I was told the estate of my parents was not taxable. Does this mean I can cash in the IRAs tax-free?

SITUATION: I was appointed the personal representative and trustee of my parent’s estate. The total amount of the estate is under 2MM. I had a meeting with my parent’s attorney who informed me the estate is tax free because it falls below the taxable estate level. My friends tell me I still have to pay tax on the IRAs. Who is right?

We have seen income taxes decimate estates due to misplaced words by well-intended professional advisors. There are two independent and non-intersecting taxes in America. The income tax is the one most of us think about. Attorneys are often focused on the estate tax. The tax the attorney was referring to was the estate tax. However, any accounts of retained income are still subject to income tax upon distribution.

Prior to taking any distributions to retirement plans, a competent advisor will review the options for each of the heirs. Some heirs may benefit from a lump sum distribution, some may benefit from distributions over an extended period of time, and others may benefit by refusing to inherit some or all of the IRAs!

What do I need to do to protect my inheritance from step children?


SITUATION: My financial advisor told me that the largest problems in his experience occurred after the death of a spouse with children and step children. My kids and step kids get along today. How do I arrange my plan to avoid future problems? people say I should move it into an IRA. What is the benefit of each?

Until early in 2016, moving to an IRA may have resulted in owning unsuitable and inappropriate investments within an IRA. The new DOL rules provide protection to employees who want to move their money out of their former employer’s retirement plans.

A lawyer friend told us that the playbook for estates of families with step kids goes as follows: the children of the mother harbor the feeling that the husband and his children spent their life taking advantage of their mother and justify taking the assets of the couple exclusively for the children of the mother. We have seen this play out in multiple cases where the family had no idea there were problems brewing between the two families.

Every individual has interests that are independent of any other person. Most attorneys that represent couples require they sign a conflict of interest agreement which allows the attorney to represent one over the other. In the case of step families, it may be beneficial for each spouse to have their own attorney.

Under the advice of their attorneys, the parents should create a trust that clearly describes how they want their assets divided. Portions of their estate can be retained in revocable trusts and other portions could be transferred to irrevocable trusts. Plans should be named to name guardians and POAs long before any medical or cognitive challenges occur. Further deterrents can be written indicating those family members who violate the wishes could be disinherited. These are complicated issues that require a competent estate attorney who can describe the potential conflicts to each spouse independent of the other.

A competent financial advisor serving as a fiduciary can create a flow chart that would illustrate how the assets would be distributed based on any current plan or lack of planning. The advisor could create a flow chart that illustrates how the estate would flow based on their goals and objectives and offer a comparison illustrating the benefit of the strategies. This document could serve as a template that would allow the attorneys to create estate plan documents specific to the goals of the client.

I may be getting a divorce, how do I protect my inheritance?


SITUATION: My marriage has been on the rocks for quite some time and I suspect my spouse has already been to an attorney. My father died years ago and my mother is terminally ill. She is no longer able to make decisions that will change her estate plan. What can I do to make sure my inheritance is not divorce court?

Marital assets are those assets that are acquired during the course of a marriage. Typically, the courts considered all marital assets equally owned by each spouse. Basic estate planning rules teach us that inheritances are not a marital asset, however, many people co-mingle their inheritances with marital assets which are very difficult to later untangle.

We recommend those families who inherit hold these accounts separately from marital assets even if they don’t suspect marital trouble. While it may seem divisive, it actually provides very clear boundaries that likely respect the goals and objectives of the parent.

In the event that the parent could change the estate, they could hold inherited assets in trust after they pass away with the objectives of providing income to their child with the principle continuing down the family line after the child dies. This would also protect the assets from the unknown future claims of the creditors of your children including the IRS.

To protect an inheritance, the proceeds should be held in accounts independent of any marital assets. The income from those assets should not be used to augment the living expenses of the couple and their family. Any tax liability of the assets should be paid from the accounts that generate the income. Another option is to create a trust specifically named to define them as inherited assets and to allow the trust to file its own tax return independent of the married couple. Doing otherwise could result in the accounts being deemed in the part of marital assets.