financial health

Rilus Dana of Dana and Associates, LLC, recently presented the program “Protecting Your Legacy” to members of Banner High Country Seniors of Payson.

The primary message, “Do some planning before something happens!”

Now is a good time to take a fresh look at our assets.

There are some common misconceptions with wills and trusts and many plans fail. To assure your estate passes to your heirs as easily and as quickly as possible take steps while your physical and mental health are still good.

Dana presented two examples for Banner High Country Seniors.

The Millers

Happily married for 40 years, they have three children. The oldest daughter is married and very responsible, has two children and works as an accountant. The middle daughter is a hard worker, but husband runs the finances. The youngest daughter has special needs and has AHCCCS to help pay for her expenses.

The Millers assets total $2,290,000 and include: a primary residence valued at $350,000, with a $100,000 mortgage; a rental house valued at $200,000; his IRA, worth $800,000 and names the wife as first beneficiary and the children as second beneficiary; her IRA worth $500,000 and names the husband as first beneficiary and the children as second beneficiary; they have $5,000 in checking and $35,000 in savings; and investments have a value of $500,000.

Mr. Miller passes away. The survivors need to know if his assets must go through probate, (a process designed to transfer assets out of the name of the deceased in order to properly distribute them).

Because all assets were held jointly and Mrs. Miller was listed as a beneficiary probate is avoided.

To minimize the tax liability on inheriting Mr. Miller’s IRA, Mrs. Miller utilizes a Spousal Rollover on her husband’s IRA. Income tax is deferred, however any money that Mrs. Miller takes from the IRA is subject to income tax. At age 70.5 Mrs. Miller will be forced to start taking minimum distributions based upon her life expectancy.

Mrs. Miller talks to her neighbors about how to help her children avoid probate upon her passing. A neighbor advises her to add her children’s names to her bank accounts and the title of her house.

Mrs. Miller puts the name of her oldest daughter on the titles of both the primary residence and rental property and on all the bank and investment accounts. And also makes her the first beneficiary of the IRA account, which is now worth $1.3 million.

The assets total $2,860,000.

Mrs. Miller’s health begins to decline and she decides to sell her house and buy into a retirement home, but her real estate agent discovers her home has a lien on it ...

Meet the Son-in-Law

• He has a federal Tax Debt

• He was sued over the administration of his parents’ estate

• Through community property laws, the son-in law now has an interest in the assets

This problem could have been avoided, but instead of speaking with a professional, a neighbor’s advice was followed. Judgments against the son-in-law totaling $400,000 are enforced against Mrs. Miller’s assets, taking the estate’s value down to $2,460,000.

More bad news further depletes the estate.

• A tenant falls and is injured at the Millers’ rental house.

• The injured tenant sues Mrs. Miller and her oldest daughter as they are co-owners of the property.

• A judgment was imposed against Mrs. Miller for $500,000, reducing the estate’s value to $1,960,000.

Mrs. Miller tries to correct her mistake and removes her daughter’s name from everything and then seeks counsel from someone more qualified than her neighbor.

But before a lawyer can resolve the issues Mrs. Miller has a stroke and no longer has capacity. So her daughter calls their lawyer and says she needs Power of Attorney.

Mrs. Miller did not establish a Power of Attorney for the daughter before becoming incapacitated. The alternative is to have the daughter given Guardianship and Conservatorship — which she files for.

The court appoints an attorney and court investigator to evaluate the situation and determine if the appointment of the daughter as Guardian and Conservator is in Mrs. Miller’s best interest. This process takes time and money. In this example it takes six months for the oldest daughter to be appointed as conservator.

Mrs. Miller dies and probate is required.

Oldest daughter gets divorced and is forced to file bankruptcy. She calls professional counselor’s office in a panic and wants to know if she is going to have to disclose Mrs. Miller’s IRA assets in the bankruptcy.

The IRA must be disclosed in the bankruptcy. In 2014 The U.S. Supreme Court decided that an inherited IRA cannot be shielded from creditors. The objective of IRA accounts is to ensure the money is available to retirees upon retirement. Once the IRA owner passes and leaves the IRA to a beneficiary, the account is no longer considered a retirement account and is then subject to creditors (Clark v. Rameker).

Mrs. Miller’s $1.5 million IRA goes to the oldest daughter and is considered income.

With Mrs. Miller’s death the probate assets, except the IRA, are split between the three Miller sisters.

As a result of the inheritance, the youngest child no longer qualifies for AHCCCS benefits. She must spend down her inheritance before she qualifies again.

The middle daughter is upset because the IRA, worth $1.5 million, went to the oldest daughter.

The oldest daughter agrees to share the IRA with middle sister, but she must first settle with the bankruptcy court for $500,000. The oldest daughter receives $150,000 from probate and the $1.5 million IRA. She pays $350,000 from the IRA to bankruptcy, plus $91,029 for income tax on the $350,000 IRA distribution.

The IRA balance becomes $1,058,971 from which the oldest daughter gives the middle daughter $750,000. The tax on this distribution is $242,915.

The oldest daughter ends up receiving $66,000 since she lost inherited funds to bankruptcy and income taxes. The middle daughter receives $750,000 from IRA and $150,000 from probate. The youngest daughter ends up receiving $150,000 from probate and was disqualified from receiving benefits from AHCCCS.

The Johnsons

Happily married for 40 years the Johnsons have three children, common to the marriage.

The Johnsons have the same setup — family members, assets and situations that occur as the Millers — however, the Johnsons set up different trusts to give them more protection.

Trusts mainly help people to avoid probate.

If you do not have a will, your estate assets default to whomever is listed in the will. The estate tax exemption is now more than $10 million. If you are married you get two exemptions without a trust. Now, the estate tax only affects a couple if it has more than $20 million in assets.

The Johnson family assets are co-owned in a trust by Mr. and Mrs. Johnson, The rental house is a limited liability company. The IRAs name spouses as the first beneficiary and their three children as second. The Johnsons’ assets total $2,290,000.

A trust is a legal contract that gives instruction on how to manage assets and for whom.

Each daughter is set up with their own trust to protect their inheritance in the event of their parents passing. The two older girls have dynasty trusts and the youngest has a special needs trust.

Mr. Johnson dies, but because all assets were held jointly with Mrs. Johnson and set up to directly funnel into the trust, probate court is avoided

Mrs. Johnson names the trust the beneficiary after her passing.

Mrs. Johnson’s financial status after five years shows the value of the assets has increased to $2,860,000.

There are no financial issues involving the husband of the oldest daughter.

However when the tenant falls and is injured at the Johnson rental house, the tenant sues the LLC as the owner of the house. The judgment is limited to the Rental Property, LLC assets for $250,000, which reduces the total assets to $2,610,000.

Mrs. Johnson has a stroke. Wife established daughter as agent in Power of Attorney.

The oldest daughter is named the trustee of the trust to manage the assets for the benefit of Mrs. Johnson.

Mrs. Johnson also named the trust the beneficiary of her estate when she dies.

She passes away and leaves all assets in the trust, including the $1.5 million IRA.

The oldest daughter gets divorced and is forced to file bankruptcy. She calls office in a panic and wants to know if she is going to have to disclose Mrs. Johnson’s IRA assets in the bankruptcy.

All of the oldest daughter’s inheritance is protected because of Mrs. Johnson’s successful estate plan. Mrs. Johnson named the trust the beneficiary after her passing and it funded the dynasty trusts of her two older daughters and the special needs trust of her youngest daughter.

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