Steve Darty

Each January, I promise to lose the holiday weight, set a few goals, and let my clients know if we need to update their estate planning strategies. This year we have fewer changes to consider, though they could prove crucial depending on your estate.

Inherited IRAs

Typically it is prudent to roll our retirement account money into an IRA, and then leave to our children individually so they may stretch out the distributions for their lifetime, preserving the advantageous character that caused us to create an IRA in the first place. Historically these inherited IRAs have enjoyed excellent creditor protection should the heir file bankruptcy or become the defendant in a lawsuit. This changed last year after the U.S. Supreme Court, in Clark v. Rameker, ruled that inherited IRAs are not “retirement funds” and, therefore, lack the creditor protections afforded under federal law. Prior to this ruling, up to $1.25 million were protected from creditors if held within a Roth or traditional IRA under federal bankruptcy laws but this no longer is the case.

If you have IRAs that you wish to leave to your heirs, consider using a “Standalone Retirement Trust” to hold these assets instead of leaving them directly to your heirs. If an IRA’s tax-deferred growth benefits make sense during your lifetime, then shouldn’t they also make sense after you’re gone? However, if you decide to stretch it, decide to protect it.

2015 exclusion amounts

With the passage of the American Taxpayer Relief Act in 2012, estate planning shifted largely from estate tax avoidance planning to asset preservation planning. If you’re still having the traditional A-B trust discussion with your estate planner, it might be time to reassess.

In 2015, Montanans will pay no estate taxes if at the time of their death their estate is worth less than $5.34 million, or $10.68 million for married couples. After the act's passage, estate taxes apply to only about .003 of the population if you’re wondering. Of course, the estate exclusion amount could be lowered in the future, so let’s not throw the discussion out completely.

The 2015 gift tax exclusion amount remains at $14,000 per taxpayer, per child/heir. Spouses each have an exclusion amount so may give a combined $28,000 annually per child/heir, without incurring a gift tax. For example, a couple with two children can give a combined $56,000 to the two children annually, and so on.

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So, other than benevolence, why do we want to gift money to our kids before we die? Answer, to get it out of your name and estate. This is not just for estate tax avoidance, but could prove critical if in your latter years should you wish to qualify for Medicaid assistance for nursing home costs. As long as we make these gifts five years from our Medicaid application date, then we have preserved this money for our children.

If you’re not too keen on giving $14,000 to a child or grandchild with no strings attached, then you consider an inheritors trust. The rules are complicated but we must give the heir 30 days to withdraw this money from the trust. If not withdrawn, it stays in the trust. We can even set this up so all income and interest generated by the trust returns to you for the rest of your life. If the heir withdraws the funds from the trust within 30 days, then what? I think the implication is future gifts will then go to non-withdrawing heirs.

Making these these gifts over a period of years dramatically restructures and protects an inheritance, particularly if the trust distributes the inheritance to the heir over several years, instead of all at once in lottery fashion.

Non-taxable gifts

Certain gifts are tax exempt and therefore have no limits.

These include: 1) gifts to a spouse, 2) payments for someone’s medical or education expenses (as long as the payment is made directly to the provider), and 3) donations to a qualified charity such as your church. Check with guidestar.org for a list of the IRS tax-exempt entities.

The IRS provides taxpayers with incentives to save, invest, and to support worthy causes and the less fortunate. These actions are rewarded in the form of tax deductions, exemptions, and deferred tax payments. However, these rules are rigid and square holes require square pegs or even the best intentions can result in penalties. Prior to making any gifts, or IRA decisions, please consult your tax adviser to ensure it’s done prudently, and legally.

Darty is principal of the Darty Law Office, an estate planning firm helping clients with wills, trusts, and probate. The Darty Law Office is located at 2620 Connery Way in Missoula and can be reached at (406) 549-0306.

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