Every year thousands of generous people leave a part of their final estate to worthy charities, leaving a legacy that will continue to help others after they have passed. Having taken care of their families, these Good Samaritans also help those less fortunate and in need of help and care.

But what if there were a way to be generous and receive a benefit while still living? There is—it’s an old estate planning tool called a Charitable Remainder Trust.

A Charitable Remainder Trust (CRT) is an irrevocable trust that pays the grantor or heirs an income for a specified period of time, with any remaining balance going to one or more qualified charities. A CRT can be funded with cash, stocks, bonds, real estate, private company interests, and non-traded stock. The trust retains a carry-over basis for all assets donated to the trust and the remainder cannot be less than 10% of net fair market value of the assets donated to trust. Additionally, the time period is limited to 20 years or the life of one or more of the non-charitable beneficiaries.

For their future generosity, the grantor receives a current tax-year charitable deduction that is based on the IRS section 7520 interest rate, among other factors. The interest rate used to calculate the remainder value is based on the rate in effect in the month the trust is funded. Generally, the higher the interest rate, the higher the charitable deduction created by a CRT. As interest rates have moved up, so has the IRS section 7520 interest rate, and thus has the remainder value calculation and the current year deduction.

There are a couple of variations of CRTs. A Charitable Remainder Annuity Trust (CRAT) pays a fixed dollar income to the non-charitable beneficiary(ies). The dollar amount must be no less than 5% of the initial trust value and no more than 50% of the initial trust value. Generally, the present value of the annual income stream is determined and subtracted from the value of the property transferred to the trust to arrive at the value of the remainder interest. The factors for determining the present value of an income stream payable for the life of the noncharitable beneficiary are in Publication 1457, Table S, Single Life Factors and the  present value of an income stream payable for a term of years are in Publication 1457, Table B, Term Certain Factors. There are slight adjustments that must be made for payments that occur other than annually at the end of the year, but your CPA should have software that can do those calculations for you.

The other CRT variation is a Charitable Remainder Unitrust (CRUT). In a unitrust, the percentage of the trust assets is fixed at between 5% and 50% of the initial trust balance, but the dollar amount of the distributions can fluctuate from year-to-year. Generally, the present value of the remainder interest (i.e., the charitable deduction) in a CRUT is determined by finding the present-value factor that corresponds to the trust’s adjusted payout rate. The present-value factor for a CRUT with an income interest payable for a term of years is in Table D, Term Certain Factors, of Publication 1458. The present-value factor for a CRUT with an income interest payable for the life of the noncharitable beneficiary is in Table U(1), Single Life Factors, of Publication 1458. If the income interest is payable for the lives of two individuals, use Table U(2), Last-to-Die Factors, in Publication 1458. You can use an online calculator to get a ballpark idea of the current tax deduction you could be entitled to, but your CPA will provide the final numbers for your income tax filing.
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If you plan to leave any property to a charitable organization at your death, you should consider using a CRT now instead. It can reduce your income tax bill and provide additional funds for you to be even more charitable.

Using a see-through trust as a tax-deferred Traditional IRA beneficiary has steadily risen among estate planning attorneys. The benefits of using a trust as the IRA beneficiary includes:

• Avoids the problem of minor beneficiaries managing investments before their age of majority
• Protects a spend-thrift heir from self-harm upon the inheritance
• Protects a married child from having marital assets if the relationship is perceived as rocky

Usually, a single trust is named, and the beneficiaries' share of the assets are spelled out in the trust. One trust, one trustee, nice and simple.

Perhaps not.

Under the new SECURE Act rules for IRA beneficiaries, all IRA assets must be distributed within 10 years of the year following the date of death of the original IRA owner, with some exemptions for spouses, disabled and minor beneficiaries, and beneficiaries who are less than 10 years younger than the decedent. This dramatically shortens the time that a trust can protect heirs and introduces income tax planning problems for the beneficiaries.

Although there are steps a beneficiary can take to minimize the income tax bite of inheriting an IRA, having the IRA assets co-mingled with a single trust as the beneficiary will severely limit these options. Each individual beneficiary will have different tax planning opportunities and needs. Using a single trust to receive and distribute IRA assets will make income tax planning for the individual beneficiaries nearly impossible.

Here's a simple solution.

Ask your attorney to draw up your trust documents so that upon your death, a pass-through trust is established for each individual heir, and use the beneficiary designation form provided by your IRA custodian to enumerate the share each trust receives.
This way the money is not comingled, and the trustee can work with each end beneficiary to select the times and amount of the distributions that will minimize the income tax bite for that beneficiary. There are a lot of IRA beneficiary trusts out there. Many will need to be updated for the added complexities of the SECURE Act.

​IRAs that will be inherited by anyone except a spouse, minor children, beneficiaries with disabilities, and anyone who is ten years or less younger than the IRA owner, are now to be completely distributed over 10 years, rather than the lifetime of the heir.

​With a shortened time span to distribute inherited IRAs, taxable income generated from an inherited IRA, in addition to one’s normal earned income, can cause uncharacteristically high tax bills if appropriate tax planning is not executed. In larger inherited IRAs, tens of thousands of tax dollars are at stake.

With the passage of the SECURE Act, stretch IRAs became a thing of the past. Rather than allowing beneficiaries to withdraw funds based on their life expectancy, the Act requires IRA beneficiaries to make a total distribution of all funds from the IRA within 10 years, with limited exceptions for spouses, minor children, beneficiaries with disabilities, and anyone who is ten years or less younger than the IRA owner.

Congress passed the Act knowing the net effect would be higher income taxes to most IRA beneficiaries. According to the Congressional Research Service, the elimination of the stretch IRA alone has the potential to generate about $15.7 billion in tax revenue over the next decade. For many beneficiaries, the inherited IRA will come during their peak earnings years when their income tax rate could be at a maximum. The effect of high earnings and additional taxable distributions from a Beneficiary IRA could cause the net value of the IRA to be reduced by 30% or more. To minimize to tax bite of an IRA inheritance, both the original IRA owner and the beneficiary will need to do diligent tax planning.

Now, more than ever, converting Traditional IRAs to Roth IRAs should be examined. We strongly believe almost everyone should convert enough funds from a Traditional IRA to a Roth IRA to fill the 12% income tax bracket each year. 12% is a fair tax rate for most taxpayers and it’s much easier to implement effective tax planning for inherited Roth IRAs than for inherited Traditional IRAs.

Having assets in a Roth IRA has advantages for the original IRA owner as well. It will reduce the amount of required minimum distributions (RMDs) when you reach age 72 (up from 70 ½, a positive from the SECURE Act), as well as provide more flexibility in managing your income-tax rate in retirement. For a free Roth conversion flow chart that will help you understand how a Roth conversion can work for you click here.

While we usually don’t recommend going beyond the 12% bracket for Roth conversions, there could be certain circumstances where that might be appropriate. For example, if you don’t need the assets in your Traditional IRA for your retirement lifestyle and all of your heirs are high wage earners, it might be better for you to pay a 22% tax rate now rather than leaving the IRA to an heir who may be taxed 32-40% on those same assets.

If you have grandchildren, including them as partial beneficiaries of your IRA can potentially increase the net value of an inherited IRA. For example, suppose you have a $500,000 IRA, two children, and four minor grandchildren.

Both children and their spouses work and earn $150,000 per year in combined taxable income, so under current income tax law that puts them in the 22% marginal Federal income tax bracket. With a Beneficiary IRA of $250,000 each, if they take equal distributions from their Beneficiary IRA of $25,000 per year for 10 years, they will be pushed into the 24% bracket and thus nearly every dollar distributed from the Beneficiary IRA is taxed at the 24% level. Or worse, say they wait to take the full $250,000 distributions in year 10 or another single year—they would jump into the 32% Federal tax bracket.

To steer some IRA assets away from being taxed at those higher tax brackets you could earmark a portion of the IRA to go to each grandchild. Under current rules, any minor can have $1,100/year of unearned income with no income tax liability.  This kiddie tax rate applies to children under the age of 19 and college students under the age of 24. 

Every year $1,100 is distributed from your grandchild’s inherited IRA tax-free, resulting in a savings of $242 each year the child qualifies. If the child has earned income during their teen years, the distributions can be increased to fund a Traditional IRA or Roth IRA for the child’s benefit. Smart tax-planning could combine Traditional and Roth IRA contributions to eliminate all taxes on the child’s earnings. Once the child reaches the age of majority, the ten-year rule begins. It is unlikely the grandchild’s earnings will place them in a top bracket fresh out of school, so the strategy of offsetting distributions with tax-deferred savings could allow your grandchild to build a nice retirement nest egg without much loss to income taxes.

To accomplish this, you must be sure to name a custodian for the minor grandchildren since minors cannot make financial decisions for themselves. The custodian could be a parent, but one must be named.  Another important factor in determining the dollar amount that should be allocated to a grandchild is the age of the grandchild when they receive the Beneficiary IRA.

Most IRA owners will name a spouse as a primary beneficiary and that is perfectly fine. Spouses are exempt from the ten-year distribution rules. Children are generally named as contingent beneficiaries, in some equitable percentage of the account value. Most custodians only allow for simple percentage distributions to be named beneficiaries and that could create some problems. For complex beneficiary strategies, using a pass-through trust might be a better solution.

If you’ve already established a trust as the beneficiary of your IRA, it is imperative that you review and update that trust. Most trusts have language that instructs the trustee to pay out the required minimum distribution (RMD) to the beneficiary each year. Under the SECURE Act, there are no annual RMDs until the end of the 10-year term, then the required distribution is 100% of the account value. This is a tax time bomb just waiting to explode.
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At a minimum, you must rewrite the trust to allow flexibility for distributions, which also provide flexibility for income tax planning for the beneficiary(ies) of your IRA. Realizing a $500,000 Beneficiary IRA distribution through a trust in one single year will likely subject the distribution to the maximum income tax rate of 37%, plus a 3.8% Medicare surtax on some of the recipient’s income. This is just for the Federal level taxes; add in state income taxes and the beneficiary may only end up with 50% of the original account value-- certainly not what you had in mind when you drew up the trust.

Most IRA custodians do not allow for complex IRA beneficiary schemes, so the ability of pass-through trusts to manage distributions to multiple generations becomes much more important. Through a trust you can establish custodians for minor beneficiaries, name an investment and income tax counselor, and provide for flexibility in the timing of distributions during the 10-year window allowed under the SECURE Act, or even longer in the case of minor children. Although establishing the trust incurs more expense and investment of time and thought, the result can certainly provide enough benefit to owners of substantial IRA assets and their families to make it worthwhile.

For many Beneficiary IRA owners, the biggest tax planning opportunity will be to simply manage the distributions over the 10-year period. One strategy would be to offset the taxable Beneficiary IRA distributions with additional tax-deferred savings. To do this, simply increase savings to an employer’s retirement plan such as a 401k, 403b, or other tax-deferred plan, or establish and contribute to a separate deductible Traditional IRA or self-employed retirement plan of your own. Any form of tax-deductible contribution will reduce the impact on income realized from one’s Beneficiary IRA dollar-for-dollar.

Let’s go back to our previous example with the $500,000 IRA. If the IRA owner’s children in this illustration are like most investors, they only contribute about 5% of their salaries to an employee retirement plan in order to maximize the company matching formula-- a.k.a get the free money. This means the parents are likely contributing much less than the $19,500 maximum salary deferral allowed by the IRS.

Let’s assume the decedent’s children can defer an additional $15,000 for each spouse in their employer 401k plans. If they defer the additional $30,000 in one year, they can distribute another $30,000 from their Beneficiary IRA(s). This results in a wash for $30,000 of distributions from the Beneficiary IRA as it would swap funds from one tax-deferred account to another and fulfill the original IRA owner’s estate planning intent.

While inherited Roth IRAs are easier to manage from an income tax perspective, you should put some thought into the options. The most obvious option is to do nothing until the final day of the ten-year withdrawal period and then take a distribution of the entire account. This maximizes the tax-free growth of the inherited Roth IRA and because the distribution is tax free, has no effect on the recipient’s tax rate.

If the beneficiary is not making maximum retirement plan contributions when they inherit the Roth IRA, taking distributions along the way and using those funds to fund their own Roth IRA, or even better-- make contributions to a Roth 401k-- could mean you really do get to stretch the inherited Roth IRA over your lifetime. Non-deductible 401k contributions, up to the annual $19,500 limit, will work as well. When you retire, the non-deductible contributions, but not the earnings, can be rolled over into your own Roth IRA. Taking money from one pocket and moving it to the other pocket, that has no hole in it, (i.e. tax-free) makes a lot of sense.

The SECURE Act makes working with a financial planner more important than ever before. Earning an 8% or even 10% return on your investments pales in comparison to shielding 30% or more of your assets from the ravages of our income tax system. To get started on a plan to preserve your IRA assets, click HERE.
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Often, navigating the Social Security Administration’s rules can be complex and confusing. None more so than trying to determine a surviving spouse’s social security benefit. Nearly every couple will face this problem at some point.

Timing is everything regarding social security surviving spouse benefits. The filing date alone—when you decide to claim social security and when your spouse does—ultimately determines how much you both will receive in Widow or Widowers benefit. Getting your initial claiming strategy right is paramount to maximizing this important benefit.

If the deceased spouse has not begun receiving social security income at the time of death, the survivor’s benefit is based upon the decedent’s primary insurance amount (their social security income at Normal Retirement Age) plus any delayed retirement credits up to the date of death. Delayed retirement credits add about 8% to the social security income received for each year you delay taking your social security benefit beyond your normal retirement date, up to age 70. If this is the case the surviving spouse’s decision to claim social security benefits will be based on their age at the time they file. What this means is if the survivor decides to receive social security income before they reach their normal retirement date, there will be a reduction in income for each year of early filing, even if the deceased spouse had earned delayed retirement credits.

If the deceased spouse had been receiving social security income before their normal retirement date, their benefit and the widow(er)’s benefits are reduced forever, depending on when the initial benefit claim was filed. Generally, you would lose about 8% of social security income for each year you receive social security payments prior to reaching your Normal Retirement Age (NRA). A widow(er)’s benefit is limited to the larger of 82.5% of the deceased spouse’s death primary insurance amount or the reduced income benefit the deceased would have been eligible for if they had lived.

The Social Security Administration provides the following example:

“Mr. B, age 64 on August 3, received reduced retirement income benefit of $350 (primary insurance amount $374.90) for August and September. He died in October. Mrs. B, age 66, comes in, to file for widow's benefits. The retirement income benefit if Mr. B were alive would be $350. 82 1/2 percent of the death primary insurance amount is $309.20 ($374.90 X .825). The life and death primary insurance amounts are the same. The widow’s income benefit will be the higher of the two, $350 in this example.”

Your widow or widower can get benefits at any age if they take care of your child younger than age 16 or disabled, who’s receiving Social Security benefits. If the surviving spouse is disabled, benefits can begin as early as age 50. Unmarried children, younger than age 18 (or up to age 19 if they’re attending elementary or secondary school full time), can also get benefits.  Children can get benefits at any age if they were disabled before age 22.  Under certain circumstances stepchildren, grandchildren, step-grandchildren, or adopted children may also be eligible for benefits. These circumstances are exempt from the deemed filing rules and do not affect future claims made under their own work record. There is a family maximum to survivor benefits that will vary between 150% and 180% of the deceased worker’s benefit amount.

For divorcees who had been married for ten years or longer, the survivor benefit is available if they have not remarried before age 60. An ex-spouse’s survivor benefit has no effect on the family maximum benefit, so a new spouse and any children can still be eligible to receive survivor benefits based on the same wage earner.

Although a widow may be eligible for benefits based on their own work record, if they file for social security benefits, they will receive the highest benefit they qualify for at the time they file.  Some benefits are calculated independently with the larger benefit being paid or the smaller benefit being paid plus the excess amount of the larger one. Other types of benefits are calculated with a carry-over reduction amount from the first benefit to the second.
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Although the loss of a loved one is a terrible time to assess and compare your social security filing options, it is important that you choose wisely. If possible, delay the decision until you have had the time to be emotionally ready to face the problem and consult with a trusted financial planner.
 

Mistakenly, many believe that they do not have enough assets to worry about estate planning. With today’s $5.6 million exclusion per individual and simplified portability that raises a couple’s exclusion to $11.2 million, estate taxes may not be an overbearing concern. But there are many estate planning steps everyone with heirs and assets should take. A financial plan would be incomplete without a review of the basics of estate planning. As a fiduciary, your advisor should cover this important topic. Just be sure to work with a fee-only advisor to avoid being sold high commission and high expense insurance products you might not need under the guise of estate planning.
 
How Assets Transfer After Your Death
 
Transfer by Will

Assets that transfer by will are assets you specifically list in your will to any designated beneficiary. If you don’t have a will, the state you reside in has one for you. While the state's method of distributing your assets may not be what you would wish for and could lead to serious problems for your heirs, your assets will be distributed to someone.

Without a will an asset could be passed under state law to your heirs as an undivided interest in a home or other real estate. This presents a problem if the asset needs to be liquidated to evenly divide and title the property.  Because all parties must agree to the terms of any sale and beneficiaries may have differing opinions as to the value, holding an undivided interest can make final disposition very difficult. Sometimes sentiment will stand in the way of liquidating the asset, causing friction among family members and leaving some susceptible to emotional blackmail or simply leaving all with a claim to property that in essence has no remainder value.

Another common mistake in drafting a will is to misunderstand how some assets transfer and the hierarchy of the transfer.  If an asset transfers by contract, that is, if there is a named beneficiary of an IRA or insurance product, the contract takes precedent and that asset will not be available to transfer through your will.

It is inappropriate to transfer certain retirement plan assets through your will. IRA and 401k type assets lose their tax advantaged status and result in needless income tax leakage for your estate.

Items transferred through your will are also subject to the delays and costs of probate. Probate costs vary from state to state but it is the delay that is often the problem. If there is not enough liquidity in the estate, heirs could be hard pressed to carry the expenses of maintenance and taxes while the probate process proceeds.

Another drawback to transferring assets through your will is that wills are all a matter of public record and must be filed with the county where the decedent last lived. That means your estate and its’ disposition is not a private matter. Anyone who is curious can learn about matters that you may have preferred to be private.

Transfer by Contract

You can also transfer assets to your heirs via contract. Contracts are private agreements and thus can preserve privacy. Assets that transfer by contract also will avoid the delays of the probate process. For example, the beneficiary of a life insurance contract will receive any funds soon after the required paperwork is completed and processed. IRA and other retirement accounts may also have a named beneficiary. Once the death certificate is presented to the custodian the distribution of those assets will begin. For this reason, it is important that you keep the beneficiary designations on assets that transfer by contract up to date. You should review your beneficiary forms regularly and any time there is a life changing event.

A revocable living trust is another type of contract often used to transfer assets. Investment accounts, real estate, collectibles, and many other items can be owned by a revocable living trust. RLCs are a very popular alternative to wills. These trusts protect the privacy of your estate and your heirs and avoid the delays of probate. A common mistake in the use of a revocable living trust is forgetting to title assets in the trust name. Maybe you buy a vacation home, or you open a new investment account and forget to have it titled to the trust. You should regularly review your estate assets and be sure they are titled correctly.

If you do not want to go to the expense and trouble of setting up a revocable living trust there are other tolls you can use to transfer assets via contract rather than through your will.

An often-overlooked tool is called Transfer on Death (TOD). Many states have adopted laws that enable individuals to transfer assets by contract rather than by will, which greatly simplifies final distributions for heirs.

For investment accounts the TOD designation allows you to specify beneficiaries for each account you may have that is registered in your name. You may specify a different percentage ownership for each beneficiary. Upon your death the assets in the TOD account will transfer to the named beneficiaries without the delay of probate and separate from other items in your will. You can make changes to the beneficiaries and their percentage participation whenever you choose. There is usually no additional charge for having the TOD designation added to your account, but not all institutions may offer this type of account, so be sure to ask.

For banking accounts you should know about the Pay on Death designation which works in a similar fashion, and also avoids probate.  Ask your banking institution if they offer this type of account.

Per Stirpes

Per Stirpes is a Latin term meaning "per branch".  It indicates how property should be distributed in the event of a named beneficiary is deceased.

For example let's say you have a son and daughter who each have two children of their own. You have an IRA which you wish to leave to your children in equal shares. If you have indicated this on the IRA beneficiary form you may think all is well. However, suppose your daughter is traveling with you when you both die in an automobile accident. What will happen to the assets in the IRA?

Without the per stirpes indication the IRA will transfer Per Capita, meaning your son will inherit all the assets in the IRA, leaving your grandchildren from you daughter with no share. If, however, you included the per stirpes designation on the beneficiary form, your surviving son would inherit his half of the IRA, and your daughter’s heirs (the branch) would inherit the other half of the assets. This dramatic difference is due to those two small words - per stirpes.

Durable Power of Attorney

A Durable Power of Attorney is another estate planning must have. Many of us worry, with good reason, that we might one day become incapacitated and unable to attend to our own affairs. How can we be sure our bills are paid, our investments are managed, or our property sold if the need arises?

A power of attorney is a document that delegates legal authority to another person. You may be familiar with a limited non-durable power of attorney from attending a property closing when one of the parties is absent. The Power of Attorney allows the principal (person granting the Power of Attorney) to name an Attorney in fact (the person to whom the legal authority is being delegated) to sign documents to effect a property closing on their behalf.

Non-Durable Powers of Attorney can be granted for a wide variety of tasks, and they remain in effect until canceled by the Principal or until the Principal becomes incompetent or dies.

A durable Power of Attorney is often granted between spouses or between a parent and a trusted child or other relative. The durable Power of Attorney as the name implies enables the Agent to act on the Principals behalf even if the Principal becomes mentally or physically incompetent. This is an important distinction. Should the Principal become incompetent through disease such as Alzheimer's or as the result of an accident or illness, there is someone in place who can make legal decisions, access funds, and pay bills on behalf of the Principal. As with non-durable POAs a durable Power of Attorney ends when revoked by the Principal or when the Principal dies.

If you have not executed a Durable Power of Attorney and you become unable to handle your own affairs your family will probably have to go to court to have you declared incompetent - a very public airing of a very private matter. The court must then appoint someone, maybe not the person you would choose to handle your affairs. Sometimes a bond must be posted, an attorney or CPA hired to prepare detailed financial reports that must be filed with the court, and the court must give permission for certain transactions like the sale of real estate. All of this can be a long and expensive undertaking that can easily be avoided with proper planning.
 
Healthcare Power of Attorney
 
The healthcare power of attorney, sometimes called a healthcare proxy, is another estate planning necessity. It names an individual to make healthcare decisions on your behalf when you are incapable of making those decisions for yourself. Not to be confused with a healthcare directive, this document works much like a durable power of attorney except it is for medical care rather than financial assets. Usually it is granted to a spouse or close relative to grant them the authority to make healthcare decisions on your behalf.
 
Healthcare directive

While not a legal document a healthcare directive does inform your family of your wishes for end of life care. You should not subject your family to the agony of having to guess under what circumstances you would like medical care withheld. You should spell out the conditions under which you would like to not be revived or the treatments you would not want to be subjected to. If you do not want to be kept alive by feeding tubes or respirators at some point, you should spell out those circumstances and spare your family any potential guilt or heartache of having to make such hard decisions at what will be for them a very horrible time.

Letter of Instruction
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Another non-legal document you should prepare is a simple letter telling your heirs who they should contact if you die and where they can find documents they will need as they close out your estate. Some of the items you should include are:

• The location of estate planning documents (wills, trusts etc.)
• The location of financial documents (tax returns, deeds, bank statements)
• The location of Safe deposit boxes and their keys
• Life insurance policies LTC policies
• Investment accounts and contact information
• Phone numbers for accountants, attorneys, financial and insurance advisors
• Funeral home information if you have made arrangements
• Information and passwords for email and social media accounts
• Information and passwords on home security systems
• Information and contacts for pensions

While planning for our own deaths is never something we wish to think about, making life easier for our heirs is usually a goal for everyone. Maybe looking at it in this light will make estate planning easier to consider and implement.

Many times I have had clients ask about having a child named as a Joint Tennant with right of survivorship on an investment or banking account. The reasons the client cites is usually to provide liquidity for the estate, avoid probate, and have someone who can access funds should they not be able to write checks for a period of time. I will generally discourage this as it can cause problems with the final disposition of assets and leave the clients vulnerable to divorce or other legal proceedings. 

An often overlooked tool is called Transfer on Death (TOD). Many states have adopted laws that enable individuals to transfer assets by contract rather than by will, which greatly simplifies final distributions for heirs. For a complete list of states that have adopted the Uniform TOD Securities Registration Act you can look here.

A TOD account allows you to specify beneficiaries for each account you may have that is registered in your name. You may specify a different percentage ownership for each beneficiary. Upon your death the assets in the TOD account will transfer to the named beneficiaries without the delay of probate, and separate from other items in your will. You can make changes to the beneficiaries and their percentage participation whenever you choose. There is usually no additional charge for having the TOD designation added to your account, but not all institutions may offer this type of account, so be sure to ask.

For banking accounts you should know about the Pay on Death designation which works in a similar fashion, and also avoids probate. Again, ask your banking institution if they offer this account.

If you need someone who can write checks and pay bills for you if you become incapacitated you should have an attorney draw up a Durable Power of Attorney. 

Per Stirpes is a term you must learn about in order to build a successful estate plan. It is a Latin term meaning "per branch". Sometimes it is omitted from beneficiary forms, wills, and trusts with sometimes devastating consequences.

Per Stirpes is an important term because it indicates how property should be distributed in the event of a deceased beneficiary or heir.

For example let's say you have a son and daughter who each have two children of their own. You have an IRA which you wish to leave to your children in equal shares. If you have indicated this on the IRA beneficiary form you may think all is well. However, suppose your daughter is traveling with you when you both die in an automobile accident. What will happen to the assets in the IRA?

Without the per stirpes indication your son will inherit all the assets in the IRA, leaving your grandchildren from you daughter with no share. If, however, you included the per stirpes designation on the beneficiary form, your surviving son would inherit his half of the IRA, and your daughters heirs would inherit the other half of the assets. This dramatic difference is due to those two small words - per stirpes.

The lesson is to be sure to review your beneficiary forms for IRA's, insurance policies, employee retirement plans, wills, and trusts to be sure your assets transfer according to your wishes when you are no longer here to explain your intent.

Assets can transfer to your heirs in one of two ways when you die. They can transfer by will, which includes probate court and public filing of related documents, or they can transfer by contract.

The advantages of having your assets transfer by contract include:

• Privacy - The details of a contract are private and not subject to the public scrutiny of your will and the probate system.
• Speed - Contractual agreements transfer outside of the probate process and so are not subject to the delays that often arise during probate.
• Expense - By transferring assets outside of the probate process you and your heirs could save significant money in probate fees (these fees vary from state to state).
  

Examples of assets that transfer by contract include accounts or assets titled Joint Tenants with Right of Survivorship, Transfer on Death and Pay on Death accounts, Life Insurance and Annuity contracts, Trusts, and your IRA and 401k accounts if you complete the beneficiary forms correctly.

When you first establish an IRA or 401k, an annuity or life insurance contract, you are provided a form to name beneficiaries. If you fail to complete these forms the assets will usually pass back into your estate and become part of the probate process. By naming a beneficiary or beneficiaries you can let these assets transfer by contract. You should also name contingent beneficiaries and choose whether you want the assets to transfer per stirpes or per capita. By filling out these beneficiary forms you are insuring that your wishes are honored after your death.

Many people name only a spouse as a beneficiary. If the couple have children or grand children they wish to provide for they should consider making them contingent beneficiaries to preserve the tax benefits of an IRA (however if the children or grandchildren are minors be sure a guardian has been named or the funds will be encumbered until the courts name a guardian).

Currently only surviving spouses can transfer assets from their deceased spouse's 401k to their own IRA, but the recently enacted Pension Protection Act of 2006 will extend that privilege to any beneficiary after 2007.

The bottom line is beneficiary forms are an integral and important part of your estate plan. Choosing the right way to transfer these assets can save time and money, but can also be confusing. If you are unsure how to proceed choose a professional to help you, but don't delay.

Many of us worry, with good reason, that we might one day become incapacitated and unable to attend to our own affairs. How can we be sure our bills are paid, our investments are managed, or our property sold if the need arises?

A power of attorney is a document that delegates legal authority to another person. You may be familiar with a limited non durable power of attorney from attending a property closing when one of the parties is absent. The Power of Attorney allows the principal (person granting the Power of Attorney) to name an Attorney in fact (the person to whom the legal authority is being delegated) to sign documents to effect a property closing on their behalf.

Non Durable Powers of Attorney can be granted for a wide variety of tasks, and they remain in effect until canceled by the Principal or until the Principal becomes incompetent or dies.

A durable Power of Attorney is often granted between spouses or between a parent and a trusted child or other relative. The durable Power of Attorney as the name implies enables the Agent to act on the Principals behalf even if the Principal becomes mentally or physically incompetent. This is an important distinction. Should the Principal become incompetent through disease such as Alzheimer's or as the result of an accident or illness, there is someone in place who can make legal decisions, access funds, and pay bills on behalf of the Principal. As with non durable POA's a durable Power of Attorney ends when revoked by the Principal or when the Principal dies.

If you have not executed a Durable Power of Attorney and you become unable to handle your own affairs your family will probably have to go to court to have you declared incompetent - a very public airing of a very private matter. The court must then appoint someone, maybe not the person you would choose to handle your affairs. Sometimes a bond must be posted, an attorney or CPA hired to prepare detailed financial reports that must be filed with the court, and the court must give permission for certain transactions like the sale of real estate. All of this can be a long and expensive undertaking that can easily be avoided with proper planning.

You should consult with an attorney to have this important estate planning document prepared in accordance to your wishes and personal situation. You also should be sure to update the document from time to time. If a Power of Attorney is over three years old your agent could run into problems with some financial institutions refusing to honor it because of a concern it may have been revoked. Your attorney should be able to guide you.

Sometimes there are good reasons to name a trust rather than an individual as a beneficiary of your IRA. Maybe you have a child who you fear will spend the money they inherit wastefully, or maybe you have a special needs heir and a direct inheritance would affect their qualifications for aid, maybe there is a second spouse you wish to provide for but children from a first marriage you want to protect also.

All of these goals can be achieved and the "stretch out" provisions of IRA rules preserved if you do some careful planning.

IRS rules only allow individuals to inherit IRAs without triggering immediate taxation. However if you structure a trust as a "see through" trust you can exert some control without losing the tax benefits of a "stretch IRA". To qualify as "see through" the trust must:

• The trust must be valid under state law;
• The trust must be irrevocable or become irrevocable at the death of the grantor;
• The trust beneficiaries must be identifiable individuals
  
• Documentation must be provided to the custodian of the IRA by Oct. 31 of the year after the owner dies
  

The trust must pay out the IRA's required minimum distributions to the beneficiaries or be subject to taxes at the trust level which reach the maximum tax rate (35%) with only $10,000 of income. The trust must base the RMD on the age of the oldest beneficiary so if there is a large difference in the ages of your desired beneficiaries you may want to consider splitting the IRA to allow a lower RMD for younger beneficiaries.

Having a trust as the beneficiary of your IRA can provide many benefits, but the price of making a mistake is high, so be sure to consult with a qualified legal and tax advisor before choosing this option.