Jarvis Law Office

An Inherited IRA and Its Requirements Can Create Confusion

The age of 70 ½ is the deadline for withdrawing from an IRA you created on your own and one you inherited from a spouse. However, a withdrawal from an IRA inherited from someone other than your spouse has an earlier deadline and some pretty stiff penalties if the rules aren't followed.

Recently, the News & Observer discussed the withdrawal rules in "Money Matters: Sibling seeks advice after inheriting brother's IRA."

Here are the basic rules:

• You must begin to take required minimum distributions the year after the IRA creator's death. This amount varies depending on the beneficiary's age. You can take more than the minimum amount, but everything withdrawn counts as income for income tax purposes. If you do not take the minimum amount, you will be assessed a 50% penalty and the amount you should have taken out will still count as income for tax purposes.
• There is an exception to the above if the IRA creator passed away before the age of 70 ½. You do not have to take a required minimum distribution as long as you take all the money out of the IRA within five years.
• If you make a mistake and do not take a distribution when you are required to do so, you can fix the error and apply to the IRS for a waiver of the penalties. As this can be complicated you should seek the advice of a professional.

Reference: News & Observer (Feb. 27, 2016) "Money Matters: Sibling seeks advice after inheriting brother's IRA."

Inherited Property Can Become a Major Problem

Two heirs to commercial real estate property discovered their windfalls were actually financial nightmares years after the estate was settled. As detailed by the New York Times in the article "Contaminated Property Makes for Costly Inheritance" the people learned that despite not being responsible for the pollution, they were responsible for the cleanup.

In one case a woman inherited a portion of the property from her father. When she and the other owners went to sell the property an environmental report revealed that previous tenants had left behind pollution that would cost millions to clean up.

In the other case a woman inherited property from her father through a trust. Some 25 years after the trust sold the property the woman was named in a lawsuit that claimed pollutants on the property had resulted in illness. The woman won the legal case, but it cost her $500,000 in legal fees.

An important take away from these stories is that neither was responsible for the pollution on the property, but that does not matter. When property is discovered to be polluted previous owners can often be sued and held liable. Plaintiffs usually go after the previous owner who has the most money.

What this means for heirs is that if inherited property could be contaminated, it is often a good idea to disclaim the inheritance as it could cost more than it is worth. However, disclaiming inherited property must be done quickly so heirs should perform due diligence quickly.

Reference: New York Times (Feb. 19, 2016) "Contaminated Property Makes for Costly Inheritance"

Challenging a Will Can Be a Challenge in Itself

The costs and difficulties faced when challenging a will were discussed recently in the Rochester Business Journal.

In an article entitled "Choosing to contest a will costs financial, emotional tolls" it is explained that contesting a will almost always create rifts in families. These rifts are similar to the emotional impact of getting a divorce. Hurt feelings between relatives take a long time to heal and many times they never do.

The article also explains why challenging a will is so financially costly.

To be successful with a challenge it must be proven that the testator was not mentally competent to create the will.

This is very difficult for two reasons. First, it does not take much to be competent enough to make a will. The person does not need to be generally competent to do everything else in life. When it comes to testamentary capacity he or she just needs to be lucid enough at the time to understand and approve of the will. Secondly, in almost all circumstances the person who wishes to contest a will was not present when the will was signed. Consequently, this makes it impossible for the person to have direct knowledge regarding whether the testator was lucid and mentally incompetent.

This does not mean that wills should never be challenged. It just means that anyone thinking about contesting a will should proceed with caution and seek the services of an experienced estate attorney.

Consult with an estate planning attorney before contesting a will, giving the attorney time to review the case and assess the likelihood of success.

Reference: Rochester Business Journal (Jan. 8, 2016) "Choosing to contest a will costs financial, emotional tolls."

Divorce Decree and Estate Planning Sometimes Don't Mix

There are many possible requirements placed in a divorce decree and requiring a life insurance policy probably isn't at the top of the list but that order can be the cause of lingering resentment for the ex-spouse who is ordered to pay it.

For example, what if one spouse is ordered to pay the other spouse periodic payments? This order may not be for ongoing support but as the best way to make an equitable division of property. Sometimes the spouse who is ordered to pay might also be ordered to take out a life insurance policy and designate the other spouse as a beneficiary. That way if the paying spouse passes away before all of the payments are made, then the life insurance can be used to make the non-paying spouse whole.

A problem with this is that people often try to get around these orders. How? By designating someone else the beneficiary of the life insurance policies and not making any offsetting changes to their estate plans.

Recently, Market Watch answered what happens in those situations in "Can I leave my stepchildren nothing if my husband dies?"

A reader asked Market Watch a question about her husband's life insurance. It seems that as part of the divorce decree from a previous wife he was ordered to maintain a life insurance policy with his children as beneficiaries until those children reached the age of 23. The policy however listed only the new spouse as a beneficiary.

He had no will and the new spouse wondered if she could keep the insurance money or must she give it to the stepchildren if her husband did pass away.

The answer to the woman's question and other similar questions is simple.

The terms of the divorce can be enforced. The children could ask to have the man held in contempt of court and file a claim against the estate for the amount of the life insurance.

A possible solution? If her husband is insurable, then he should take out a new policy and designate her as the beneficiary.

It might be wise to contact an estate planning attorney for advice before proceeding.

Reference: Market Watch (Jan. 12, 2016) "Can I leave my stepchildren nothing if my husband dies?"

The ABLE Act Makes Things Easier

Children with special needs may be covered by monthly Supplemental Security Insurance payments but it generally takes a lot more money than those checks to properly care for the child. This has long created an issue for these parents as they worry about what will happen to their child when the parents pass away.

Parents could not just leave money to the child in their estate plans because that could make the child ineligible to receive SSI. Instead, special needs trusts had to be created by the parents. These were often less than ideal as they could only be created by a parent and required a trustee other than the disabled person to handle the money.

The Achieving a Better Life Experience Act seeks to make things easier.

Recently, the Centre Daily Times reviewed the basics of the Act in "Elder law: Understanding the ABLE Act."

These specifics include:

• A person who became disabled prior to the age of 26 can create and maintain the account for him or herself.
• Funds in the account are not used to determine SSI eligibility as long as they are less than $100,000.
• Account income is not subject to income tax.
• Funds must be used for qualified disability expenses.
• When the account holder passes away, account assets must be used to pay back the government for benefits received unless they are rolled over into the account of a family member who is also disabled.

An estate planning attorney should be consulted for advice on dealing with potential restrictions on ABLE accounts and the possible use of a special needs trust.

Reference: Centre Daily Times (Jan. 9, 2016) "Elder law: Understanding the ABLE Act."

There Are Many Options When Inheriting an Annuity

Annuities are often included in retirement plans and are contracts that can be inherited. If they are inherited then the beneficiary needs to closely investigate options and tax consequences.

If a spouse inherits the annuity, then they can almost always continue the annuity contract as it is and thus face no immediate tax issues. But there are options, especially for non-spouse heirs.

As the Motley Fool discussed in an article entitled "Tax Rules for an Inherited Non-Qualified Annuity," there are typically three options, including:

• Take a Lump Sum – If an heir chooses a one-time payment, then the heir will need to pay income tax on any appreciated amount over the original premium payments the deceased made.
• Arrange for Smaller Payments Over Time – By accepting smaller period payments, the heir can avoid a large one-time income tax payment. However, income tax will still be owed on any appreciation of the annuity.
• Switch to a Different Annuity – The person who purchases an annuity can switch to a different provider without paying income tax. However, it is unclear if someone who inherits the annuity can do the same. In a private letter ruling the IRS allowed one heir to do so, but many annuity providers do not wish to rely on the ruling as it technically only applies to the person who asked for it. Some providers will work with heirs on switching providers though.

Should you inherit a non-qualified annuity it would most likely be beneficial to meet with an estate planning attorney about your options and the impact of any decisions.

Reference: Motley Fool (Dec. 19, 2015) "Tax Rules for an Inherited Non-Qualified Annuity"

Passionate Investing Needs Careful Planning

Traditional assets are generally the first thing one thinks of when it comes to estate planning with the most common assets being securities and real estate. However, one can often have "tangible items of personal property" which can be collections from rare wines to art to vintage cars to almost anything that can potentially be of value and later sold for profit.

Those uncommon investments or "passion assets" often can become problems that are more difficult to solve because those who invest in these assets have an emotional attachment to the objects themselves beyond their pure investment value.

Investopedia, in a recent article entitled "How to Handle Passion Assets in an Estate Plan," discussed how planning for these passion assets can be problematic. One key problem is determining whether heirs want to keep the items or want them to be sold. The answer to that question can make different ways of holding the assets better than others. For example, if heirs want to sell a passion asset, then holding it in an irrevocable trust can create a substantial capital gains tax liability. Alternatively, holding title directly can avoid capital gains taxes but can create estate tax issues if heirs do not also inherit enough liquid assets to pay the tax.

It is important to consult an estate planning attorney when you have common investments but passion assets can make it even more necessary.

Reference: Investopedia (Dec. 17, 2015) "How to Handle Passion Assets in an Estate Plan"

A Billion Dollar Estate Faces a Challenge

Yu Pengnian, a 93-year-old real estate executive in Hong Kong, has died and left an estate estimated at more than US$1.55 billion. Pengnian continued his life-long support to charity by leaving the bulk of his estate to a charitable foundation.

All of his assets, except for the contents of two safes given to his grandsons, were directed by will to go to a charitable foundation. His two sons were left nothing in the will. Those sons have filed will caveats with the probate court overseeing the will, which is essentially filing the same thing as a notice of intent to challenge the will.

Ejinsight reported this story in "Heirs gird for court battle over late billionaire's fortune."

It is possible that we will see many similar will contests all over the world in the coming decades as a recent trend has seen the extremely wealthy pledge to leave at least half of their estates to charitable causes. With billions of dollars at stake, it should come as no surprise that the families of these wealthy philanthropists might not always be pleased with giving so much away to charity.

By giving all of his money to charity and leaving nothing for his sons, Yu Pengnian might have made an avoidable mistake. It might have been better to leave something of value to his sons and include a no-contest clause in the will.

Even if there is a no-contest clause in Pengnian's will, which is unknown, it would not have stopped the sons from contesting the will as they receive nothing from it now. On the other hand, if they succeed in challenging the validity of the will, then they will each receive half of the assets of the estate.

Speaking with an estate planning attorney could help reduce the possibility of such challenges.

Reference: Ejinsight (Dec. 10, 2015) "Heirs gird for court battle over late billionaire's fortune."

The Challenge of Conservation Easements

Environmental concerns are mounting around the world and we've seen an increase in recycling efforts and alternative energy sources.

Many landowners have created perpetual conservation easements meant to preserve the protected land in the state of nature it was in at the time the easement is created.

However, this can create issues for those who inherit land under a conservation easement. As the land cannot be used for development, it lowers the value at which it can be sold. Both heirs and other later owners of the property are often interested in adjusting the easements so the property can be developed.

The Wills, Trusts & Estates Prof Blog recently wrote about an attempt to fix this problem in Vermont in "Debate Arises In Vermont Over Allowing Adjustments To Conservation Easements."

The proposal discussed in the article would have allowed the state government of Vermont to make adjustments to conservation easements that furthered the overall goal of conservation. This particular proposal did not get very far as opponents were concerned it would give the government free reign to disregard the wishes of property owners who originally put the land in easements.

As there are approximately 40 million acres of land in the country under conservation easements, this issue is likely to continue to be a controversial one for many years to come. The ultimate question is whether a current property owner should have the right to determine how later owners can use the land in perpetuity.

The answer to that question is a challenge.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 14, 2015) "Debate Arises In Vermont Over Allowing Adjustments To Conservation Easements."

A Family Meeting May Help Avoid Court Challenges

Estate plans are often challenged in court when family members feel they have been mistreated and a court battle seems the only way out. Giving family members the opportunity to discuss and have their views taken into consideration was recently addressed in The Wills, Trusts & Estates Prof Blog with "Using Family Meetings to Smooth Over and Explain Estate Transitions."

The idea is a fairly simple one. You can call a family meeting, including everyone who has a potential stake in your estate plan. At the meeting you can tell them what you plan for your estate and why. By doing so you give your family the opportunity to say how they feel about your plans and to engage in dialogue about it.

If your family has the opportunity to discuss it now, it might make it less likely that they will take it to court after you pass away.

While making an estate challenge a little less likely, it may not be the answer for all families and should be discussed with an estate planning attorney.

Reference: Wills, Trusts & Estates Prof Blog (Dec. 7, 2015) "Using Family Meetings To Smooth Over And Explain Estate Transitions."