal strategies do estate planning attorneys have now that may not have been available or common when you did your last Will? Learning new things can warrant needing to update your Will or Trust.

If it has been some time since you last thought about your Will, it’s probably time to consider an update. Life happens, laws change, and the most effective estate plans continue to evolve over time. If you have questions or concerns about your existing Will, please feel free to call us at 217-726-9200 or email us at info@edwardsgroupllc.com with your questions. We will be more than happy to help you. If you’d like to learn more about our Dynasty Program, which helps Edwards Group clients make sure their plans are up to date and evolve over time, click here.

myths about retirement

Contributing to an IRA After Retirement

One of our clients had a question a while back: Can a retired person keep contributing to an IRA? Take a moment and learn about the logistics of contributing to an IRA after retirement.

Can a retired person keep contributing to an IRA?

There are many types of Individual Retirement Accounts (IRAs), but they all exist to help you save for retirement. Once you’ve reached retirement though, can you keep contributing to your IRA?

Yes and no. If you are earning a salary based on work you are doing, then you can contribute to an IRA account. This is because you generated earned income. Earned income includes wages earned by working for yourself or wages earned by working for someone else. The IRS describes earned income as earnings from self-employment, wages, salaries, tips, union strike benefits, and long-term disability benefits that are received prior to retirement. The amount of earned income you create affects the maximum amount you can contribute to your IRA account. You cannot contribute more than your earned income if your earned income is less than your maximum contribution. The maximum you can contribute is $5,500 if you are under 50 and $6,500 if you are over 50.

Not everyone works for themselves or others to generate income. You may generate unearned income through interest, dividends, investment income, pensions, and social security. Unearned income may not contribute to an IRA account. While you may financially depend on unearned income, you cannot contribute to an IRA in a year when you have only that type of income.

There are exceptions to these rules. If you are married, you can take advantage of a Spousal IRA. This IRA account aims to help save for retirement by allowing a working spouse to contribute to a nonworking spouse’s IRA account. As long as the working spouse has a high enough earned income, he or she can contribute equal maximums into both IRA accounts.

All in all, working for wages allows you to generate earned income and contribute to an IRA account. If your income comes from alternative sources other than work, it generally cannot be used to contribute to an IRA account.

Read more about IRAs using these links:

6 IRA Planning Tips

7 IRA Planning Traps to Consider

Other IRA articles here…

5 Problems Caused by VA Financial Planners

There are financial planners out there who hold themselves as VA planners offering “free” VA benefit advice, but their “free” advice often comes with a hidden price.

Non-attorney Planning Tactics Can Backfire

David and Chris were in Atlanta a few months ago at the Academy of VA Pension Planners. It’s one of many professional organizations that David belongs to in order to make sure the firm serves our clients better than anyone else. The AVAPP solely focuses on helping Veterans, and their families, get the benefits they earned in service to their country.

Did you know that only 28% of Veterans who qualify use their benefits? And as one of the only law firms in Central Illinois to be accredited by the VA, we want to make sure that everyone who has served our country gets to age with dignity and receive the best care possible.

There are some financial planners who hold themselves out as VA planners offering “free” VA benefit advice. Some are very knowledgeable, but there are some problems with the “free” advice that you need to watch out for.

5 Tactics that Non-attorney VA Planners Use

1. Transferring the house to the kids

Maximizing VA benefits sometimes means rearranging assets. One mistake we have seen is transferring a house to the children. While this will help work for VA benefits (allowing the house to be sold without messing up benefits), there are problems with this strategy. One problem is when the house is later sold, the kids will pay capital gains taxes that could have been avoided. By putting the house in a Veterans Asset Protection Trust, we could get the VA benefits but also avoid the capital gains tax later.

2. IRAs and taxes

Because the VA has asset limits, sometimes IRA accounts must be moved to qualify for benefits. Without proper tax planning, some families incur a huge tax bill that could have been avoided. Instead, working with an experienced attorney can help you consider all the planning options and the tax impact.

3. Annuities with long surrender charges

Often, the “free” VA advice comes with a recommendation to tie up assets in an annuity with long surrender periods. Is anything really “free” in this world? Unfortunately, some families do not realize that the VA financial planner they are relying on is ultimately trying to sell them costly and expensive annuities that tie up their assets far into the future. (This is how the financial planner makes his living.) Instead, a Veterans Asset Protection Trust can help you protect and arrange assets, while allowing your family free access to the investments held in the trust. You need to consider all of the legal and financial tools to see which is best. Unfortunately, non-attorneys often ignore legal tools, such as trusts, even though they may be the best option to help qualify for benefits.

4. Transferring assets to children

Some non-attorney planners transfer assets to the kids so the client can get VA benefits. So, what is the problem with that? If the client needs more care down the road, the funds may have already been spent by the kids. Plus, the gift could keep them from qualifying for Medicaid. (And 70% of nursing home residents use Medicaid to pay for their care.) Transfers of assets must consider both the current goal (VA benefits) and future needs (such as Medicaid benefits to pay for nursing care). By working with an attorney experienced in both VA and Medicaid planning, you can have a flexible plan that considers future health needs.

5. Messing up wishes

Another strategy that non-attorney planners use that can backfire is to transfer the parent’s money to one child in order to qualify for VA benefits. However, that strategy then changes the entire estate plan because one child legally ends up with all the money (unless they voluntarily share it with their siblings, and sadly, we’re experienced enough to know this happens much less often than you think). Instead, once again, the Veterans Asset Protection Trust is a great tool to preserve your wishes after death, but still help you qualify for VA benefits now.

Most of these issues (and more) are discussed in our Elder Law Packet, on pages 7-9: 12 Reasons Not to Give Your Property to Your Kids Now.

To request your free Elder Law Packet, call 217-726-9200. And, as always, if you have any questions at all, please feel free to give our office a call. We will be more than happy to talk with you.

6 IRA Planning Tips

Here are 6 IRA planning tips you should consider for your family:

1. Help your grandkids with their own IRA

Anyone who starts an IRA early, in their teens or 20’s, will see it grow to huge amounts by retirement. But young people often don’t have the funds to put into an IRA in the early years. The solution? If you have the means, help your grandchildren put money into an IRA as soon as they start working their first part-time job, or as soon as you can. What do I mean? If you have the means, give each grandchild with a job (they have to have income to do an IRA) $5500 with the stipulation that they put it into a Roth IRA. Even if you only do this for a few years, it will make a HUGE difference in their retirement later.

2. Use your IRA for charitable giving

Do you plan to leave money to a charity or church at your death? If so, use IRA funds to do it. If you leave the IRA to charity, there will be no tax on the IRA because the charity is tax exempt. Uncle Sam will be out of luck. How do you do this? Name a charity on your IRA beneficiary designation or consider using a donor advised fund at the Community Foundation for the Land of Lincoln (to direct funds to the charities you choose).

3. Explode your wealth with those unwanted RMD’s

Once you are age 70, you have to take out a minimum amount (RMD) from your traditional IRA each year. What do you plan to do with that money? Do you need it? If not, what about using it to create more wealth for your family? One option is to buy a life insurance policy using your RMD every year to pay the premium. The benefits? More money at death, plus the life insurance death benefit is income tax free! (Unlike the IRA that has a built-in tax bill for your family.)

4. Again, consider your grandchildren (and children)

Why not leave some (or all) of your IRA to your grandchildren? Worried about skipping your children? What about getting life insurance to make up the difference? The result? Save income taxes, bless the grandkids, and leave your kids tax-free life insurance funds (instead of an IRA with a tax bill).

5. Consider a trust for your IRA

Want to avoid your kids or grandkids IRA “blowout” (taking IRA quickly and incurring a lot of tax)? Leave the IRA instead to a trust, so the trustee will make sure the “stretch out” happens. Read more about “blowouts” and “stretch outs” in last week’s blog post.

6. Convert to a Roth IRA

If your family will stretch the IRA, the biggest bang is to use the Roth IRA. Convert the IRA now to a Roth, avoid the RMD’s during your life, then give your family tax free distributions for years or decades. Poor Uncle Sam will be left out! (But remember to consult your tax advisor regarding the timing and amount of those Roth conversions.)

7 IRA Planning Traps to Consider

When it comes to your IRA, there are some planning traps you need to look out for…

Here are 7 IRA planning problems to consider:

1. Incorrect beneficiaries – This is very basic, but often overlooked. Confirm that the beneficiaries are set up correctly. If you lack a beneficiary, then the account will go to your estate, limiting your “stretch” to as little as 5 years. Have you named the wrong beneficiaries or are you missing someone (like a new grandchild)? If you have named a trust as the beneficiary, was that done as part of a detailed plan with an attorney experienced in IRA trust planning?

2. A “blow out” instead of a “stretch out” – Remember, a big goal of IRA planning is to pay the taxes later by doing a “stretch” IRA. This means that we want your child to be able to take out the IRA over their life expectancy. But many kids don’t do it. In fact, the vast majority of kids take out the entire IRA within a couple years of death. Why do kids take it out (and pay the taxes now)? Here are a few reasons:

  • They want to spend it!
  • They don’t know the benefit of the stretch.
  • They wrongly think they can roll it into their own IRA (so they take it all out, triggering tax, then it’s too late to put back in).
  • They cash out a Roth IRA because it’s tax free, not realizing they are missing out on years of tax free growth in the future.

3. Not getting good advice – Many families have cashed out retirement funds or annuities and are later surprised by a big tax bill. Good advice from your attorney and tax advisor after death will help the family understand the options.

4. Not considering younger generations – Do you like your grandkids? Well, what about saving tax while helping out your grandchildren? The younger the beneficiary of your IRA, the longer the stretch and the bigger the tax savings. You might consider giving your IRA’s (or part of them) to your grandchildren.

5. Naming grandchildren as direct beneficiaries – What if someone took our advice about younger generations and decided to name grandchildren as IRA beneficiaries? That’s good, right? Well, yes, but there could also be problems. If you name a minor child as beneficiary, the IRA company may require a court guardianship before the grandchild can benefit from the IRA. Then, at age 18, the grandchild gets control of the IRA, regardless of the remaining amount. (And we all know what happens when 18-year-olds inherit large sums of money.)

6. Not considering a trust to hold IRA funds after death – Many people incorrectly think that leaving an IRA to a trust will trigger tax on the entire IRA. But this is not true. IRA funds and trusts require special expertise and planning, but a properly drafted trust can hold an IRA and still benefit from the stretch out. And using a trust can help avoid the “blow out” mentioned in #2, while protecting the money from young heirs, future divorces or other unforeseen risks.

7. Not converting to a Roth IRA – Converting to a Roth IRA means you pay taxes now and then future growth of the IRA is tax free. If you don’t need the money, and you can afford to pay the taxes, converting to a Roth may give your family more money later. Let’s ay you convert to a Roth at age 70. A Roth IRA has no RMD (required minimum distributions) so if you live to be age 95, you will have had 25 years of tax free growth that you can leave to the family. And the kids (or grankids) can have another 30-50+ years of tax-free growth if they “stretch” the Roth IRA. Converting to a Roth IRA is a great tool, but please consult your tax advisor first. Make you know how much tax will be owed before you move funds to the Roth IRA.

Are you ready to find out what you should do when it comes to your IRA? And not just what to avoid? Read our article, 7 Questions to Ask in Order to Do Effective IRA Planning.

The Lifecycle of an IRA: 4 Stages

There are 4 stages in the lifecycle of your IRA, and each one gets progressively more complicated.

The last stage is “What happens when I’m gone?”

Here is what you need to know about each stage leading up to the last:

Before age 59 1/2, you are usually paying into the IRA. But if you try to take anything out, you pay the taxes plus a 10% penalty.

After 59 1/2, you can take funds from your IRA if you like, and pay the tax. But you can also just leave it in and let it grow

After you turn 70 1/2, then you must start taking funds out. How much you take out is based on your age. The term for this is the “Required Minimum Distribution” or RMD. This requires that you take out a certain percentage every year, based on your age. The IRS has a table that says how much you have to take out. To calculate your first RMD, take the value of your IRA at the beginning of the year and divide by 27.4. The second year you divide by 26.5 and so on, based on the table. The good news is that even at age 100, the IRS table still estimates that you have over 6 years to live!

So, what’s the next stage of your IRA?

After you die. At that point, the IRA will take one of two forms:

1) If you leave it to your spouse, then the spouse can just take it and add it to their IRA.

2) If you leave it to your kids or others, then they can’t put it in their IRA. Instead, they will keep it separate as an inherited IRA. At that point, they are required to begin taking those minimum distributions (RMD’s) based on their life expectancy. It doesn’t matter what age your child is, they have to begin taking money out annually after your death. For instance, if you leave your IRA to a child who is 47-years-old, then she has to take out at least 1/37th of the IRA the first year, 1/36th the next year, 1/35th the next, and so on.

With IRA planning, the key is how we handle this after-death stage. There are quite a few planning tricks that can help, plus plenty of traps for the unwary. We will address some of those traps in next week’s post.

IRAs: The Best Time to Pay Your Taxes

“When is the second best time to pay your taxes?”

Many of our clients have retirement accounts, such as an IRA, 401(k) or a 403(b). These accounts take careful planning. Why? Because the accounts typically have never been taxed, and how you plan for them will determine how and when your family will have to pay the taxes on them. That planning often involves the SECOND BEST time to pay taxes.

You may be wondering at this point, “when is THE BEST time to pay your taxes?” Well that would be NEVER, right? If you can avoid taxes altogether, that would be great. But if you can’t avoid it altogether, then the next best time is…

LATER. Not today, but at some later date. Maybe in a few months, or a few years, or a few decades. This is one situation where it pays to procrastinate because the money continues to grow while you wait. (And in many cases you’re waiting years or decades.) So, the longer we put off paying the tax, the better off we are. On the other hand, if your family has to pay the tax immediately after your death, that is the worst case scenario. Good planning will help your family avoid that worst case scenario. Good planning will help your family avoid that worst case scenario and pay the IRA taxes LATER instead of immediately.

To read more about IRAs, click here.