Issues with Family Vacation Homes

August 19, 2013,

Many New York families have vacation homes. While the reference often conjures up images of the super-wealthy wintering in palacial estates, the truth is that owning a second piece of real estate in a favorite location is not only for the elite. Middle class families who prudently save often decide to purchase a second home for investment purposes.

Considering the frequency of these homes, it is important for families to be aware of some financial and estate planning issues that they may create. A Forbes story from last week provides a helpful introduction into the topic.

Unfortunately, the use and future ownership of these homes is often cause for confusion, misunderstanding , and argument. For one thing, parents and children often have different ideas about the property. Is it meant to be a family keepsake that is passed down through the generations as a meeting place and memory maker? Or is it simply an investment item that can be sold if necessary without much thought? Often different family members have different levels of attached to these homes. One sibling may hold the location dear and never dream of getting rid of it while another may have few memories of the home and not wish to hold onto the property if it does not make financial sense.

The Forbes discussion notes that the single most common mistake made with regards to these issues is parents who decide to just "let the kids figure it out." Without honest discussion and legal planning ahead of time it is likely problems will arise. It is easy to see why. Adult children may live far away from one another. Those who live near the home may use it, while others may get nothing from the property. Those with a larger family and more immediate financial needs may view the property as a windfall, while others may not.

Solving these disputes is not as easy as simply giving the property to those who most enjoy it. After all, many parents seek to split their assets evenly between children. Because a second home may be one of the family's largest assets, it is often impossible to offset that value with something else.

On top of all of this there are tax issues to consider. What is the best way to pass on the asset? Children can receive it via will or perhaps as part of a trust (QTIPs are common in these cases). Alternatively, it may even be appropriate to use a limited liability company to make the transfer. These choices can literally save families tens of thousands of dollars (or more!).

In other words, there are many complex estate planning issues that come into play with vacation homes, and it is critical not to discount them or fail to anticipate them.

New York Taxes & Part-Time Residents

August 16, 2013,

Our government is based on federalism, which is why we have different laws in individual states as well as federal laws. This allows for legal "experimentation," with representatives in each state free to make different rules in many areas, from taxation and healthcare to marriage and even crimes.

One complexity in living in such a system exists when laws conflict and individuals do not necessarily live in one state or another. Sometimes the conflict is easy to resolve. For example, if one state allows you to drive while talking on the phone and another does not, then citizens are forced to abide by the law of the state they are in at any given moment.

But sometimes it is not that easy. There is often much complexity when it comes to different estate planning and tax rules.

NY Income Taxes For "Snowbirds"
Late last month Forbes published an article that touched on one of those complexities, discussing how New York residents who winter in warmer states struggle with tax obligations. The story notes that it is often difficult for someone who splits time between two states to convince the higher tax state that their primary residence has changed, leading to no tax obligation.

A recent New York Division of Tax Appeals case illustrates the point. The couple at issue spends most of the year in a Queens home in the Malba neighborhood. In the mid-1990s the couple transferred the house to a QPRT. This refers to a "qualified personal residence trust" and usually used to transfer a home to others (in this case the couple's children) with gift and estate tax savings. Even though the couple's children technically own the home now, the seniors still live there most of the time and pay rent to the children. In addition, the seniors own a Florida home where they live in the winter.

The tax dispute in question was whether the couple owed New York income tax. They did not technically own a home in New York. In a somewhat complex ruling, the state of New York won, successfully arguing that the couple met both "domicile' and "residence" requirements. There are detailed rules and requirements about how these two locations are decided as a legal matter.

While this case related specifically with income tax, similar disagreement may arise with inheritance and estate taxes, as seniors may split time between different locations. For help understanding how different state tax rules may apply to your family, be sure to get help from an estate planning lawyer.

Reminder: More Estate Planning Opportunities for Couples After Windsor v U.S.

August 14, 2013,

A JDSupra post from last month offers a helpful reminder of the changing legal landscape for New York same sex couples who are married.

As virtually everyone knows, in late June the U.S. Supreme Court declared the main portion of the federal law known as the "Defense of Marriage Act" (DOMA) unconstitutional. The crux of the particular case, Windsor v. United States, related to the estate tax. Windsor, a New York resident, was forced to pay over $350,000 in estate taxes following the death of her wife, Thea Spyer. The couple's marriage was legally recognized in New York, but the federal government treated the pair as strangers.

Estate Planning Options
With the Supreme Courts ruling, issued by Justice Kennedy, the federal government is now required to treat all couples the same who are properly married under state law. This opens up a large number of new estate planning tools for married same sex couples in New York.

Most obviously that includes claiming the marital deduction on gift and estate taxes. As pointed out in the article, this deduction applies both to assets that pass directly (in a will) and those transferred via a trust. In these cases a trust known as a QTIP is common. QTIP refers to "Qualified Terminable Interest Property" trust and is often used to allow a surviving partner to benefit from asset before they eventually pass to another, like an adult child.

In addition, same sex couples can now take advantage of each other's exemption amounts when making gifts and transfers. For example, the partners can "split" gifts to third parties and double the annual tax-free exclusion amount for federal purposes. Similarly, married same sex couples can now elect portability. This is a legal tool that allows the spouse of one who is deceased to essentially borrow the "unused" exemption amount of the spouse who has passed away. In essence, it is another way that partners can jointly pass on assets to loved ones with as small a tax burden as possible.

As we have previously pointed out, other legal details, like the increased Social Security benefits and the filing of joint tax returns, are also open to same sex couples married in New York.

Critically, the article makes the unique point that as a result of the unconstitutional ruling, section 3 of DOMA is deemed to have been void from the outset. In other words, those adversely affected by the law in the recent past (usually three years), may be able to file amended tax returns and recoup some of their overpaid tax.

Following the Windsor decision, it is critical that all New York same sex couple visit with an estate planning attorney to update their current documents or have new plans created to account for the new legal options open to them.

Children on Famed Football Coach Challenge Will

August 12, 2013,

The State recently reported on another "will contest" involving a well-known South Carolina family. The story is an example of a very common estate planning problem, disagreement between adult children and a second (or third) spouse.

The basics of the family situation are well known. The patriarch, former University of South Carolina football coach Jim Carlen, had three children with his first wife, Sharon. In the early 1980s, Carlen divorced Sharon and married his second wife, Meredith. Carlen and Meredith had one child together. While specific details are sparse, it seems that Meredith and the Carlen children from the first marriage may not have had the best relationship. Tension of this sort is quite common among all families with parents who re-marry following divorce or death.

In Carlen's case, the children are claiming that the man's second wife exercised undue influence on him in his waning years, taking advantage of his dementia. Carlen apparently wrote a series of wills (among other estate planning documents). The first, in 1970, left his assets to his wife and children. All subsequent wills were similar, with the children left substantial property.

Yet, in 2010, that changed. Already in poor mental and physical health and unable to drive on his own, Carlen was allegedly driven to a new attorney. He had been diagnosed with dementia in 2009. At that time the attorney presented him with a re-drafted will. Carlen signed the document.

The petition that the three adult children filed while challenging the will lays out the situation: "Unlike the 2007 will which provided for both Coach Carlen's children and his wife, Meredith, the 2010 will left all of his property to his wife Meredith and left nothing whatsoever to his children or grandchildren: not money; not personal property; not a photograph; (nor) memorabilia from any point in Coach Carlen's career or a token for them to remember him by."

It wasn't even until after the coach's death last year the adult children learned of the latest will and the fact that they had been totally disinherited. All told, the estate valued at about $10 million would pass to his second-wife, Meredith. Carlen's three adult children and twelve grandchildren would receive nothing.

In seeking to have the 2010 will declared void, the children petitioned the court claiming that it was the product of undue influence at a time when he had diminished mental capacity.

Preventing these sorts of "will contest" should be up paramount important to all New Yorkers when crafting an estate plan. Please contact our office to see how we can help.

Adding Candidates & Political Parties to Your Estate Plan

August 8, 2013,

How should you decide who you should name as beneficiaries in your estate planning documents? For many, the answer is not too complicated: leave it all to the children. However, just because that model is the most common form of passing on assets does not mean that there are not others who you might like to leave something. For many, designating beneficiaries in a will and trust documents is an important way to re-iterate their values, morals, and interests one final time. After all, estate planning is about legacy-building.

Charitable contributions are common, as New Yorkers seek to help out their favorite causes one final time. Similarly, many residents decide to leave assets to political causes. The total amount donated to political parties and candidates this way is actually quite substantial. However, because of campaign finance laws, there are some additional complications when making these bequests.

Political Beneficiaries
As discussed in a recent USA Today analysis, nearly $600,000 have been given to individual federal office candidates alone by deceased individuals in the last four years. This total, culled from Federal Election Commission (FEC) data, does not include any money left to political parties or other-politically connected organizations.

Federal law allows these contributions as part of an estate plan in a similar way to donations to charities. However, one key difference are the general restrictions on all political donations, made even by the living. Current law limits individual donors to $5,200 per candidate and $32,500 to a political party on a yearly basis. All estate planning which involves political beneficiaries must take those campaign finance rules into account.

Yet, it may not be as simple as remembering not to leave too much. That is because recent U.S. Supreme Court decisions related to campaign finance laws are leading some to argue that those restrictions are unconstitutional. Most notably, the 2010 Citizen's United decision struck down laws which placed caps on a corporation's ability to donate unlimited funds to these causes.

Another suit is pending which would essentially do the same for individual donors. That latest suit was filed by the Libertarian Party,which is arguing that the $217,000 that a man left the party in his will should be given in a lump sum--instead of in annual installment falling below the campaign contributions limit.

It is impossible to say now if the law around contributions to political parties and candidates will change. Right now,it is important to reiterate the importance of having professional help with including political parties or candidates in an estate plan.

Taxes & Withdrawal From Retirement Accounts

August 7, 2013,

Planning for retirement is rarely a simple task. For one thing, a resident must carefully ask the basic question: How much do I need? Sophisticated models and projections exists to help make educated guesses about this answer. But it is never an exact science. That is because it is impossible to say with certainty how long the retirement will last or what the future financial world will look like.

On top of that, however, there is also significant complexity regarding the accounts, trusts, and other tools used to provide the assets and income needed in retirement. It is critical to understand tax issues with retirement accounts and investments to appreciate exactly how much money will be available for you to live in your golden years.

Take, for example, the issue of taxes and individual retirement accounts (or any other tax-deferred plan). Do you know how much of the account will be taxed on withdrawal?

A Wall Street Journal story this week explored how many investors are not familiar with the specific tax rules related to IRAs. Most appreciate that the federal government will take a tax bite out of those withdrawals (no taxes were paid when initially put into the account). But will states take out an income tax as well?

The answer: it depends. Each state has somewhat different rules. Those living in the seven states that have no income tax obviously will not have a state tax burden. But even those in states with a state income tax, like New York, may have some special rules apply which minimize the tax.

As in most states, in New York, a resident is able to deduct their IRA contributions when they are actually made. This means that the tax is applied years later, when the money is withdrawn. However, under New York law, the first $20,000 of retirement plan withdrawals are actually exempt (at least for those over 59.5 years old). In other words, the state tax bite on the retirement withdrawal may be a bit less than expected.

An added complexity comes if one move to a different state. Which state's law applies: the one where you set up the account or where you live when you withdraw from it? In most cases, the latter is true, the rules of your current state apply. Therefore those who move into or out of the state need to investigate the area's particular tax rules to understand exactly what their obligation will be on what funds will actually make it to their bank account.

GRATs - A Good Idea in this Low Interest Rate Environment?

August 6, 2013,

A post over at Think Advisor last week provides some helpful insight into one financial and estate planning tool which might be appropriate for some New York residents. The tool is know as a GRAT - Grantor Retained Annuity Trust. As with many other trusts, one key purpose of the GRAT is to minimize tax liability, particularly for those with significant assets.

How It Works
The basic concept behind the GRAT is straightforward. Assets are placed in trust. The grantor (person creating the trust) then retains the right to receive fixed payments from the trust. Those payment can last either for a set period of time designated in advance or over the grantor's life. At the end of the trust's life the assets placed in the trust then fall to the beneficiaries.

Timing: Why to Consider it Now
Grantor Retained Annuity Trusts have been available for quite some time. However, there has been a push by some in recent years for increased use of the GRAT. This renewed interest is based two factors, current interest rates and the political dynamic which may close the window of their availability.

1) Interest Rates - For the past few years, interest rates have been quite low. As financial advisors often explain, a GRAT can be particularly valuable in a low interest rate environment. Here's why: the 'taxable" portion of the transfer into the GRAT is based on the value of the property minus the estimated value that the grantor will retain as part of the annuity. The larger the retained estimate, the lower the taxable amount. Therefore, in a low interest rate environment, the portion of the transfer that is taxable will ultimately be lower. As the Think Advisor article points out, in some cases, this scenario can effectively reduce a tax liability to zero.

2) Politics - On top of the benefit with today's interest rates, there may be a push for use of GRATs now because the ability to use this tool may be taken away. Recent federal proposals have included elimination of the benefits available in these types of trusts. Therefore, if the GRAT is a good fit in your situation, it is important to act now.

There are many other issues to consider with regard to GRATs, like the possible need to combine with a life insurance trust. For help understanding the many different types of financial and estate planning tools that might be available to meet the needs of your family, please contact our estate planning attorneys today.

Think Twice Before Disinheriting A Child

August 2, 2013,

Families are complicated. No matter how well intentioned, virtually all family histories include some situations, dynamics, and incidents that cause immense disagreement, tension, stress, and frayed relationship. Virtually all families have some level of "dysfunction," and no family is perfect.

Estate planning attorneys are acutely aware of this reality, as we worked with every manner of family on issues which must take into account their unique situations. Simply "splitting everything between the children" is not an ideal option for many. In certain cases parents have serious concerns about their child's ability to manage an inheritance or the fairness of dividing things equally.

In the most extreme cases, some parents consider disinheriting a child altogether. This may be based on many different reasons: the child is estranged, they have significant means and do not need an inheritance, or perhaps they have drug and alcohol problems.

But is disinheritance the best option? Perhaps, but it should not be decided upon lightly. A planning professional can provide specific advice to discuss the pitfalls and ramifications of such a move.

A Bloomberg story from this month touched on the same topic, arguing that many parents who think that they want to cut their child out of their will may need to think twice.

The most obvious concern about cutting out a child is the door that it opens for subsequent litigation. As one professional interviewed for the story explained, "A good attorney will assume a will or trust will be contested. You do everything you can to cut off potential litigation in advance."

A disinherited child may pursue legal redress. Even if it is unsuccessful it requires resources and delays a final resolution. But even if the party left out does not do anything, a disinheritance also places immense pressure on those who did receive an inheritance. For example, cutting out one child automatically creates a rift between those children left in and left out--even if that rift did not exist before. It is a template for family drama.

No matter what, it is prudent to at least learn about the alternatives available, like trusts for spendthrifts and "sprinkle" trusts. These legal tools may be able to more accurately address concerns without the need to completely disinherit a child. The spendthrift trust can structure the inheritance in such a way that it cannot be exposed to creditors and does not allow the child to blow through it all at once. A 'sprinkle" trust may allow for an inheritance to be based on the child's need down the road, to account for different financial situations for each child.

Understanding "Portability" in Estate Planning

August 1, 2013,

The last major piece of federal tax legislation was the American Tax Relief Act (ATRA). It was signed by President Obama on January 1st of this year and was passed in order to avert to so-called fiscal cliff (we went over that cliff a few months later anyway). The tax rules made permanent in ATRA have significant effects on estate planning. One such issue relates to the concept of "portability." A recent Forbes article provides a helpful primer of some of basic portability concepts.

The first question: what is portability?

Essentially, the principle of portability applies to the estate tax exclusion amounts between couples. Right now an individual has $5.25 million that is excluded from estate taxes. That means, as a couple, two individual have $10,5 million in exclusion available. But what often happens is that one spouse dies first and transfers most (perhaps all) of their assets to the surviving spouse. Transfers to a spouse are entirely exempt, and so there is no estate tax burden.

However, what happens when the second spouse dies? Generally that spouse would only be able to have $5.25 million of the estate exemption. If the estate is worth more than that, then there would be an tax obligation.

Portability changes that by allowing the surviving spouse to use the unused portion of the first spouse's exclusion amount. This is often referred to as DSUE amount - "deceased spousal unused exclusion" amount. In other words, this allows the estate of the second spouse to exempt millions more from their estate tax burdens. In practical terms, because of portability, adult children and other heirs often receive a much larger tax-free inheritance when their only surviving parent dies.

The basic idea behind this option is logical. Because married couples almost always act as a single unit, it does not make sense for the pair to lose their own exempt amount merely because they likely will not die at the same time.

Importantly, taking advantage of portability does not happen automatically. One must explicitly elect to take it. There are timing and paperwork requirements to take advantage. Considering the significant resources at stake, it is obviously very important not to go it alone. Having professional support is essential to take full advantage of the legal tax savings tools available to you.

For help in New York, contact the estate planning attorneys at our firm today.

"Funeral Shopping" - The Basics

July 26, 2013,

Last week Forbes dove into a topic that families give little attention until the task is thrust upon them: picking burial and funeral vendors. For obvious reasons, most of us have little direct experience evaluating different options for quality or negotiating to receive the best value.

For starters, as the story points out, it is important to have a specific idea of what you want at the services before calling any funeral parlor director. That is because, without an idea ahead of time, you may be persuaded to purchase many different things that you do not truly need or want. Having detailed plans in place as part of a comprehensive estate plan ahead of time can help narrow the focus.

There is a lot of pressure in any sales situation, and it can be made worse when it comes to funeral services. When a certain item is offered by the funeral parlor, a family may feel as if not agreeing to the most expensive options reflects on the value of the one who passed away. Of course this is not true, but the pressure is there. Having one's wishes laid one with clarity ahead of time takes away much of that burden from the surviving family.

Beyond being clear about wishes, it is also helpful to ask for a specific price list from the funeral parlor. It is easy to agree to many different services or features without appreciating the cost of each. As the story points out, by having a list in hand ahead of time, a family can weigh the value of each service with the cost to make the best choices on their own time after careful consideration.

Perhaps the most logical (but overlooked) tip is to shop around for services. Considering the emotional turmoil of the situation and time pressures, many families simply make a single call and go with whatever they hear. Even individuals who are normally prudent about getting the best deal fail to consider different options from different vendors when dealing with funeral services. This is a mistake. Prices vary considerably, and using a parlor just because your family has used it in the past or because it is close may result in significant over-payment. Assign someone to call around and get a feel for the basic price difference between a few relatively close options.

For more tailored advice about planning for these services, paying for them, and putting plans into place to ease the transition for family members, feel free to contact our estate planning attorneys today.

When Your Retirement Must Include a Third

July 25, 2013,

Financial Planning News shared a helpful article earlier this month about a difficult situation faced by many New York families: Planning for retirement with a special needs child. If you have a child with various special needs, those circumstances must obviously be built into both an estate plan and a retirement plan.

On the estate planning side, it is important to balance the child's need for access to public support services and the effect an inheritance may have on that eligibility. In these situations a special needs trust is often critical to meet the needs.

When it comes to retirement planning, the article shares how it is essential to fully understand the future costs for advanced medical care, physical therapy, behavioral therapy, and much more. There is a mistaken assumption that these costs only exist when the child is growing. In reality, even many adult children with special disabilities have significant needs that parents must work into their long-term plans.

Many different long-term retirement strategies hinge on those obligations. Obviously, those planning for retirement may need to increase expected cost of living when funds for a special needs child are added to the mix. One planner interviewed for the story notes that, in general, increased expected monthly allocations by 10-15% is common when caring for a child is part of the mix. To best meet goals it also may require shifting to a conservative portfolio that can better weather storms, downsizing unnecessary assets, and similar details.

There is an obvious intersection between retirement planning and estate planning, however. All advisors will explain that it is critical to keep the child's eligibility for government programs in mind. This means avoiding disqualifying inheritances in the form of pensions, 401(k)s or similar assets. In fact, this need even exists for many relatively wealthy families. Depending on the child's needs, even private wealth in the millions can be depleted quite quickly. Taking advantage of available support while protecting those family assets is important.

Special needs trust can help families avoid having to entirely disinherit a child with special needs. However, there are special rules that apply to these trusts and assets can generally only be used in certain ways. It is imperative to understand those rules ahead of time.

There are no one-sized-fits-all answers. Obviously the specific strategies depend on the family's goals, resources, and the specific special needs of the child. Yet, in all situations, it is absolutely critical not to go it alone. Contact estate planning attorneys and financial planners to at least learn the options out there.

The Other Side of the Coin: Managing Your Inheritance Wisely

July 23, 2013,

As estate planning attorneys, we spend most of our time talking about how to structure an inheritance: putting the legal framework in place so that one can be confident that their wishes will be carried out. Professionals are eager to give advice about use of wills and trusts to save on taxes while passing on assets.

With so much focus on this aspect of the inheritance, far less guidance is given to the beneficiaries. What should you do after you receive an inheritance?

WMUR News published a helpful article last week that offers a good starting point on that very topic. The story runs through some basic tips about the next steps after receiving an inheritance. It is a worthwhile read both for those who expect an inheritance as well as for those who expect to leave one. After all, it is always possible to have discussions with family members about how you hope they use any assets they receive. In fact, the entire structure of an estate plan may change depending on how one hopes their generosity will be used by the next generation.

The story points to a Metlife study which suggested that about two-thirds of all "Baby-Boomer households" will receive some kind of inheritance. The median amount is around $64,000, but many families will receive more much or considerably less.

One of the seven tips outlines in the advice article is an obvious one: review your overall financial goals before deciding what to do with the windfall. Your current situation will obviously affect the options. Do you have many short-term goals (i.e. buying a house) or is more focus on long-term investments? It is important not to rush into any decision. There is no harm in waiting a short while while evaluating your options. At this time, it is helpful not to "co-mingle" funds with a spouse as the inheritance is likely considered separate property so long as it remains separate.

Many of the tips fall under the general theme of using the funds prudently, instead of spending it on relatively trivial matters. For example, paying down debt or creating an emergency reserve fund are usually smart choices for an inheritance.

One unique reminder is that shortly after receiving an inheritance may actually be a good time to tweak your own estate plan. Beyond being a basic reminder to get your own wishes in place, the finances need to be included in one's plan. Perhaps the inheritance should be rolled into a trust or lead to changing insurance policies.

Sobering News from Retirement Accounts Study

July 19, 2013,

Retirement saving--it is a topic on the minds of many New York families. The days of working in the same spot for several decades and then enjoying retirement on a defined benefits pension plan are long gone for most residents. With Social Security offering only the barest funds, it instead falls to everyone to take steps on their own to plan for their golden years. Individual Retirement Accounts (IRAs), 401(k)s, and similar tools are used by most to accomplish this goal.

However, the latest research on retirement trends suggest what many estate planners know: many families have no saved nearly enough to last their entire planned retirement. As discussed in a MarketWatch story this week, a new research projects gives most people less than a 50% chance of having their retirement last for 30 years. That is based on current stock and bond markets with a typical withdrawal of 4% per year (with a hypothetical portfolio of 60% bonds and 40% stocks).

In short, it is still tough out there in the world of retirement planning.

As the article points out, this latest analysis offers a somewhat bleaker picture than simulations in past years--which typically show anywhere from 80% to 90% chance of funds lasting for three decades based on those same parameters.

What changed in this year's study? According to the authors it is a combination of low bond yields and high stock valuations.

It is important to point out that while the headline of "50% of plans failing" seems like a cause for alarm, it might be more sensational than necessary. That is because even a plan that failed after 29 and a half years would be deemed "failure," even if it was plenty for the actual individual. In other words, following these sorts of estimates are very conservative, and many more than half of the plans will likely still serve their purpose in the real world.

Also, the authors note that, in reality, "by the time you're 20 years into retirement, there is a more than 50% chance that one spouse in a couple won't be there any more. So, he said, you can likely ratchet your spending down a bit."

What Does This Mean for You?
While these pessimistic study results are not welcome, there are still options for families to deal with the changing investment landscape. For one thing, withdrawal amounts can be lowered in order to ensure the nest egg lasts longer. The study is based on a 4% annual withdrawal, but decreasing that to 2% results in 99% likelihood of lasting thirty years. Also, there is no reason that the withdrawal rate must stay constant. Changes can be made on a regular basis to account for changing investment dynamics.

Are "Stretch IRAs" Going to be Phased Out?

July 17, 2013,

Structuring an estate plan to account for taxes can be a complex task. While state and federal estate taxes make up the majority of discussion about taxation, there are other issues to consider. For example, there are ways to structure disbursement of various assets--insurance policies, retirement accounts, and more--so that Uncle Sam takes as small a bite as possible.

Adding to the complexity is the fact that laws frequently change which either open up more opportunities or take away previously available tax-saving options. For example, last week Forbes discussed a U.S. Senate vote that may eliminate a commonly-used tax strategy.

Stretch IRAs
For years many families have created stretch IRAs. This refers to the process of naming a child or grandchild as beneficiary of the retirement account. Then, the younger individual is able to withdraw from the account in small pieces over the course of their lives. In so doing, the account is able to grow for a significant period of time without being taxed. The account is still taxed eventually, but over the course of the heir's lifetime they ultimately pay far less as a percentage than if they would if given it all in a lump sum and taxed immediately.

Loophole Being Closed?
However, the ability to use a stretch IRA may be on the way out. That is because U.S. Senators passed a bill recently to eliminate the ability to drag out an inherited IRA withdrawal--supporters of the measure referred to the stretch IRA as a "loophole." Specifically, per the terms of the legislation, most retirement accounts would be required to be completely distributed within five years of the owner's passing. Spouses would be excluded from this rule, as would disabled heirs. Minors would be able to spread out disbursements until they turned twenty six years old, even if that was longer than five years.

Of course, the fact that the Senate passed the bill does not mean that it is a done deal. House Republicans may be opposed to the bill, which would kill its chances. It is unclear right now if they do, but similar changes have received bipartisan support in the past. President Obama supports the IRA-change and would likely sign such a bill if it made it to his desk.

In any event, the proposal should be watched closely by those who plan to use a stretch IRA as part of their tax-saving strategy. There are various alternatives that might be worth pursuing in lieu of a stretch IRA. The Forbes article offers an overview of some of those options. The best resources, however, are professionals like estate planning attorneys and tax advisers who can explain what makes the most sense in your specific situation.

Update: Gandolfini's Estate Faces Huge Estate Tax Liability

July 15, 2013,

Last week we discussed the recently unearthed will of former Sopranos star James Gandolfini. The document was filed with a Manhattan court late last month, with the actor's assets being left to a wide range of people including his two children, wife, sisters, and several friends. Those earlier reports noted that Gandolfini's assets including life insurance, real estate in Italy, and more. All told he allegedly had more than $70 million in assets.

With fortunes of that size, estate taxes are obviously an immediate concern. There are both federal and state taxes that apply to inheritances. The rates for each are different and they take effect at different income levels. Federal estate taxes apply to non-exempt assets over $5.25 million with a top rate of 40%. Alternatively, New York's separate tax kicks in at assets over $1 million with rates between 5% and 16%.

Considering there are two levels of taxation and rates that are not trivial, it is critical to account for these potential taxes in an estate plans. Attorneys working on these issues for local residents must be intimately aware of all legal options to guard against the largest tax bills.

Unfortunately, it now appears that Gandolfini's plan may not have been all that tailored, exposing the estate to a significant tax burden. Literally tens of millions of dollars will likely be lost as a result of what some have dubbed an "estate planning disaster."

According to a recent report in the NY Daily News, more than $30 million of the $70 million total may not go to family members--but to the government. That is because specialized legal tools to prevent the estate from tax exposure were not used. As much as 80% of the total estate was apparently open to taxation. With both state and federal taxes applied, nearly 55% of the exposed estate will be lost to the the government.

Sadly, this means that the family will likely be required to sell assets to pay the tax bill. Few individuals in these cases have enough actual cash available to pay the bill with funds not tied up in real or personal property. There will not be a huge amount of time to sell the assets and pay the bill, with much coming due in six to nine months.

The sad situation is a vivid reminder of the consequences of not taking full advantages of the available ways to save on estate taxes. Even if your family's fortune is below the exemption levels, estate planning is critical to streamlining the processes and ensuring your wishes are actually carried out in as efficient a way as possible.