More On Non-Probate Assets
These assets must be valued, with an appraisal or by the account custodian, at the date of death of the estate owner. IF the value of these “non-probate assets” together with the “probate assets” equate to more than $2,193,000.00, then Washington Estate Tax is owed. If the assets equate to more than $11,800,000.00, then Federal Estate Tax is owed.
This is one reason why it is important to know what “non-probate assets” are and how much they are worth. The other reason to be aware of these types of assets is because, if the estate owner had any debts (other than potential estate tax debt) then these assets are subject to being used to satisfy those debts. It follows, then, that beneficiaries of these assets should be made aware of that fact and not receive these assets until such time as all debts are, at least, accounted for and hopefully satisfied with other assets.
INVESTMENT BANK ACCOUNT – BENEFICIARY DESIGNATIONS
Per Washington Law, the Beneficiary nominated in a non-probate asset contract is supreme – unless the nomination (at the bank, for example) pre-dates the Will’s designation of the beneficiary of that same asset. With a Will dated after the bank account beneficiary is designated, the Will rules. Check out RCW 11.11 for the Testamentary Disposition of Non-Probate Assets Act.
RCW 11.11 basically provides that those who have diligently gone to the banks, investment houses and to their IRA custodians to complete “Beneficiary Designations” will NOT have to do that all over again, if minds are changed. Indeed, RCW 11.11.020 states emphatically that the Will supersedes those designations – IF the Will post-dates those designations. So, after running around to 10 different banks and brokers to name those beneficiaries, a testator need only make a specific bequest of those accounts to whomever in the Will to change those beneficiaries.
HOWEVER, IMPORTANT NOTE: IRAs (and bonds) are exempt from this law (RCW 11.11.010.7(a)(v)). So, if the Owner desires a change in designated beneficiaries, the change must take place with the IRA Custodian unless the IRA Custodian does not have a default beneficiary and the designated beneficiary is no longer living. Only then will a IRA Beneficiary must be contacted to make the change.
IRAs (Individual Retirement Accounts): Beneficiary Designations:
The Owner of an IRA must establish any IRA with an IRA Custodian. Contracts are signed. It is in those contracts where the Owner designates an IRA Beneficiary. Careful review of the IRA Contract may also reveal the IRA Custodian’s “Default Beneficiary” if the Owner makes no designation or if the Owner’s designated beneficiary dies before distribution. That Default Beneficiary is likely the Owners’ Estate. This “Default Beneficiary” designation can be problematic if not fully understood.
Estates are not “persons” so the law requires that, if an Estate is the designated beneficiary, that the estate take distribution of the IRA within 5 years. This is not the ideal distribution time for a tax-deferred asset. Also, the IRA monies are subject to the Estate’s creditors, if any, which is never good. Whereas the IRA monies would not be subject to the Estate’s creditors if the IRA monies went to a named beneficiary other than the estate. And, finally, the IRA distribution is taxable. So, if it is distributed to the Estate, then the income of the IRA is fully taxed at the rate of the Estate, which is likely higher than a younger beneficiary.
Lesson Learned: Owners should be very careful regarding IRA Beneficiary designations. Owners should understand that an Owner’s Will is likely not the mechanism with which to change the Owner’s designation of the IRA Beneficiary. Under RCW 11.11, IRAs are not considered non-probate assets; therefore here a beneficiary designation in a post-dated Will does not supersede the IRA Custodian’s previous IRA beneficiary designation. Changing IRA Beneficiaries in a post-dated Will can only operate to change IRA beneficiaries IF the IRA has no beneficiary designation and the IRA Custodian has no default beneficiary designation, which is unusual.
RETIRMENT FUNDS – DISTRIBUTIONS
Calculations of RMD for Owner AND Beneficiaries? Just Ask.
Before signing the Retirement Funds Contract, the Owner should be clear as to HOW and BY WHOM and WHEN the RMDs are calculated for both the Owner and for the Beneficiaries. It is also wise to set up a standard date for payout of the RMDs. Be aware to prepare!
New (2017) Law – SECURES ACT
The SECURE ACT is a 2017 Federal law that planners have studied and are still learning. We all should be aware of it regarding the non-probate asset of an IRAs: the SECURES Act (Setting Every Community Up for Retirement Enhancement), (Public Law 116-94) was passed by Congress in June 2019 and signed by President Trump on 12/20/2019.
The SECURES Act changed retirement plan administration and benefits in an effort to improve retirement security and saving opportunities. If owners have a retirement account, or want one, they should review The Act with their tax advisor and estate planning attorney.
To summarize, the SECURES Act addresses life-time distributions of the IRA (known as “Required Minimum Distributions” or RMDs or MRDs for those who like to say Minimum Required Distribution). The SECURES Act also affects the inheritance benefits and administration of an IRA.
There’s “good news”:
- TIME FOR DISTRIBUTION EXTENDED: For RMDs, the minimum age for having to take an RMD has been raised from 70.5 to 72 years of age. Once 72, the owner of the IRA must take distributions (calculations of which are based on life-expectancy) in the year following the year they turn 72. Distributions may start on April 1. And if the owner of the IRA is still working, the extension continues until April 1 of the year after the year an owner retires. That keeps the asset growing in a tax-deferred account longer.
- TIME FOR CONTRIBUTION EXTENDED: Owner/workers are also allowed to contribute to IRAs (traditional) after turning 70.5 years of age – even if the Owner/worker is having to take RMDs.
These two 2019 changes to the IRA rules allow more principal to be saved and more tax-deferred growth.
So, again, be certain that the IRAs Beneficiary Designations, as discussed above, are properly made with the IRA Custodian. Will designations are risky for IRAs. Remember, the IRA is an exempt Non-Probate Asset under the Testamentary Transfer of Non-Probate Assets Act RCW 11.11 – so the Will cannot override the IRA’s Beneficiary Designation, if the IRA’s designation remains applicable at death. And most have a default beneficiary as the estate. NOTE: The IRS just found that the surviving spouse was akin to the estate when the surviving spouse was the sole heir. That ruling allow the surviving spouse to take a roll over (discussed below.)
So, keep current on your Beneficiary Designations and have Contingent Beneficiary Designations. EVERY YEAR we renew insurance, change batteries. Make the habit of updating and getting a fresh copy of your important papers.
The bad news of the SECURE Act is that IRA Beneficiaries (non-spouse) have less time to enjoy the IRA’s benefits of tax-deferred growth. The Act eliminates the “stretch” that was allowed for a non-spouse beneficiary of an IRA. Now, those non-spouse beneficiaries must withdraw all pre-tax distributions from their inherited accounts within 10 years. It does not mean that they must withdraw 1/10th every year; but planning for the tax consequences is best to avoid having to pay more tax than is legally required.
There are exceptions to this new “10 year rule” (other than spousal beneficiaries) so that additional tax-deferred growth time can be added and so that the beneficiary will likely be in a lower tax bracket upon distribution:
- If the IRA Beneficiary is the Owner’s Minor Children (note, not grandchildren), then those children are exempt from the 10 year rule until they reach the age of majority, which could be 26 if they are enrolled in specified educational programs. Once of majority age, the child’s 10 years of distribution must begin and full distribution must occur in that 10th year – with a big tax bill – unless good planning occurs.
- If the Owner’s IRA Beneficiary is not more than 10 years younger than the Owner, then that Beneficiary can stretch the old way. So here, children and grands are not even contemplated. But friend and “significant others” within 10 years younger of the Owner or any amount of years older than the Owner are excluded from the 10 year rule.
- If the Owner’s IRA Beneficiary is disabled or chronically ill, that Beneficiary can stretch the old way.
The 10 year rule also affects Trusts that are named as IRA Beneficiaries. The Owner should be sure to have the Trust reviewed to ensure that this new 10 year rule does not interrupt the Owner/Trustor’s goals of the Trust. Note: there are specials exceptions there too for the chronically ill and disabled trust beneficiaries.