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In our efforts to quickly provide you with information about new legislation (the CARES Act and its impact on the new SECURE Act), we incorrectly stated the RMD rollover rule in our last newsletter in the section addressing required minimum distributions as follows: “If you have already taken an RMD for 2020, you are not allowed to repay it into your retirement plan, but you are permitted to roll it over into a new IRA within 60 days of the distribution, allowing you to avoid paying income tax on the RMD.” 

Here is the rule correctly stated, with some additional explanation:

Under the previous tax law, an RMD you have taken cannot be rolled back into an IRA unless this is done within 60 days after the distribution, and a rollover from one IRA to another IRA (or from one Roth IRA to another Roth IRA) can be done only one time per year (365 days). Under the CARES Act, if you had already taken an RMD prior to the passage of the new law, you are allowed to roll it over into the original account within 60 days, and this time limit was extended by IRS Notice 2020-23 for distributions—including RMDs—taken between February 1st and May 15th if the rollover occurs by July 15th. If you took an RMD in January, it may not be returned unless the IRS provides additional relief.
 
Although the once-per-year IRA rollover rule is still in effect, if you have already used your IRA rollover, you are permitted to do a rollover to a non-IRA retirement account such as a 401(k). The once-per-year rule does not apply to RMDs taken from a 401(k) or to Roth conversions.

Our sincerest apologies for the misstatement of the new, temporary rule.

The COVID-19 pandemic has led to volatile markets, and your retirement account may have a much smaller balance than only a few short months ago. In response to the economic fallout stemming from the pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which was signed into law on March 27, 2020. The CARES Act was primarily aimed at providing quick and substantial relief to individuals and businesses affected by the economic shutdown in response to the spread of COVID-19. Several of the relief measures can provide significant peace of mind, as they provide you with the option to access some of the funds in your retirement accounts without the usual penalties if you have been negatively affected by COVID-19. In addition, the new legislation contains other provisions that may lower your tax bill for 2020.

Early Distributions. Under the CARES Act, the 10% early distribution penalty tax that would otherwise apply to the majority of distributions made before a participant turns age 59 ½ is waived for “coronavirus-related distributions” (CRD) made at any time during 2020 from qualified retirement plans, such as IRAs, 401(k)s, 403(a) and (b) plans, and 457 plans, for distributions of up to $100,000.

A CRD is a distribution from an eligible retirement plan made during 2020 to a qualifying individual who is diagnosed with coronavirus, or whose spouse or dependent has been diagnosed with it, or who has experienced adverse financial consequences from a coronavirus-related quarantine, furlough, layoff, work reduction, business closure or reduction in hours (for business owners) or an inability to work due to lack of child care related to coronavirus. The distributions will be subject to income tax, but if you qualify, you may opt to spread the payments evenly over three years rather than having to pay it all in 2020. You may also recontribute the distributed funds to the retirement plan or another retirement plan (with an exception for 457 plan distributions), by a single rollover or multiple rollovers, within three years of the date of the distribution regardless of any contribution limit established by the plan.
 
Loans. During the 180-day period from the date of enactment of the CARES Act, plans can increase their loan limits to the lesser of $100,000 or 100% of the participant’s vested account balance for qualified individuals, up from the previous limits of $50,000 or 50% (note that loans are not permitted from IRAs) for participants adversely affected by coronavirus as discussed above. In addition, qualified individuals with an existing loan from a retirement plan that is due to be repaid by December 31, 2020, can delay repayment by one year. Later repayments will be adjusted to reflect the delayed due date plus interest accruing during the delay. The one-year period of delay in repayment is disregarded in determining the maximum five-year loan period.

Required Minimum Distributions. If you are a participant in a 401(k), 403(a) or (b) plan, a 457, or an IRA (not a defined benefit plan), the CARES Act waives required minimum distributions (RMDs) for the calendar year 2020, meaning that if you do not need the distribution, you can leave the funds in your account, avoiding any income tax that would be due if you took a distribution.[1] The CARES Act waiver also applies to RMDs for retirees who reached age 70 ½ in 2019 but deferred taking an RMD in 2019 until April 1, 2020. Normally, retirees in this category would also have to take a second RMD for 2020 by December 31, 2020, but this RMD is waived as well. If you have already taken an RMD for 2020, you are not allowed to repay it into your retirement plan, but you are permitted to roll it over into a new IRA within 60 days of the distribution, allowing you to avoid paying income tax on the RMD. 

The waiver is also applicable to designated beneficiaries who have inherited retirement accounts. Further, 2020 is not counted for purposes of the post-death payout “five-year rule” applicable to non-designated beneficiaries[2] when the owner died before his or her own required beginning date.
 
However, the CARES Act has no impact on the new 10-year payout rule required by the SECURE Act, which precludes most non-spousal beneficiaries from stretching their distributions over their lifetime, as 2020 is the first year that non-eligible designated beneficiaries[3] would be subject to that rule when they inherit a retirement account. Because the 10-year payout does not start until the year after the year in which the account owner died, 2021 counts as year one rather than 2020.

Note: The CARES Act does not affect your ability, if you are 70 ½ years old or older, to make an annual qualified charitable distribution (QCD) of up to $100,000 from your IRA directly to a qualified charity in 2020 without counting the distribution as taxable income. However, the suspension of RMDs may reduce your incentive for doing so because the distribution will not offset the RMD, thus enabling you to avoid taxable income. However, a QCD will reduce your taxable IRA balance, so it will still provide a tax benefit to you. Further, under the CARES Act, for 2020, individuals who itemize their deductions can elect to deduct up to 100% (up from 60%) of their adjusted gross income for cash charitable contributions, so if you choose to take a cash distribution from your IRA and contribute that cash to a qualified charity, you can potentially completely offset the tax attributable to the distribution using the charitable deduction.

Review beneficiary designations. Now is also a great time to reach out to your financial advisor to review your beneficiary designations. As you know, life circumstances can change very quickly. If a marriage, death, or divorce has occurred since you last reviewed your beneficiary designations, you should give some thought to whether they are still consistent with your estate planning objectives. It would be unfortunate if your retirement funds went to an ex-spouse or someone else you no longer want to benefit. In addition, alternate beneficiaries should be named in case the primary beneficiary passes away before inheriting the account.

If a trust is the beneficiary of your retirement account, it is crucial for us to meet to review your estate plan. Before the SECURE Act was passed, we may have included “conduit” provisions in your trust so that the trust would qualify as a designated beneficiary of a retirement account, allowing the RMDs to pass through to the trust’s primary beneficiary for their individual life expectancy. Now, conduit trusts are ineffective after ten years, at which point the retirement account balances must be paid directly to the trust’s beneficiaries, which may substantially increase the income taxes they owe and make the entire amount available to claims by their creditors or divorcing spouses. Needless to say, if your estate plan includes this type of trust, it may no longer achieve your goals.

We Can Help

We have all been affected by COVID-19 in one way or another, but we want to let you know that we are available to help. If you would like to discuss how to best include your retirement account, which may be one of the largest assets you own, into your estate plan or have any other estate planning concerns, please give us a call. Our goal is to make sure that you have the best estate plan in place so you can gain peace of mind from knowing that you and your loved ones are secure, both now and in the future. We are happy to meet with you by video conference or by phone if you prefer.

[3] Beneficiaries who do not fall within one of five categories (surviving spouse, minor child of the participant, disabled beneficiary, chronically ill individuals, beneficiaries less than 10 years younger than the plan participant) of beneficiaries that are still allowed to use the life expectancy payout.

Many scientific studies have established that there is a wide range of benefits flowing from a positive attitude and positive thinking. At a time when many are focused on worst-case scenarios and gloomy predictions, you can resist the pull of negativity and embrace the beneficial results of positivity. This is not just an attempt to make yourself feel better in spite of reality, but rather to take full advantage of the proven benefits of positivity. You can increase not only your own wellbeing but also that of your children or other beneficiaries by creating an estate plan designed to promote their happiness, which in turn, will enable them to live healthier and more successful lives. Fortunately, if you are someone for whom it does not come naturally, positive thinking can be learned by surrounding yourself with positive people, deliberately engaging in positive self-talk, and living a healthy lifestyle, just to name a few common methods.

Health Benefits of Positivity

According to the Mayo Clinic, positive thinking has a multitude of health benefits, including an increased life span, lower rates of depression, lower levels of distress, greater resistance to the common cold, more psychological and physical well-being, better cardiovascular health and less risk of death from cardiovascular disease, and better coping skills.[1] Happiness, a byproduct of a positive attitude, has repeatedly been shown to boost the immune system, with studies showing that happy people who were exposed to illnesses were less likely to become sick or had milder symptoms than others who were less happy.[2]

Impact of Positivity on Success

Dr. Martin Seligman, a well-known researcher in the field of psychology, has found that those who are happy and satisfied with their lives are more likely to have desirable outcomes in school, work, social relationships, health, and life in general. Negative emotions narrow our perspective, driving us toward a single, instinctive action (reacting to danger) while ignoring everything else around us. In contrast, positive emotions are accompanied by a broadened perspective that allows us to see and examine a variety of options and then choose the one we believe is best for that moment. 

Those who tend to be more optimistic are more likely to establish clear life goals, focus on different ways to reach their goals, and believe that their goals will become a reality. Hopeful people view negative events as temporary setbacks or isolated unfortunate events. As a result, they are more resilient and able to handle challenges and view them as learning experiences. They have confidence that they can take action to improve their lives, and thus, are more likely to do just that.

Use Your Estate Plan to Create Positivity and Appropriate its Benefits for Your Beneficiaries

Rather than focusing primarily on negative goals, such as preventing a spendthrift child from wasting his or her inheritance, view your estate planning as a way to pass along a positive legacy. One method is to create an ethical will that shares your important values, religious beliefs, life lessons, and blessings with your family members. An ethical will, which could be in written or video form, is something that could be shared during your lifetime as a way of drawing family members closer together, or it could be one of the most meaningful gifts you leave for family members when you pass away. The positive emotions that come from the enhanced relationship and knowledge that they are loved could be a powerful catalyst that increases the wellbeing of your family.

In addition, you can provide funds for activities that create positive experiences for your beneficiaries, ultimately enhancing their wellbeing. Although providing financial security for family members and loved ones is clearly a positive goal, rather than simply thinking of your wealth as a way for your children or loved ones to acquire more “stuff”, you can be more deliberate and thoughtful about your estate planning, setting aside money for meaningful experiences, e.g., family trips, schooling, or volunteer activities, that will allow your beneficiaries to flourish and develop their strengths and interests. In fact, research shows that experiential gifts (gifts of events that recipients experience) result in a stronger relationship between the giver and the gift recipient than material gifts, even if the gift giver does not experience the event with the recipient.[3] The improvement in the relationship is the result of the positive emotions that are experienced while the recipient is experiencing the gift. These positive emotions also can ultimately increase their physical and mental wellbeing and likelihood of success in life.

Let Us Help You Achieve a Positive Goal

During this time of crisis, a positive attitude is more important than ever. We can help you think through and identify the ways you can incorporate positivity into your estate planning, which will provide you with the confidence and peace of knowing that you are not only providing your family with financial security, but also that you are leaving a positive legacy that will promote your loved ones’ physical, emotional, and spiritual wellbeing and future success.  Please call us today to schedule a meeting so we can discuss how you can best achieve your positive estate planning goals. We are more than happy to meet with you over the phone or videoconference if you prefer.

[3] Cindy Chan and Cassie Mogilner, “Experiential Gifts Foster Stronger Relationships than Material Gifts,” 43(6) Journal of Consumer Research 913 (April 2017), https://acadehttps://academic.oup.com/jcr/article/43/6/913/2632328mic.oup.com/jcr/article/43/6/913/2632328

In March 2004, the Senate passed Resolution 316, which officially recognized April as National Financial Literacy Month. Both Houses of Congress have passed similar resolutions since then designed to encourage financial literacy so that individuals are better prepared to manage their money, credit, and debt. Nevertheless, in the fourth quarter of 2019, U.S. household debt, which includes student debt, credit card debt, auto debt, mortgages, home equity loans, and other debts, exceeded $14 trillion for the first time ever.[1] In addition, forty percent of the respondents of one recent survey indicated that it would be very difficult for them to meet their current financial obligations if their next paycheck were delayed for one week, and another thirty-four percent said it would be somewhat difficult.[2] The COVID-19 pandemic has, unfortunately, made this potential difficulty a scary reality for many Americans.

Whether or not you are indeed struggling financially, it is important to do a realistic assessment of your financial situation and how prepared you and your family are for the future. Creating or updating your estate plan is an important part of exercising control over your finances, and ensuring that proper plans are in place can provide substantial peace of mind and security for you and your family.

Take an Inventory

One of the first steps in creating an estate plan is to take an inventory of your money and property. Regardless of whether you are wealthy or just getting by, everything that you own is part of your estate and should be listed–or at least accounted for– in your inventory. This inventory should include the following:

• The value of all of your real estate, including your home

• Tangible personal property, i.e., cars, heirlooms, artwork, jewelry, furniture, etc.

• All accounts (e.g., bank, investment, retirement accounts) and their balances, using the most recent statements

• The contents of all safety deposit boxes (and note where they are located)

• The cash value and death benefits of all insurance policies

• All liabilities, i.e., mortgages, lines of credit, notes, other debts

• All business interests

As you and your estate planning attorney evaluate your inventory, there are several questions you should ask yourself.

Am I saving adequately for retirement? Clearly, the answer to this question will vary for different individuals and circumstances, but many financial advisors recommend saving ten to fifteen percent of your pre-tax income during the entire span of your entire working years. If you have not been saving adequately, consider increasing your contributions to your retirement accounts.

Are sufficient funds available to provide for my spouse and dependents if I pass away? If the answer is no, consider purchasing a life insurance policy large enough to replace your income, as well as pay off any outstanding debts, college for your children, final expenses, and other important expenses, e.g., the cost of your child’s wedding or their first car.

Do I have a lot of debt? If you have substantial debt, your family members generally will not be responsible for paying it if you pass away. However, your estate will have to pay off your creditors before your beneficiaries receive anything. Life insurance can help in this situation as well: You can either purchase life insurance sufficient to pay your debt or you can make family members or loved ones the beneficiaries of your policy (or a trust for their benefit), as the proceeds of the policy never become part of your estate but are transferred directly the beneficiaries of the policy. Similarly, retirement, investment, and brokerage accounts allow you to name one or more beneficiaries, keeping those funds outside of your estate. Real estate or accounts owned jointly will also pass directly to the surviving owner when permitted by state law.

An even better course of action, however, would be to meet with a financial planner who can help you create a budget enabling you to decrease or eliminate your debt so that your loved ones will receive all the money and property you would like them to have.

Protect Your Assets

If you transfer money and property you would like to preserve for your beneficiaries into an irrevocable trust, that is, a trust that cannot be amended, modified, or revoked (except under limited circumstances), those assets will be protected from any of your future creditors or judgments (with time limits). Because the money and property used to fund the trust is no longer yours and you have no control over it, it is not available to pay your creditors. Your family members and loved ones can be named as the beneficiaries of the trust. This strategy can be particularly helpful for individuals working in professions that are at a high risk of lawsuits, e.g., doctors, lawyers, etc.

Warning: An irrevocable trust will not protect money and property from creditors having a claim at the time the trust is created. Courts can rescind transfers to trusts if they are determined to have been made with the intention to defraud current creditors.

Consider the Needs of Your Beneficiaries

Protect their inheritance from their creditors. Even if you take all the steps necessary to ensure that your beneficiaries receive a nice nest egg when you pass away, it can disappear quickly once it is in their hands unless your estate plan is designed to avoid this possibility. Fortunately, you can create a trust with terms that will protect your beneficiaries’ inheritance against claims arising from their creditors, divorcing spouses, or lawsuits. There are a variety of different types of trusts that can protect the money and property from such claims, but the following are among the most commonly used.

• A fully discretionary trust gives a trustee absolute and complete discretion regarding the amount and timing of distributions to your beneficiaries; in fact, the trustee is not required to make any distributions to them at all. In this case, the beneficiaries’ creditors will not be able to reach the funds held by the trust because the beneficiary does not have an enforceable right to receive any distributions from the trust.

• A beneficiary-controlled trust gives a beneficiary who is also a trustee the discretion to make distributions to him or herself for their “health, education, maintenance and support.” An independent co-trustee has the authority to make discretionary distributions for other purposes. Thus, the beneficiary has some degree of control over the trust funds, but the money and property held in the trust, with restrictions on distribution, may still be protected from creditor’s claims.

Create a trust for a specific purpose(s). You can include terms in your trust authorizing the trustee to make distributions for your children or other loved ones for specific purposes so that even after you have passed away, you are still able to help the trust beneficiaries make certain important purchases or pay for special care. 

• A trust can authorize distributions for certain important expenses. For example, you would likely want to help your child pay for a wedding, make a down payment on a home, or start a business while you are alive, so you may want to create a trust authorizing distributions for those purposes so that they will be covered even after your death. Like other types of discretionary trusts, the money and property held by the trust cannot be reached by the beneficiaries’ creditors. Once the money has been distributed to the beneficiary, though, the creditors will be able to reach it.

• If you have a special needs child or grandchild, a special needs trust may be an appropriate consideration. This type of trust, which must be carefully drafted, allows you to provide for someone with special needs without causing them to become disqualified for government benefits for which they are otherwise eligible.

Let Us Help You and Your Family Move Toward a Secure Future

Celebrate Financial Literacy Month by taking steps to get your financial house in order. Estate planning is an essential part of this process, as it is all about providing you and your family with the peace of mind that comes with knowing that even if the unexpected happens, the future is secure. Please call us today to set up a meeting so we can create an estate plan that meets all of your needs and goals.

[2] American Payroll Association, “Getting Paid in America Survey,” last modified September 10, 2019, https://www.nationalpayrollweek.com/wp-content/uploads/2019GettingPaidInAmericaSurveyResults.pdf

In 1984, Congress issued a resolution, signed by President Reagan, establishing March 21st as National Single Parent Day: a day devoted to recognizing the dedication of single parents, who make self-sacrificial efforts to care for their children’s needs, and encouraging family members, friends, and communities to help provide an optimal environment for their children. As a single parent, you should feel proud of your efforts to nurture and care for your children. Here are a few additional things you can do to provide for your children’s future that you may not have considered.

Name a guardian. If your children’s other parent is willing and able to care for them if you pass away unexpectedly, he or she will likely be given physical custody of the children and responsibility for their care. In the case of single parents, however, the other parent often may not be able or willing to take on this role. This is why it is crucial for you to name a guardian who will step into your shoes to provide day-to-day care for your children if something happens to you. If you do not name a person you trust, a court will step in to appoint someone. Because the person the court chooses to be your children’s guardian may not be the person you would have chosen, it is vitally important that you designate this person in advance. You can name a guardian in your will (and in some states, a separate document can be used specifically for this purpose): Although the court will still have to appoint the guardian, the court will typically defer to your wishes.

In making your decision, there are a few factors to keep in mind: Does your chosen guardian share your values and parenting style? Will your chosen guardian require your children to relocate? Does your chosen guardian have the energy and stamina needed to care for your children? Do they have the time to be an involved caregiver? Do you want more than one guardian to care for multiple children, or do you prefer for the children to stay together? It is important to weigh the importance of these considerations in making your decision.

Create a custodial account. If your children are minors, you can establish a custodial account to hold an inheritance under a law called the Uniform Transfer to Minors Act or the Uniform Gifts to Minors Act. If you do not appoint the custodian, the court will appoint someone to control and manage your children’s inheritance until they reach the age of majority. This is necessary because minors legally cannot own money or property on their own. A custodian will manage the funds in the account for the benefit of your children, but the downside is that when they reach the age of majority (18-21 years old depending on applicable state law), the funds will be distributed to them in a lump sum. At that point, they can spend the money as they wish, which may not be optimal for a young person who is not yet mature enough to make prudent financial decisions. In addition, any present or future creditors could try to reach your children’s inheritance to satisfy their claims.

Create a trust. A trust is often preferred over a custodial account because it is more flexible and can be designed to protect the funds against your children’s future creditors and their own imprudent spending. You can name someone who is adept at handling money to manage and disperse the funds for the benefit of your children if you die before they reach adulthood—or the age you have decided to the funds should be distributed to them. This can be the same person who will act as the children’s guardian, or a different person if you do not trust the guardian (e.g., an ex-spouse) to handle the money you have left to your children.

If you would like to set up a trust that can be used to manage your money and property for your (and your children’s) benefit if you become too ill to do it yourself, you can establish a revocable living trust with yourself as the trustee. This type of trust will remain in effect if you pass away, and the successor trustee you have named can continue to manage the funds and make distributions for the benefit of your children. The successor trustee can also step in to manage and distribute the funds for your benefit if you are unable to do so. An often less preferable option is to include provisions in your will for the establishment of a trust at your death. This type of trust will not help if you become disabled because it will not go into effect until your death. In addition, it will not be funded until your will has been probated, a process that may be expensive and time-consuming. Also, by creating the trust through your will, the management and distribution of funds may also be subject to ongoing oversight by the probate court.

The trust terms can specify the purposes for which the trust funds can be used, how and when the trustee should make distributions, and, if you so choose, the age at which you would like the trust funds to be fully transferred to your children—which does not have to be at the age of majority. You can choose the type of distributions you believe are best for your children: Some parents give the trustee the discretion to make distributions for specific purposes, such as the children’s health, maintenance, education, or support, or even for a down payment on a house or to provide funding for the child to start up a business. Others give the trustee complete discretion in making distributions for the benefit of the children. The timing of distributions, which can be designed to meet your particular goals, can also be spelled out in the trust.

If you have more than one child, you can specify whether the distributions should be for equal amounts or if a greater percentage of the money in the trust should be distributed for the benefit of certain children, e.g., children with special needs or younger children who did not get as much financial assistance from you while you were alive. In addition, you can address specific issues that may be of concern. For example, you can indicate whether you would like a home you own to be sold, or if you prefer for the children’s guardian to move into the home so they will not have to relocate. If your home is not sold, the terms of the trust can also indicate who will be responsible for paying the real estate taxes, utility bills, and maintenance expenses. The home is a particularly complex issue to consider, as there are often emotional ties and memories connected to it, as well as ongoing costs, and frequently, a mortgage. As experienced estate planning attorneys, we can help you think through the best course of action for your family.

Consider writing down your wishes regarding grandparents’ visitation. If you have named someone other than a grandparent (your parent) to be your children’s guardian, it is important to specify in your estate planning documents whether you wish the grandparents to be able to visit with your children.

While you are living, it is your fundamental constitutional right to determine whether–and how often– your children will see your parents (their grandparents). However, when you pass away, grandparents may have a right to see your children. Every state has enacted a grandparent visitation statute, and they vary regarding their permissiveness or restrictiveness. Some statutes only allow grandparents to obtain a visitation order when the children’s parents have separated, divorced, or one or both of them have died. Others are less restrictive[1] and allow grandparents to obtain a visitation order even if the parents are still married and are both still living. What both types of statutes have in common is that they both require visitation not to interfere in the parent-child relationship and to be in the best interests of the child.

Call Us Today

As a single parent, you can gain substantial peace of mind by creating an estate plan that ensures your children will be properly cared for—both physically and financially—in the unlikely event that something happens to you while they are still too young to take care of themselves. Please call our office today to schedule a consultation.

[1] Some of these less restrictive statutes have been found to be an unconstitutional infringement on the fundamental right of parents to control the upbringing of their children.