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Orange County Blog

Tuesday, March 29, 2016

HOW A CALIFORNIA PRIVATE RETIREMENT PLAN WORKS

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Most people are aware that ERISA Qualified retirement plans are exempt from judgments.  The problem, of course, is that there are many rules, regulations, and limitations on ERISA plans such as 401k, 403b, etc. plans.  However, for many clients, a California Statutory Private Retirement Plan works very nicely.


Read more . . .


Monday, March 28, 2016

SHOULD A TRUST ALWAYS BE NAMED AS BENEFICIARY OF AN IRA?

Trusts are extremely flexible, useful estate planning tools that have been used for decades to accomplish a myriad of purposes.  A traditional and widely-used practice is to employ trusts to Control distributions to beneficiaries and to Protect the beneficiaries from creditors, lawsuits, taxes, and from themselves.  Why not use a trust to distribute qualified plan money for the same reasons?

 

New IRS rules now permit an individual to create an IRA Beneficiary Trust to insure that your beneficiaries (those who will receive the IRA's after your death) “stretch-out” their taxable, required minimum IRA distributions over a much longer period of time. And, if they do it right, the IRAs can continue to compound for many years income-tax free -- and may literally grow to be worth millions of dollars! In 2005, the IRS issued a private letter ruling 200537044 (the “PLR”) that approved this new type of revocable trust created solely to be the beneficiary of an IRA account. As a result of this PLR, it is now possible to create a stand-alone trust that allows each beneficiary to take “stretched-out” distributions based on his/her individual RMDs.

 

IRA Beneficiary Trusts insure that their beneficiaries will stretch-out payments from the IRA after they inherit their shares of the account so that the funds will grow inside the account without being taxed. This type of trust has also been referred to as an IRA trust, an IRA inheritance trust, a stand-alone IRA trust, an IRA stretch trust or an IRA protection trust.

 

If children and grandchildren who inherit IRA funds keep the funds in the IRA over their lives and only take the required minimum distributions each year (the “stretch-out”), the amount of money that can be earned, accumulated and paid to the beneficiaries can be staggering. To illustrate how this compounding can work, I have calculated how much money a beneficiary can receive from a parent's $100,000 IRA account; I have used two different ages (10 and 35) for the beneficiary and have assumed that the account averages an annualized 8% return:

 

Age

Years Paid Out

Paid Out

Remaining in Account

Total

35

45

$1,223,584

$5,046

$1,228,630

10

70

$4,279,898

$1,083,614

$5,363,512

This wealth accumulation strategy only works if the beneficiaries retain the inherited funds inside the IRA account. If a beneficiary takes all of the funds out of the IRA account at the time of the owner's death (called a “blow-out” because it blows the stretch-out), this wealth accumulation technique will be lost. One of the reasons to create an IRA Beneficiary Trust is because it can insure the stretch-out and can prevent a blow-out. This blow-out happens more often than you may think. The beneficiaries may not be aware of the tax rules and their distribution choices, so they may immediately withdraw the IRA's at the first opportunity (or worse yet, do a prohibited rollover!). Or the beneficiary, influenced by his or her spouse, may just decide to withdraw the IRA's to foolishly spend it. If the “stretch-out” isn’t done properly by the beneficiaries and income taxes are paid up front shortly after the IRA's are inherited, your family may lose hundreds of thousands of dollars (or more). 

 

Even if you assume that your beneficiaries will do the right thing (that is, keep the funds in the IRA account for their lives to maximize the income tax “stretch-out” of the IRA's), the IRA's may still be seriously exposed to one or more of the following threats that can arise years after you are gone:

 

  • The beneficiary’s spouse may snatch half (or more) of the inherited IRA's in a divorce. The divorce rate is over 50% and a big pile of inherited money may become a divorce incentive for the ex-spouse. Even though inherited property is separate property, the beneficiary's ex-spouse's divorce lawyer will probably go after the IRA funds because the IRA account is frequently the largest asset and the lawyer knows there is a good chance the spouse who inherited the IRA will give a large portion or all of the IRA account just to end the divorce and to be rid of the ex-spouse.

     

  • The beneficiary's poor spending habits, creditors and lawsuits may grab all of an inherited IRA's.

     

  • The beneficiary could lose his or her needs-based government benefits (if he or she ever requires them), such as supplemental income (SSI) or long-term nursing care.

     

  • And even if the beneficiary never encounters any of these problems, he or she may get walloped with a huge estate tax when he or she passes the IRA's down to the next generation.

 

One of the big advantages to the IRA Beneficiary Trust is the option to give a "Special Trustee" the right to elect out of the "conduit trust" (i.e., where the MRD must be paid to the beneficiary on an annual basis) to a fully discretionary "accumulation trust" (i.e., where the trustee can hold the beneficiary's MRD inside the trust). This election must be made, if at all, by September 30 of the year following the client's death. Making this election may result in a shorter “stretch-out” because the age of the oldest “possible beneficiary” must be used (the Special Trustee is also given the power to limit such possible beneficiaries to minimize this issue); however, having this option to elect between the different forms of trusts provides the flexibility to consider all factors known at the time of death and up to the election deadline (e.g., creditor problems, disability, etc.) the benefits of which may greatly out-weigh the increase in the income tax costs.

 

I have been directly trained by the lawyer that conceived this strategy and obtained the PLR.  Since 2006, I have drafted dozens of IRA Beneficiary Trusts. I understand all of the nuances involved in the proper establishment and implementation of this plan.  I recommend that all clients and their advisors consider naming a properly-drafted IRA Beneficiary Trust as the beneficiary of qualified retirement plans that are valued over $300,000.


Wednesday, March 16, 2016

ARE YOU A PANTHER OR A BRONCO? (What the Super Bowl Teaches us about Asset Protection Planning)

No doubt about it, Football is America’s favorite spectator sport.  I read somewhere that the Super Bowl 50 broadcast was the most-watched television event ever, with over 160 million viewers.  And, I must admit that I love football and have watched almost all of the Super Bowls!

  

This year’s game started me thinking of something that relates to my profession as an Estate Planning and Asset Protection attorney.  In retrospect, it was easy to get caught up in the excitement of the 17-1 Panthers, with their great quarterback Cam Newton, and their explosive offense.  But, now that the game is over, I am again reminded of one of football’s simplest, but most important axioms – GREAT DEFENSE BEATS GREAT OFFENSE!

 So… are you making sure that you are playing great DEFENSE, namely practicing effective Asset Protection Planning? 

Are you familiar with the recent US Supreme court ruling which held that inherited IRAs are not protected from creditors?  Do you know what you can do to protect those inherited IRAs?

Do you know that a Private Retirement Plan does not have annual contribution limits, that virtually any kind of asset can be contributed to the retirement plan, and that there is no requirement to include employees or even spouses in the company’s plan?  And, best of all, a Private Retirement Plan is completely exempt from creditors and judgments, including Bankruptcy, and does not run afoul of fraudulent conveyance statutes?

Would you be able to use a Qualified Personal Residence Trust (QPRT) to protect the equity in your home? How about a domestic Self-Settled Asset Protection Trust?

These are all defensive strategies that might save you from financial ruin if faced with a serious lawsuit! 

But the thing is, timing is essential – to work best, these strategies must be put into place before a problem arises.  The next meeting you have with your financial planner, accountant, insurance agent, or estate planning lawyer, express your interest in Asset Protection!


Thursday, February 25, 2016

Welcome!

Welcome to the Orange County Blog. Please check back later for more updates and new information.

Friday, September 5, 2014

Avoiding Conservatorship with a Durable Power of Attorney

A simple way to avoid a Conservatorship is with a document called a Durable Power of Attorney (DPA).  The DPA allows you (the Principal) to name an agent to make financial decisions for you during periods of incapacity, which is usually defined as occurring if two doctors sign certificates under penalty of perjury that state that they have examined you and determined that because of a mental illness or injury, you are not able to handle your own financial affairs.  At that time, your hand-picked agent (called your “Attorney-in-Fact”) can do all the things on your behalf that a court-appointed Conservator can do.

The obvious benefit of the DPA is that there is no court involvement and therefore matters can be handled much easier, cheaper, and faster than through Conservatorship.

There are many kinds of documents called Powers of Attorney.  All of them terminate upon the death of the Principal.  What we are talking about here is usually a “Springing” Durable Power of Attorney, which means that it only springs into effect upon the future incapacity of the Principal.  (If you are married, your spouse can be given authority as your Attorney-in-Fact to act in your stead even if you are not incapacitated, but only out of town or otherwise unavailable).

So, for example, in your DPA, you would name your spouse if you’re married as your Attorney-in-Fact to act on your behalf if needed, and if your spouse is unavailable or unwilling, your adult children can be named as alternates, or any other adult that you have total confidence in can serve as your Attorney-in-Fact.  Co-Attorneys-in-Fact usually must act together.

Beware of General Powers of Attorney, which are effective immediately upon signing and are not effective upon the incapacity of the Principal!


Friday, September 5, 2014

Law Day

Bill Handel hosts a popular morning radio show on KFI here in Southern California.  He is a licensed attorney, but during the week his show is a lively discussion of current events, etc.   However, on Saturday mornings Mr. Handel hosts a show called “Handel on the Law”.  Callers ask questions concerning virtually any legal topic, and Bill dispenses “marginal” legal advice in the most amusing manner.  It’s very entertaining and fun, since Bill’s favorite thing to say to a caller that’s finds himself in dire legal straits is “You’re an idiot!  You have no case!”

As part of his show, Handel sponsored “Law Day”.  He asked for attorneys in the area to volunteer to appear at a local law school to answer questions, for free, from the general public.  Each attorney would be given a table at which he or she could sit (or stand) with prospective clients to discuss their legal questions.  Attendees were given a directory with each lawyer’s name and area of expertise, and a map of the layout of the tables.

I thought that it might be a good opportunity to meet some other local attorneys, schmooze with them a little, maybe hand out a few business cards and develop some relationships that might lead to referrals later on.  Boy, was I surprised!  There were over a hundred lawyers present, but about 2,000 members of the public showed up!  From the moment the doors opened at 10 AM until they closed at 5 PM, I was swamped with people asking all sorts of questions about estate planning.  I talked all day, barely having enough time to go the bathroom.  Forget about getting lunch!  I have no idea how many people stopped by my table that day, but believe me, I was thrashed at the end of the day.

There was the young couple that had just gotten married, and wanted to know if they should sign a Pre-nup.  (Of course, Pre-nups are signed before you get married.)  A gentleman asked me if he could transfer his house to his kids to qualify for Medi-Cal.  There was the woman who told me a long, involved story about how her brother stole her inheritance from her, and wondered if I could do anything about it (unfortunately, this alleged misdeed occurred in the 1980′s!).  A man wanted to know about the stepped-up basis on inherited real property.  There was a couple that had heard that it was advantageous to set up a Charitable Remainder Trust, but weren’t’ sure what it was.  And so on, and so on…all day long.

This experience further confirmed my feeling that the public desperately needs and wants legal advice.

What You’ll Get From Reading This Blog

I’ve organized and written this blog to read as if you had attended one of my informational seminars, or were meeting with me for an informal conversation at my office.  I have tried to stay away from excessive technical language and copious footnotes, because I feel a book is easier to read and comprehend if the “jargon” is kept to a minimum.  Check back frequently for updates!


Monday, March 31, 2014

Double or Triple your IRA for your children

After your death, your IRA can be stretched to double or even triple its size for your intended beneficiaries.  The presentation below explains how, or for more information call me.





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