Some people assume that because they’ve named a specific heir as the beneficiary of their IRA in their will or trust that there’s no need to list the same person again as beneficiary in their IRA paperwork. Because of this, they often leave the IRA beneficiary form blank or list “my estate” as the beneficiary.

But this is a major mistake—and one that can lead to serious complications and expense.

IRAs Aren’t Like Other Estate Assets
First off, the person you name on your IRA’s beneficiary form is the one who will inherit the account’s funds, even if a different person is named in your will or in a trust. Your IRA beneficiary designation controls who gets the funds, no matter what you may indicate elsewhere.

Given this, you must ensure your IRA’s beneficiary designation form is up to date and lists either the name of the person you want to inherit your IRA, or the name of the trustee, if you want it to go to a revocable living trust or special IRA trust you’ve prepared. For example, if you listed an ex-spouse as the beneficiary of your IRA and forget to change it to your current spouse, your ex will get the funds when you die, even if your current spouse is listed as the beneficiary in your will.

Probate Problems
Moreover, not naming a beneficiary, or naming your “estate” in the IRA’s beneficiary designation form, means your IRA account will be subject to the court process called probate. Probate costs unnecessary time and money and guarantees your family will get stuck in court.

When you name your desired heir on the IRA beneficiary form, those funds will be available almost immediately to the named beneficiary following your death, and the money will be protected from creditors. But if your beneficiary must go through probate to claim the funds, he or she might have to wait months, or even years, for probate to be finalized.

Plus, your heir may also be on the hook for attorney and executor fees, as well as potential liabilities from creditor claims, associated with probate, thereby reducing the IRA’s total value.

Reduced Growth and Tax Savings
Another big problem caused by naming your estate in the IRA beneficiary designation or forgetting to name anyone at all is that your heir will lose out on an important opportunity for tax savings and growth of the funds. This is because the IRS calculates how the IRA’s funds will be dispersed and taxed based on the owner’s life expectancy. Since your estate is not a human, it’s ineligible for a valuable tax-savings option known as the “stretch provision” that would be available had you named the appropriate beneficiary.

Typically, when an individual is named as the IRA’s beneficiary, he or she can choose to take only the required minimum distributions over the course of his or her life expectancy. “Stretching” out the payments in this way allows for much more tax-deferred growth of the IRA’s invested funds and minimizes the amount of income tax due when withdrawals are made.

However, if the IRA’s beneficiary designation lists “my estate” or is left blank, the option to stretch out payments is no longer available. In such cases, if you die before April 1st of the year you reach 70 ½ years old (the required beginning date for distributions), your estate will have to pay out all of the IRA’s funds within five years of your death. If you die after age 70 1/2, the estate will have to make distributions over your remaining life expectancy.

This means the beneficiary who eventually gets your IRA funds from your estate will have to take the funds sooner—and pay the deferred taxes upon distribution. This limits their opportunity for additional tax-deferred growth of the account and requires him or her to pay a potentially hefty income tax bill.

A Simple Fix
Fortunately, preventing these complications is super easy—just be sure to name your chosen heir as beneficiary in your IRA paperwork (along with at least one alternate beneficiary). And remember to update the named beneficiary if your life circumstances change, such as after a death or divorce.

Dedicated to empowering your family, building your wealth and defining your legacy,

Probate-court-hearingMany people think that if they die while they are married, the law dictates everything they own goes directly to their spouse or children. They’re thinking of state rules that apply if someone dies without leaving a will. In legal jargon, this is referred to as dying “intestate.” In California’s case, the specifics will vary depending on the type of property held and the number of children you have, if any. However, the general rule is that your spouse will receive a certain share and the rest will be divided among your children.

Now that may seem like, “So far, so good,” right? Your spouse is getting an inheritance and so are the kids. But wait. Here are some examples of how the intestacy laws can – and do – fail many common family situations.

First off, if both parents of minor-aged children die intestate, then the children are almost always left without a legal guardian. Kids won’t automatically go to a godparent, even if that’s what everyone knew the parents had intended. Instead, a court will appoint someone to be the children’s guardian. In such situations, the judge may not make the decision that you, as a parent, would have made. In fact, sometimes the judge appoints the last person you would have wanted to have custody of your children.

It’s important to note that when it comes to asset division, in most cases, state intestacy law presumes that a family consists of a husband, wife, and their natural-born children. But, that’s not the way all families are structured, and things can become legally complicated for those other families quickly.

According to Wealth Management, one analysis counted 50 different types of family structures in American households – 50! Almost 18% of Americans have been remarried, and through adoption and stepfamilies, millions of children are living in blended families. The laws just haven’t kept up, and absurd results often occur for these types of families if they’ve relied on intestacy as their estate plan. For example, stepchildren that you helped raise (but didn’t legally adopt) may end up with no inheritance, while a soon-to-be-ex-spouse may inherit everything from you.

Of course, with proactive estate planning, you can control your assets and essentially eliminate the risk of these crazy results.

Also, keep in mind that intestacy provides no asset protection or preservation benefits. Without any protections in place, an estate’s assets are vulnerable to creditors, lawsuits, and others who may claim entitlement to the property. These claims would take precedence over the statutory requirements for inheritance. In other words, the family won’t be first in line; they’ll be last. They’d only be able to inherit the scraps and leftovers.

The best way to safeguard and pass along what you’ve worked so hard to build is to do your own estate planning rather than leave things to the laws of intestacy. Protect yourself, your family and your assets by talking to a qualified estate planning attorney today.

Dedicated to empowering your family, building your wealth and securing your legacy,

Marc Garlett 91024

trustMy last article talked about what a trust is. Now I’m going to tell you why someone would go to the trouble of creating a trust in the first place. Ready? The short answer is, because the trouble one goes through to create a trust is generally minuscule compared to trouble left for family members when someone dies without a trust. But let’s go a little deeper…

During our lifetime, we can transfer our assets with a simple stroke of the pen. By signing our name to a piece of paper – usually a contract of some sort – we can buy, sell, or exchange almost anything with almost anyone.

But after we die, how do we transfer the assets we own? It comes down to two options. We can either preplan to transfer our assets how and to whom we choose, or we can let the state transfer our assets for us once we’re gone. The first option is handled through a trust. The second option is handled through the court process called probate.

So why not just let the great state of California handle things for us? Well, probate is:

Expensive. Probate fees are statutory. In other words, they are written into California’s laws and based on a percentage of the total value of your estate (your estate = all your stuff). Probate fees consist of filing fees, court fees, attorney’s fees, executor’s fees, bond fees, referee fees, appraisal fees, etc. All totaled, probate fees generally amount to between 5 and 10 percent of the value of the estate. The fees for administering a trust are generally significantly less than probate.

Public. Value privacy? Probate is a court proceeding so everything is a matter of public record. EVERYTHING. Not only can your reputation and legacy be dragged through the mud but anyone who cares to look (and there are plenty of scoundrels and con-artists who do look) will know how much your beneficiaries are inheriting, when they will receive it, and exactly where to find them. A trust, on the other hand, is completely private with no public record or court involvement necessary.

Time consuming. Probate in California takes on average, around a year-and-a-half. And that’s only if things don’t get complicated. Probate can, in fact, take years. And keep in mind, throughout the probate process, the surviving family members have little to no access to the assets being probated. A trust, however, usually only takes months to administer and distribute, not years.

Emotionally draining. Most people (other than lawyers, that is) don’t like being hauled into court. Not only does it cost time, money, and privacy, it also takes a toll emotionally.  Rather than grieving for your loss on your timetable, you are forced onto the Court’s schedule. In comparison, administering a trust, because it is handled in private and not through court, can take place at the trustee’s pace and comfort level.

Loss of control. Finally, even with a will, probate means a loss of the ability to provide protection for your heirs’ inheritance against bankruptcy, lawsuits, and divorce. Going through probate also means giving up much of the ability provide your family with tax advantages, limits on how they may spend their bequest, or guidance as to what age (or maturity level) they should receive their inheritance.

It all comes down to making an already very difficult situation (your passing) more difficult or less difficult on the people you love most in the world. If your choice would be to opt for “less difficult” you understand why people go to the trouble of creating a living trust.

I sincerely hope you and yours have a wonderful new year and an outstanding 2017. Happy New Year!

Dedicated to empowering your family, enhancing your wealth and establishing your legacy,
Marc Garlett 91024

probate court 91024Many people are familiar with probate and all of the headaches which it entails. Whether they’ve lost a loved one or a friend, no one who goes through the probate process looks at it with a friendly gaze.

I often have clients come into my office having made an attempt to avoid probate on their own. Commonly, they have tried to avoid it by adding children’s names to real property, investment accounts, or bank accounts. While they may have succeeded in ensuring their children will avoid probate, they have usually created a much bigger problem.

When you purchase an asset (such as stock in a corporation or piece of real estate) you are assigned a “basis” in the property. Your basis is the value you paid for the property. For example, if you bought an investment property for $100,000, your basis in the property is exactly that: $100,000. If you sell the property for more than you paid for it, you have to pay capital gains tax on the difference.

If you give away your property (or add someone’s name to the deed), their basis in the property becomes the same as yours. In the scenario above for example, if a child’s name was added to a real property deed, the child’s basis in the property would be $100,000. When the parent dies and the child goes to sell the house, the child has to pay capital gains tax on the difference between their basis and what sales price of the property.

So how do you avoid forcing your children to pay capital gains taxes? By NOT adding them to the deed or account!

If your child inherits the property through a revocable living trust, your child will get a “step up” in their basis to fair market value at the date of your death. Thus, if the property above was worth $300,000 at the date of death, the child’s basis becomes $300,000 when they inherit it. This means that if your child goes to sell the property, they will pay no capital gains taxes.

Finally, gifting to your children has other dangerous pitfalls. If you add children’s names to property or accounts, you are subjecting those assets to potential risk if your child were to accidentally injure someone or run up a credit card.

By far, the safest way to pass your family’s wealth on to your children is through a fully funded revocable living trust. Setting up and funding a revocable living trust avoids probate, protects your children from unnecessary taxes, and gives you the ability to protect their inheritance from divorce, lawsuits, and creditors.

Perhaps you already know all of this. Perhaps you don’t. But if you’d like more information on protecting and passing wealth to your children, call our office to schedule an appointment or to RSVP for our next free public seminars (at The Lodge in Sierra Madre: Wednesday, Oct. 21, 2015, 6:00 – 8:00 pm & Thursday, Oct. 22, 2015, 10:00 am – noon).

To your family’s health, wealth, and happiness,

probate court 91024A common estate planning mistake made by many people – including celebrities and the wealthy – is not ensuring the trust you have created actually holds all your assets. This process of transferring your personal assets into your trust is called “funding.”

Unfortunately, most lawyers do not make sure this is properly handled for their clients, so even if you’ve worked with an attorney you need to double check this critical issue. If you do not transfer your assets into your trust correctly, it is nothing more than an empty shell and will not accomplish the objectives (such as avoiding probate) you had in mind when you established it.

Here is a basic rundown of the proper procedures for funding your trust:

Real estate – a new deed in the name of the trust must be drawn and recorded at the county clerk’s office. For properties with mortgages there may be additional issues to consider so always seek legal counsel before recording a new deed.

Stocks, bonds, mutual funds – to transfer the ownership of these assets into your trust, you need to contact your broker, investment counselor or transfer agent for the proper paperwork and complete those documents as instructed.

Savings bonds – you will need to obtain a reissue form from the Federal Reserve Bank and re-title the bonds in the name of the trust.

Brokerage accounts – contact your broker for the proper forms that will enable the broker to close the existing accounts and transfer the assets into a new trust account.

Stock certificates – you will need to send a completed “stock power” form as well as a W-9 form with your tax ID number with the original stock certificates to the company’s transfer agent.

Bank accounts, CDs – new accounts will need to be established in the name of the trust. If your bank cannot transfer CDs until the maturity date, then mark them “in trust for” a beneficiary until the CDs mature and you can transfer them to the trust.

Life insurance, retirement plans – these assets cannot be owned by a living trust but it may be appropriate to name your trust as beneficiary. Seek legal counsel before changing the primary or contingent beneficiary on these types of assets.

Written confirmation – don’t just assume everything has been transferred correctly because you submitted the paperwork. Always ask for and keep a copy of a written confirmation indicating your assets have been moved into your trust.

As your partner in planning for the financial security of yourself and your family, we would never let your trust go unfunded. That’s because our concern for you doesn’t stop with the signing of your legal documents — we always follow up with clients to ensure everything has been done properly so they are fully protected.

If you’d like to learn more about how a trust might benefit you and your family, call us to schedule a Family Estate Planning Session and get educated about your options. There’s no obligation and if you mention this article there will be no fee.

To your family’s health, wealth, and happiness,

Marc Garlett 91024