816-741-7882
Professional services with a personal touch.

Spousal Wealth Transfer

03/18/2015

Divorce, Death, Benefits and Taxes

The emotional stress and damage of divorce can have even more lasting consequences if personal finances and assets are not updated to reflect your changed situation.

It’s particularly important to address what will happen after your death, when certain assets and benefits may unintentionally be passed to your former spouse or his or her family.

Divorce-money-fightFor example, a current New York court case involving the assets of a woman who died at age 43 has now reached that state’s appellate court.  The woman’s family is battling her former in-laws who stand to inherit her home that her family has owned for generations, all because she did not update her will.  New York divorce laws automatically prevent her ex-husband from inheriting the property, but her secondary beneficiaries remain her ex-in-laws; so they are fighting over the property now.

It may be emotionally difficult to address your financial assets in the midst of divorce, but if you are going through a divorce or have even been divorced several years, it will pay off in the long run for you and your family to review and update your financial documents.

Be sure you have updated your estate plans, check insurance and other beneficiary designations and beneficiary deeds.  Also provide your loved ones with copies of the updated documents, or let them know where to find them.  Divorcing couples should also consider individually seeking a new financial adviser to avoid any conflicts of interest. 

Make certain your will clearly states your intentions, and that your powers of attorney, health-care proxy, and beneficiary designations on IRAs, insurance policies, bank accounts, brokerage accounts, and annuities name the people that you wish.  Remember, no matter what a will says, these financial accounts and policies will pass to the individuals named on them, so having updated directives for each account is extremely important.

As we have detailed in our blog IRAs Need Updated Beneficiary Forms, changes in beneficiaries for annuities and IRAs must be submitted in writing and require a signed and dated document be sent to the financial institution handling the account or policy.

For some accounts, the original financial agreements stipulate the ex-spouse cannot be removed as a beneficiary, so the beneficiary may want to take steps to clarify the arrangements to ensure his or her name remains on the account.

When a divorce is final, the final divorce decree may be sent to the plan administrator directing how money in IRA accounts should be divided and transferred into separate accounts.  Company-sponsored qualified retirement plans will need additional steps.  In those cases, the court must issue a Qualified Domestic Relations Order (QDRO) properly apportioning retirement plan assets between the former spouses.

However you wish to change your beneficiary status or account information, it’s also a good idea to request a written confirmation notice from your insurance company, financial planner and/or banker confirming they have received and acted on your changes.  Then, keep all the updated documents in a secure location that can be found in the event that you may become incapacitated or die.

Divorce may also affect a person’s current and future income tax obligation, and may affect future taxes owed on assets and retirement accounts.  Receiving or paying alimony payments or child support may also have tax consequences.

Divorce is painful.  Planning your next steps both personally and financially can help ease concerns as time passes.

Consider meeting with a McRuer CPAs expert who will help you identify and act upon the best financial strategy to help you now and in the years ahead.  Contact us online or call 816.741.7882 for a consultation.

02/18/2014

IRAs Need Updated Designated Beneficiary Forms

Individual Retirement Accounts have been around long enough now that many Americans are learning what happens when they inherit an IRA. It’s not always good news.  If the owner has not filed an up-to-date beneficiary form, the heir of the estate risks losing a major portion of the IRA value to taxes and fees. IRA-nest-egg

The Employee Benefit Research Institute (EBRI) reports the average IRA value is close to $94,000. The EBRI also says there are nearly 15 million IRA accounts held by more than 11 million people.  With total assets of more than $1 trillion, it’s important to make certain that, should the owner die, the IRA doesn’t lose its value upon transfer to a new owner.

Advisors warn that many IRA owners mistakenly believe because they have a will, the person(s) they list as their heir(s) will automatically receive the IRA to use as a savings tool or turn into cash in whatever manner they wish.  Yet, without a specific and up-to-date IRA beneficiary designation form for each IRA, the beneficiary may be forced to empty the account right away risking taxes and penalties; and may even be bumped into a higher income tax bracket.   Some states require the accounts to go through probate court when there is no beneficiary form.

IRA owners should fill out what is a very simple beneficiary form separate from their will.  That way, when the owner dies, the designated beneficiary is able to determine the best distribution strategy over his or her lifetime.  A new beneficiary form is needed any time an IRA account is changed or updated, or the account is moved to a new custodian.

Typically, IRA beneficiaries must take distributions during their lifetime.  Inherited traditional IRAs require taxes to be paid on distributions.  Rollover, SEP, and SIMPLE IRAs are treated the same way. Beneficiaries are not required to pay taxes on distributions from an inherited Roth IRA.

Generally, surviving spouses have several choices including even disclaiming up to 100% of the IRA assets, which, besides avoiding extra taxable income, enables their children to inherit the IRA assets.  But, if the spouse decides to take a lump sum distribution, or begins distributions on a traditional IRA, taxes must be paid.

Non-spouse beneficiaries have fewer choices.  Among them, including taking the lump sum amount and paying a large share in federal taxes; disclaiming all or part of the assets for up to 9 months after the previous owner’s death; or begin taking taxable distributions from the account.

If you inherit an IRA, you cannot roll it over into your own IRA. You must also make certain it is re-titled as an inherited IRA.  If you move the IRA to a new custodian, make certain it is made as a “trustee-to-trustee” transfer or it will be considered as a taxable total distribution, thereby, ending the account as an IRA.  There are deadlines for your actions and you can even face the dreaded 50% penalty if you don’t make a required withdrawal in time.

To ensure you leave as much of your IRA asset as possible to whom you choose, or if you inherit an IRA, consult your financial advisor for the best steps to take to lessen the taxes and maximize the advantages of these retirement accounts.

If you have any questions about your financial savings plans, beneficiaries and the tax consequences of your choices, please contact us at McRuer CPAs.

RSS Feed

Welcome from Scott McRuer
& the McRuer CPAs Team

Scott McRuer
Learn more about Scott

Follow Scott and his team on your favorite social media

Facebook LinkedIn YouTube