Should You Leave Your IRA to a Child?

What you should know about naming a minor as an IRA beneficiary.

Can a child inherit an IRA? The answer is yes, though they cannot legally own the IRA and its invested assets. Until the child turns 18 (or 21, in some states), the inherited IRA is a custodial account, managed by an adult on behalf of the minor beneficiary.1,2

IRA owners who name minors as beneficiaries have good intentions. Their idea is to “stretch” a large Roth or traditional IRA. Distributions from the inherited IRA can be scheduled over the (long) expected lifetime of the young beneficiary, with the possibility that compounding will partly or fully offset them.2

Those good intentions may be disregarded, however. When minor IRA beneficiaries become legal adults, they have the right to do whatever they want with those IRA assets. If they want to drain the whole IRA to buy a Porsche or fund an ill-conceived start-up, they can.2

How can you have a say in what happens to the IRA assets? You could create a trust to serve as the IRA beneficiary, as an intermediate step before your heir takes possession of those assets as a young adult. In other words, you name a trust as the beneficiary of your IRA, and your child or grandchild as a beneficiary of the trust. When you have that trust in place, you have more control over what happens with the inherited IRA assets.2

The trust can dictate the how, what, and when of the income distribution. Perhaps you specify that your heir gets $10,000 annually from the trust beginning at age 30. Or, maybe you include language that mandates that your heir take distributions over their life expectancy. You can even stipulate what the money should be spent on and how it should be spent.2

A trust is not for everyone. The IRA needs to be large to warrant creating one, as the process of trust creation can cost several thousand dollars. No current-year tax break comes your way from implementing a trust, either.2

In lieu of setting up a trust, you could simply name an IRA custodian. In this case, the term “custodian” refers not to a giant investment company, but a person you know and have faith in who you authorize to make investing and distribution decisions for the IRA. One such person could be named as the custodian; another, as a successor custodian.What if you designate a minor as the beneficiary of your IRA, but fail to put a custodian in place? If there is no named custodian, or if your named custodian is unable to serve in that role, then a trip to court is in order. A parent of the child, or another party who wants guardianship over the IRA assets, will have to go to court and ask to be appointed as the IRA custodian.2

You should also recognize that the Tax Cuts & Jobs Act reshaped the “kiddie tax.” This is the federal tax on a minor’s net unearned income. Required minimum distributions (RMDs) from inherited IRAs are subject to this tax. A minor’s net unearned income is now taxed at the same rate as trust income rather than at the parents’ marginal tax rate.3,4 This is a big change. Income tax brackets for a trust or a child under age 19 are now set much lower than the brackets for single or joint filers or heads of household. A 10% rate applies for the first $2,550 of taxable income, but a 24% rate plus $255 of tax applies at $2,551; a 35% rate plus $1,839 of tax, at $9,151; a 37% rate plus $3,011.50 of tax, at $12,501 and up.3,5

While this is a negative for middle-class families seeking to leave an IRA to a child, it may be a positive for wealthy families: the new kiddie tax rules may reduce the child’s tax liability when compared with the old rules.4

One last note: if you want to leave your IRA to a minor, check to see if the brokerage holding your IRA allows a child or a grandchild as an IRA beneficiary. Some brokerages do, while others do not.1

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.    Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.  Insurance products and services are offered and sold through Perry Financial Group and individually licensed and appointed insurance agents.
Citations.
1 – investopedia.com/articles/retirement/09/minor-as-ira-beneficiary.asp [6/19/18]
2 – kiplinger.com/article/retirement/T021-C000-S004-pass-an-ira-to-young-grandkids-with-care.html [5/17]
3 – forbes.com/sites/ashleaebeling/2018/05/08/the-kiddie-tax-grows-up/ [5/8/18]
4 – tinyurl.com/y7bonwzx [5/31/18]
5 – forbes.com/sites/kellyphillipserb/2018/03/07/new-irs-announces-2018-tax-rates-standard-deductions-exemption-amounts-and-more/ [3/7/18]

The Importance of Equitable Estate Planning

Have you considered the factors that may promote inequality in wealth transfer?

Suzanne is widowed and has four adult children. Her investment portfolio is worth $1 million, and she owns a bed-and-breakfast inn worth $1 million as well. Can she conveniently and equally bequeath these assets to her kids to give each child a $500,000 share of her wealth?

This may not be as easy as it seems. “Suzanne” and her estate planning dilemma are hypothetical; the above scenario genuinely illustrates why “equal” estate planning is not necessarily equitable.

Some estates are hard to divide fairly. This problem often surfaces when successful individuals or families have much of their net worth in illiquid assets, such as investment properties, collectibles, or private company interests. An illiquid asset can be hard to sell, and its price may need to be reduced to make a sale or exchange work. Once sold, the illiquid asset may not represent an “equal” share of the estate, only a devalued one.

Moreover, the illiquid asset may be unwanted by the heir. An heir may have little desire to become a landlord or maintain a classic car collection.

Life insurance can address this problem. In the above scenario, the purchase of a $2 million life insurance policy may be a very wise move. This will boost the value of the estate to $4 million and permit “Suzanne” to bequeath $1 million in assets to each of her kids. The ownership of the $1 million bed-and-breakfast inn no longer needs to be divided. That $1 million share of the estate can be left to the heir with the most interest in real estate investment.

The division of assets is still imperfect. The $1 million investment portfolio and the $1 million inn may increase in value. The $2 million in life insurance proceeds, while tax free, may or may not end up being invested by the other two heirs after the 50/50 split. Still, the initial distribution of wealth is more equitable, and more manageable, than it would be otherwise.  Buy-sell agreements can address major issues for business owners who want to hand their firms down to the next generation. A well-crafted buy-sell agreement can delineate the heir(s) in control of a company’s ownership and their degree of control. It can also clearly state when and how shareholders can transfer their shares in the business to others.

In pursuit of equitable estate planning, some families choose the blended approach. This method promises greater rewards for heirs who have made greater contributions to family wealth. It aims to distribute family assets equally, fairly, and equitably. When the blended approach is used, the bulk of family wealth is divided equally among heirs in cash. Some assets are distributed fairly – select liquid or illiquid assets are handed down to this or that heir to suit individual priorities, needs, or wants. Then, a defined percentage of the estate is distributed equitably, based on involvement in the family business or similar criteria.1

Whether you have done much or little estate planning, the matter of equitable division of assets must be considered. In terms of asset transfer, what seems equal at first consideration may not prove equal in execution. Contact us today to discuss the best approach for your estate planning. 

 

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.    Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.  Insurance products and services are offered and sold through Perry Financial Group and individually licensed and appointed insurance agents.
Citations.
1 – barrons.com/articles/the-smartest-way-to-pass-on-your-fortune-1459270512 [3/29/16]

Social Security: Myths vs. Facts

Dispelling some misperceptions about the program.

Some myths & misperceptions keep circulating about Social Security. These are worth dispelling, as more and more baby boomers are becoming eligible for their retirement benefits.

Myth #1: Social Security will go away before you do. The federal government has announced that Social Security may become insolvent between 2033 and 2037 if no action is taken – but it is practically a given that Congress will act on the program’s behalf. Social Security provides 40% of the total income of the 40 million Americans receiving retirement benefits.1

Did you know that Social Security has had a surplus each year since 1984? That situation is about to change. By about 2020, the program is projected to face a deficit, which it will tap incoming interest payments to offset. It will only be able to use that tactic until the mid-2030s. The program will not “run dry” or go bankrupt at that point, but by some estimates, its payments to retirees could become about 25% smaller.1

Myth #2: Your Social Security benefits are “your” money. It would be a fitting reward if your Social Security income represented the return of all the payroll taxes you had paid through the years. Unfortunately, that is not the case. The payroll taxes you paid decades ago funded the Social Security benefits that went to retirees at that time. Your Social Security benefits will be funded by the payroll taxes that a younger generation pays.2

Myth #3: Social Security income is tax-free. In reality, up to 85% of your Social Security income may be taxed. Social Security uses a formula to determine the taxable amount, which is as follows: adjusted gross income + nontaxable interest + one-half of your Social Security benefit = your combined income. Single filers with combined incomes between $25,000-$34,000, and joint filers with combined incomes between $32,000-$44,000, may have as much as 50% of their benefits taxed. Single filers with combined incomes above $34,000, and joint filers with combined incomes above $44,000, may have up to 85% of their benefits subject to taxation.2

Myth #4: If you have never worked, you will never get Social Security benefits. This is not necessarily true.

Generally speaking, you have to work at least ten years to become eligible for Social Security income. That is, you have to spend ten or more years at jobs in which you pay Social Security taxes; you have to pay into the system to get something back from the system. Unfortunately, caregiving and child-rearing do not qualify you for Social Security.1

To get technical about it, you must accumulate 40 “credits” to become eligible for benefits. When you receive $1,260 in earned income, you get one credit. Another $1,260 in earned income brings you another credit, and so forth. You can receive up to four credits per year. Most people will collect their 40 credits in a decade; though others will take longer.1  If you have never worked, or worked for less than 10 years, you could still qualify for Social Security on the earnings record of your spouse, your ex-spouse, or your late spouse. A widow can choose to collect up to 100% of a deceased spouse’s monthly benefit; a married spouse can collect up to 50% of the other spouse’s monthly benefit. If you have divorced, you may still file for Social Security benefits based on your ex-spouse’s earnings record – provided that the marriage lasted ten years or longer and you have not married again.1

For more information about Social Security call us today for your free consultation.

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.    Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.  Insurance products and services are offered and sold through Perry Financial Group and individually licensed and appointed insurance agents.
Citations.
1 – fool.com/retirement/2016/07/18/12-jaw-dropping-stats-about-social-security.aspx [7/18/16]
2 – usatoday.com/story/money/personalfinance/2016/04/03/social-security-facts/81883222/ [4/3/16]

What is the Best Strategy for Social Security? Well…”It Depends”

Have you ever asked a really important question that you need an answer for and the person answering says to you, “Well it depends?”  This answer drives me nuts and sadly I have to give this answer to clients from time to time.  But still I wish that solutions would always fall on one side or the other.  It just makes things easier.  In addition, you have to know all the reasons and loopholes to know what it depends on.  This is the missing component for a lot of people regarding Social Security.

Social Security represents 40% of the average person’s total income in retirement however it is very much an “it depends” type of benefit. One decision can have major impacts to the future.  I have heard clients ask these questions more times than I can remember.  “Should I take it at 62?” “Or maybe 66 or 67?” “Or maybe I should wait to take it at age 70 since that is the highest dollar amount.”  “I’ve also heard about spousal benefits or widow’s benefits, or divorced benefits.  What are those and when do I take them?” And “Aren’t there strategies to maximize my Social Security?”  So what’s the right answer?  You guessed it.  It depends.

I recently gave an hour and half presentation on this subject alone so there is a lot of information surrounding it.  In my professional opinion, I believe that Social Security should be incorporated with someone’s personal financial plan so that it coordinates with your investments and income both before and during retirement.  That way the correct strategies, scenarios, and “it depends” are specific to you.

Here are some things to think about when considering Social Security: 

  1. Health status
  2. Life expectancy or family history
  3. Need for income
  4. Whether or not you plan to work
  5. Survivor needs

If this is a topic that is of interest to you and you find yourself swimming with more questions than answers, register for our complimentary Social Security Workshop this Saturday, July 14th hosted by Andy Whitten and John Teixiera CIMA®, CFP®,AEP®, AIF®. We love to answer your “it depends” questions.

 

PFG Private Wealth Management, LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. This material and information are not intended to provide tax or legal advice.    Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.  Insurance products and services are offered and sold through Perry Financial Group and individually licensed and appointed insurance agents.

John Teixeira Earns the Certified Investment Management Analyst® (CIMA®) Designation

pfg private wealth management

We are excited to announce that John Teixeira recently obtained the Certified Investment Management Analyst® (CIMA®) designation. The CIMA® designation is delivered by Investments and Wealth InstituteTM (Institute) and taught in conjunction with the Yale School of Management

Certified Investment Management Analyst® (CIMA®) certification is the peak international, technical portfolio construction program for investment consultants, analysts, financial advisors and wealth management professionals. The CIMA® program is distinctive as one of only a few global certifications in financial services to meet international accreditation and quality standards (ANSI/ISO 17024) for personnel certification programs.

The CIMA® certification identifies individuals who have met extensive experience and ethical requirements and successfully completed advanced investment management consulting coursework provided through one of three top-20 business schools in the United States: The University of Chicago Booth School of Business, The Wharton School at the University of Pennsylvania, or the Yale School of Management. CIMA® professionals must pass a qualification and certification exam covering a wide range of in-depth investment topics. Additionally, those who earn the certification must agree to meet ongoing continuing education requirements and adhere to the Institute’s Code of Professional Responsibility.

CIMA® advisors have completed a rigorous process and have demonstrated knowledge and competency in a variety of investment management and portfolio construction topics. The CIMA® advisor learns sophisticated, technical investment concepts and how to apply them for individual and institutional clients.  Fewer than four out of 10 candidates who start the program successfully pass all requirements to earn the certification.

Please join us in congratulating John on this accomplishment!