Extension Educator, Consumer Economics
Extension Specialist, Consumer Economics
Extension Educator, Consumer Economics
January 6, 2011
According to a survey conducted for Lawyers.com in December 2009, 65% of Americans do not have a will. But here's the good news: Even without a will, you can manage who will inherit many of your assets and make it easy for them to take ownership of those accounts. This little tool could almost be called a secret estate planning tool because, based on the response in my workshops, most people don't know about it.
The tool is a POD designation, which stands for Payable on Death. You may also see it described as TOD for Transfer on Death or as a Totten trust. On many financial accounts such as checking, savings, and investment accounts, you can use it to designate who will receive the account upon your death. Just as you name the owners of an account when you set it up, you can add a Payable on Death designation that determines who gets the account upon your death.
POD accounts are a sort of trust. But unlike living trusts which are overkill for some people and can cost a significant amount of money, this tool is virtually free. It will take just a little of your time and maybe a trip to your financial institution. It's as simple as filling out the signature card for your checking account, just like naming a beneficiary on your IRA or life insurance policy.
When you pass away (for joint accounts, when the last owner passes away), the person you've designated presents a death certificate and proof of their identity to the financial institution. They are then made the owner of the account. Basically, it's no fuss-no muss.
People often tell me that they've simply added the name of a child or other relative as an owner of the account, so that person will inherit it when the original owner passes away. But there are risks with that strategy. The added owner can now do anything with the account that you can do: they could sell the stocks in an investment account or take out all the money from a savings account. What if that person goes through a divorce or gets sued? Does your account get listed as one of their assets, and could it be seized or divided as part of a divorce settlement? You might even owe gift taxes!
POD accomplishes the goal of passing the asset to your designee upon your death, but without any of those risks. Until you pass away, the person whom you designate as POD has no claim to the asset. They have no ownership rights and cannot access the account until they present a death certificate to the financial institution and take ownership of the account.
The amount of FDIC insurance on your bank accounts or NCUA insurance on credit union accounts could increase if you name more than one person in the POD designation on an account. Each beneficiary is insured up to $250,000. So if you name three different people in you POD designations on all your accounts at one financial institution, those accounts would be insured up to $750,000.
A POD designation provides no mechanism for managing your assets in the event of incapacity. For that, you'll need a Power of Attorney for property or a living trust.
In some states, you can even use POD for real estate and for vehicles. But StandardLegal.com points out some potential complications from having a POD designation as part of your property deed or vehicle title.
If you have both a will and POD designations, the POD and beneficiary designations will determine who inherits. So when you write or review your will, remember who you named in POD designations. Your will, titling of assets in joint ownership, POD designations, beneficiary statements, and trusts are the tools that make up your estate plan. They need to be in harmony, not in conflict. Your will controls only those assets which will go through probate – assets that are not handled by one of the other tools. You can learn more about these tools on our website, Planning for "What If...?"
So do yourself and your heirs a favor. Even if you don't have a will, do a little estate planning. Decide who should receive your financial accounts upon your death and complete POD designations for them. Then, if you don't have a will, put that on your to-do list for this year.
April 1, 2010
There are more great questions from readers. Let's see what we can learn.
I have several vexing questions, but most of all about your statement regarding "having to add together the balances in all of your tax-deferred IRA accounts, and calculate the proportion of that total that is from nondeductible contributions."
-- R.H., Edwardsville
Here's an example to clarify about the adding together of all traditional IRA balances to calculate the proportion of any conversion that will be tax-free.
John has two traditional IRA accounts. All the contributions to IRA #1 were deductible, and therefore all the money in that account is tax-deferred. Its balance was $10,000 at the end of 2009. All the contributions to IRA #2 were non-deductible, so John has already paid tax on those amounts. The balance in IRA #2 is $7000, and $5000 of that is from non-deductible contributions. The remaining $2000 is from earnings, which are tax-deferred.
He wants to convert to a Roth IRA this year. He cannot "cherry pick" which account to convert. Or, to use another analogy, you can't separate the cream from the coffee. Whatever amount he converts and from whichever account, the proportion of that converted amount that comes from non-deductible contribution and is therefore tax-free is $5000/$17,000 (the nondeductible contributions divided by the total value of all traditional IRAs at the end of 2009) which is about 29%.
Hope this helps.
R.H. wrote back, restating this information to verify that he understood the points. So here's the same concept in his terms:
If I could paraphrase what your wrote above, John has calculated the percentage of ALL of his IRA holdings, that represents the non-deductible Basis that is exempt from being taxed as ordinary income in a rollover to a Roth IRA. Do I have it right?
And yes, R.H., you do have it right.
Q Who would issue the 1099-R? I am presuming that the Custodian from which the rollover originates would issue it?
A Yes, the custodian (the bank, mutual fund, brokerage, etc.) issues the 1099-R, which states the amount of the distribution.
Q The Gross Distribution would be reported from his 1099-R on Line 1, and the Taxable Amount on Line 2a of a Federal Tax Return 1099-R entry? How would the issuer know about the calculation results so that they could break those amounts out on a 1099-R, box 1 and 2a, if there were multiple holdings at different Institutions?
A You're right – they often won't know the taxable amount. According to the instructions for the 1099-R that financial custodians follow, in many cases they may enter the entire amount of the distribution in box 2-a and check "Taxable amount is not determined" in box 2-b.
Q Would you include the value of a 401-K in that calculation? Your response only addressed IRA's.
A For conversions of traditional IRAs, you only use the value of your traditional IRA accounts to calculate the basis and taxable amount of the conversions. 401(k) accounts are treated separately. And if you have more than one 401(k), you do not add them together to calculate any basis – you treat each 401(k) account separately. (See IRS Pub. 590, pp.39-42, and 62-63. It refers to "IRA (or IRAs)" when calculating any basis, but does not say that about employer plans.)
Q If I my taxable income this year is very low (interest income dropped, still have high itemized deductions), it looks like I could have an additional $8000 of ordinary income and pay no taxes. income this year...Hence (if I am correct), I could do a partial rollover from one of my IRA's, and draw from the converted amount after I turn 59 1/2 in May, without EVER having to pay any Federal Tax on the rollover. That is, as the Tax Laws presently stand.
A That appears to be correct, you could totally avoid tax on that conversion. Low-income years are the ideal time to do a conversion. But be sure you understand the rules regarding the order of distributions from Roths – (see IRS Pub 590, p. 66)
Q Is the Taxable Amount in a Rollover counted as Ordinary Income, or is it taxed as a separate entity?
A Conversions are treated as ordinary income, meaning that you will pay income tax at your marginal tax rate. They do not qualify for long term capital gains rates. The one option you have if the conversion is done in 2010 is spreading the income across the 2011 and 2012 tax years. (IRS Pub. 590, p. 28 or 39)
Q I understand that you have until April 15, 2010 to make a Contribution to a Roth IRA for the 2009 Tax Year, but what about a Conversion? It has been unbelievably difficult to find that information.
A Conversions are taxed in the tax year in which they were converted. So if your tax year is Jan. 1 to Dec. 31, as it is for most taxpayers, a conversion made on Feb. 15, 2011 will be taxable income for 2011, not 2010. (IRS Pub. 590, p.28)
April 1, 2010
Several of you have sent questions about Roth conversions since my previous posts: The (New) Rules and Factors to Consider. Today, I'll review some of those questions, and share my responses with you.
how can I get a calculation of whether a conversion to a roth is right for us?
There are lots of calculators available on the Internet. I'd suggest trying a couple of different ones, since they don't all ask for the exact same inputs for the calculation.
Some that I have played with are:
There may be others on the web that are better than these, but these are the ones I happened to try out when doing the research for my blog posts.
The "answer" you get from most of these (whether converting to a Roth or staying with your traditional IRA will yields the best result) will probably be consistent, and that's the important thing. But the dollar amounts they arrive at may be significantly different. That doesn't mean that they disagree - the difference is whether they include or exclude the money that would be used to pay the taxes.
You could also work with a financial planner to evaluate this decision for you. They would be able to consider factors that a calculator can't, such as whether other characteristics of a Roth or a Traditional meet your needs better. If you'd like to go that route, please check out our guide to Choosing a Financial Professional at http://web.extension.illinois.edu/financialpro/.
We moved money to a Roth in Dec 09. Now I find we will owe not only big bucks in penalties, increase to 85% in social security and a very big income tax bill. As for the penalties, is there no waiver for year-long estimated payments, since we didn't know we would do this for the entire year. AND most of all do we need to reverse this decision? HELP QUICK
-- P.L., New Hampshire
Below are some of the points I covered in my response to P.L. Note: Extension's role is to educate rather than to provide advice, so these points discuss facts but should not be construed as making any sort of recommendation about what P.L.- or you - should do.
The amount you convert from an IRA or other retirement account is taxable income. Not only will you owe tax on that amount, you may need to pay estimated taxes or increase your withholding to avoid penalties for underpayment. IRS Publication 505, Tax Withholding and Estimated Tax, includes worksheets to help you figure out if you need to pay estimated taxes. You can avoid owing an underpayment penalty by making sure your withholding and refundable credits total at least 90% of your current year tax or 100% of your prior year tax (110% for high income taxpayers with adjusted gross income of over $150,000 or $75,000 if married filing separately).Use Form 2210 and instructions to determine if you have a penalty, and how to calculate it, when you file your taxes.
There are special rules for calculating estimated taxes in situations like P.L.'s, where the income is at the end of the year rather than being spread equally across the entire year. That could also reduce the penalty, if any.
This additional income may push you into a higher tax bracket, and if you're receiving Social Security benefits, it may cause some (or more) of those benefits to be taxed.
What if you decide that converting was a bad idea? IRS Publication 590 Individual Retirement Arrangements (IRAs) has the answer. Recharacterization is a way of undoing a conversion, so that it is treated as if the conversion had never happened. (You can also recharacterize contributions). To recharacterize a conversion, you transfer the money plus earnings back to the original type of account – a traditional IRA. But the window for recharactization ends on the due date (including extensions) for the tax return for the year in which the conversion was made. If you converted in December 2009, you have until October 15, 2010 – IF you file your taxes in a timely fashion.
It would appear that recharacterizing would resolve all three issues P.L listed. Going forward, converting just a portion of the account each year might help them avoid paying tax on so much of their Social Security or being pushed into a higher tax bracket. Converting a smaller amount each year would reduce the likelihood that you'd need to pay estimated taxes, but you have to do the calculations to be sure.
A qualified tax professional could help you work through an issue like this. You might consider either a CPA or an enrolled agent. You can find a CPA who specializes in personal finance (has the PFS designation) at http://pfp.aicpa.org/Community/Find+a+CPA+PFS+Near+You.htm. There is no centralized database of Enrolled Agents.
You could also look for a fee-only financial planner, most of whom should be well-versed in this. Check www.napfa.org and look for a planner who will work on an hourly (as-needed) basis, which means they would work with someone on a single specific issue such as yours. Before you schedule a meeting, ask if they help clients with this specific tax issue – most probably do, but ask first. And/or check http://www.garrettplanningnetwork.com/ whose members are also all fee-only, all of whom work on an ourly basis.
Check my next blog post for more quesions submitted by readers.
July 9, 2009
The past couple of weeks have been filled with discussions on wills and trusts, guardians and executors. Unless you have a legal background or some knowledge of how these things work, some or all of what has been said may have gone right over your head. I will attempt to shed some light on the discussion of Michael Jackson's estate. I just viewed the Will of Michael Joseph Jackson. At first I was taken aback by the simplicity of it. Surely someone as wealthy as Michael Jackson would have a more elaborate will. However, after noticing that the will placed all of his assets into the Michael Jackson Family Trust, I understood why it was simplistic. It was actually a pour over will. A pour over will literally pours over your assets into a living (inter vivos) trust that you would have established during your lifetime, i.e. the Michael Jackson Family Trust.
I've said a mouthful already. Let me begin by telling you what a will is. A will, according to the American Bar Association, provides for the disposition of property owned by you at the time of your death. A will can also answer questions as to your last wishes concerning your minor children. Michael Jackson's will clearly names his mother, Katherine Jackson as the guardian of his minor children and Diana Ross as the successor guardian. A guardian is a person legally responsible for the care of another person and/or her assets. His assets, however, will be placed in trust. A trust is an estate planning arrangement where a trustee (which can be one or more individuals and/or banks) takes title to the assets of the original owner for the benefit of one or more persons known as beneficiaries. Michael Jackson's will named three co-executors of his estate. An executor is in essence a manager of the estate. This person makes sure that all debts and taxes are paid and that proceeds are passed on to the proper beneficiaries. By now, we all know the beneficiaries of Michael Jackson's estate are his three children, his mother, and the charities named in his family trust.
So, is Michael Jackson's will the final word? Not necessarily. Deborah Rowe, the biological mother of the children is still living. Unlike property, children cannot simply be passed along if a living parent still has rights to them. There is speculation that Debbie might contest the will and fight for custody. When someone contests a will, he challenges the validity of it or its terms. The competency of the maker of the will at the time of signing can also be challenged. It will be interesting to watch how this all unfolds in the coming weeks and months.
Although Michael Jackson was a wealthy man, you do not have to be wealthy to establish a will and/or trust. If you have minor children, you can use a will to provide instructions on who will care for your children and their assets in the event of your death. I started my will years ago when my children were small. I did not complete my will because I did not know who I would feel comfortable with caring for my children and their assets. My mother and mother-in-law are both older women with health challenges. Although I knew what I needed to do, I did not do it. Had my husband and I died, the courts would have been forced to make a decision for us because we would have died intestate, without a will. Our children could have ended up with someone that we did not approve of. However, as of the typing of this blog, I have contacted an attorney and am in the process of establishing my will and family trust. Just in case all of this isn't enough to convince you that planning is important, I have include a list below of the benefits of having a will/ trust.
Benefits of a trust (State Bar of Arizona)
For more information on will, trusts, and estate planning, visit the following websites:
May 9, 2008
My youngest son (a pre-schooler) suffered a serious brain injury in January due to an underlying medical condition. This was a very difficult episode for our family, and it included a six-week hospital stay in St. Louis, and now we find ourselves getting used to having a very different little boy in our family. Thanks to a wonderful team of doctors and therapists, as well as the support of our family and friends from our church, the university, and our neighborhood, we are pulling through and have welcomed our son home. My wife and I (and our other children) work with him daily, along with his doctors and a team of therapists, to promote a recovery of functions. Nonetheless, at the present time the reality is that my son has suffered a loss of capacity to understand his environment and to process information, his vision has been affected, and his ability to eat and drink independently (of a feeding pump) have been reduced. Like a lot of families, we find ourselves with a child in our family that has the distinct possibility of never achieving financial independence. Families with children with special needs face unique issues from the perspective of saving and investing and planning for the future financial security of the entire family.
First off, families with children with special needs find themselves very busy with care-giving activities in the present. They often focus so much on getting through the day to day activities that they do not spend much time planning for the future, especially its financial dimensions. Secondly, they often face high out-of-pocket expenses to care for their children. These expenses might be drugs to help treat a chronic condition, co-pays on medical visits and equipment, and the cost of traveling to out-of-town specialists and health care providers. Third, many of these families have foregone work opportunities (say for the spouse that is the primary care-giver) that would bring additional income into the family. These factors all make it more difficult for these families to save and invest for their future, despite the fact that they likely will have higher financial needs in the future compared to families without a special-needs child.
What steps can families like ours take to improve their chances at providing a secure financial future for all their members, including their special-needs child? A number of things come to mind, starting with making sure that the current care-giving situation is viable and sustainable. Parents in this situation need to be aware of options (through their circle of friends and family, as well as community) for respite care and additional care-giving resources. Support groups organized by a local hospital for families with special needs children are a good place to start. Likewise, parents need to speak with their social worker contacts to ensure the family is aware of all applicable private and public programs that might help them. Additionally, parents need to update their wills and make clear their intentions for care-giving and the future of their special-needs child (a letter of intent), should something happen to them. Parents also should begin an education and financial planning process that explicitly takes into account the possibility that their special-needs child may not be able to live independently as an adult. This process includes learning about special needs trusts and talking with lawyers and financial planners familiar with these issues. The parents also should take time to re-evaluate both their savings and investment strategy (and amounts they save monthly) as well as their insurance coverage levels.Having a special needs child brings different responsibilities and experiences (including the joy of seeing your child grow and progress on their own terms, sometimes in spite of great challenges) from the parenting experience of most families. Taking the time to consider the long-term financial dimensions of this challenge can help families stay on track to a more secure financial future for all of their members.
January 30, 2008
Pay the bills, cook dinner, help with homework ... we get the daily "to dos" done (mostly) but do we take time to plan for the future? Today I was teaching a lesson called Planning for "What If...?" as in what if I'm disabled or divorced? Or, what if I die? And, as I was talking about the importance of making sure that your legal documents are up-to-date, it occurred to me that my will is critically out-of-date! Life changes. My will (and my husband's) was created when our children were babies – and now our twin sons just turned 18 years! WOW! What do you want to bet that our will could use some updating!
Now, that I have publically declared that our will is out-of-date, stay tuned for our journey as we find an attorney, make some new hard decisions about "what if" we were to die, and go through the process of creating a will.
And, while we're on the subject, is your will current? Do you have a plan if you were disabled and couldn't work? Do you have disability insurance? Read more about these Planning for "What If...?" topics at http://www.ace.uiuc.edu/cfe/whatif/index.html .
A more upbeat related topic is planning for your retirement. Right now (as the temperature drops steadily and a big snowstorm is forecast for Central Illinois), retiring to a place warm and sunny is very appealing. The Plan Well, Retire Well website has a section on goal setting, and the very first website activity in that section is called "What's Important in Your Retirement." After you get the chore of updating your will done, take time to plan for the fun in your retirement.
Comments? E-mail to RetireWell@uiuc.edu Comments will be posted.