The decision to execute a Roth conversion and generate taxable income is more complicated than it may seem at first blush — especially when you consider it in the context of your estate plan. You're essentially making a bet that paying tax today is better than having someone else pay any income and/or estate taxes on it in the future. Before you decide to convert, be sure you and your financial adviser have answered the following three questions:
1. Will your Roth outlive you? In estate planning, the top two reasons for Roth conversions are to bequeath tax-free assets and to reduce your taxable estate. It’s critical to project your spending lifestyle relative to your net worth to understand how your assets may be used in retirement. This allows you to see what assets are likely to be part of your remaining estate.
The MarketWatch article, "When a Roth conversion is right for your estate — and when it isn’t," explains that if you project you’ll spend all of your IRA assets in retirement, the decision to convert will be based on marginal tax rates over your lifetime. If you think your Roth will outlive you, make sure the conversion tax implications outweigh the long-term savings for the person who will inherit the account. If you throw the beneficiary into a higher tax bracket with the inheritance, he or she may be better off if you take the tax hit now at your lower tax rate. But if the beneficiary’s tax rate at the time of the inheritance will be lower than your current tax rate, conversion may not be worth it. Talk with your estate planning attorney about possibly leaving the assets in a traditional IRA.
2. Is there a plan to maximize the Roth benefit? If you plan well, the benefits of a Roth conversion could span multiple lifetimes, so it’s very important to communicate this to your spouse to extend the account’s tax-free growth.
3. Does your estate benefit a charity? Charities generally don’t pay any income taxes on donations, so a traditional IRA—rather than a Roth—is a terrific asset to leave to charity. When you own an IRA, it’s like you have a joint account with the U.S. Government, as taxes are owed on the money that’s distributed. However, when the account is transferred to charity, Uncle Sam doesn’t get anything. The charity gets it all! So, converting the IRA to a Roth and naming a charity as beneficiary would be a mistake by creating an unnecessary taxable event, a payable tax to the government, and would reduce the amount received by the charity.
These are just a few of the questions that can arise when talking about an IRA conversion. The more complex your circumstances, the more you’ll benefit from working with an experienced estate planning attorney.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.
Reference: MarketWatch (November 17, 2014) "When a Roth conversion is right for your estate — and when it isn’t"
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Need I Be Spoiled to Have a Trust?
Mention a trust, and the first thing most people think of is a spoiled kid living off an inherited fortune without having worked a single day in life. As a result, most people don't know very much about trusts, and they assume there's little need to have even a basic understanding of this useful estate-planning tool. In many situations, though, trusts can be the best way to achieve your financial goals, especially if they involve making sure that you and your loved ones are taken care of when you're unavailable to do so yourself.
This was the subject of a recent article by the Motley Fool titled "5 Things You Didn't Know — but Should! — About Trusts." Here are a few takeaways from the article:
You don't have to be rich to benefit from a trust. The common perception of trusts is that they are for the rich and there are Wall Street advisors managing their money. Of course, the costs of Wall Street trustees can limit their use to just people of substantial means. But a wise and trustworthy trustee from Main Street or Honeysuckle Lane may work just as well for your specific needs.
You can ask a family member to be your trustee for no compensation and to guard your assets according to the trust's terms. By protecting even a modest sum of money, a trust can make sure that your directions for your money will be followed in the future.
Trusts can last a super long time. Once upon a time,trusts had limited lifespans. A very complex legal rule says that a trust must have all of its interests vest within 21 years of the death of the last surviving person when the trust was created, so that—at least in the past—trusts couldn't last more than about 75 years or so. However, more recently dynasty trusts have made many states strike the longstanding rule or allow a much longer maximum period.
Wyoming, for example, set a 1,000-year maximum term on trusts, and Nevada’s max is 365 years. There are also some states, like South Dakota, that just let trusts go on perpetually.
Trusts let you keep your business private, even after you die. This has to be one of the best benefits of trusts: there's no requirement for your beneficiaries or the government to make their terms public—even after you pass away. A will, on the other hand, becomes a public document once it’s filed in probate court.
A will’s terms are accessible to anyone who wants to look at them, and not everyone is comfortable with that! A trust allows you to make your express instructions clear while still keeping outsiders away during one of the most difficult periods for your family.
As you can see, trusts can be very complex, but used correctly, they are a terrific solution to your estate planning challenges. Contact an experienced estate planning attorney to talk about trusts and whether they might fit into your estate planning strategy.
You can learn more about this topic as well as other strategies on our website under the tab entitled: estate planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning
Reference: Motley Fool (November 17, 2014) "5 Things You Didn't Know — but Should! — About Trusts"