A Trust To Hold your IRA or 401k For Your Partner

Qualified plan are one of the largest, if not the largest, asset many people own.  Qualified plans include a variety of programs designed to help you plan for you retirement; 401k, IRA, SEP, TIAA-CREF, 403b and Roth are all examples. 

Thanks to DOMA's demise, if you are married to your partner you can leave your qualified plan to your same-sex spouse without forcing recognition of income or estate taxes.  If you are not married, though, your Partner's options are limited to liquidating the plan and paying any deferred income taxes or electing to "stretch" the plan over your partner's projected life span, which defers the income tax recognition.  If your Partner elects to stretch, he or she must begin taking portions out beginning the year following your death and pay income tax on what is removed. 

Each choice results in your Partner owning the qualified plan.  As owner, the surviving Partner selects to whom the remaining money goes at his or her death after paying further inheritance and estate taxes.  Further, during your Partner's lifetime the qualified plan is exposed to creditors.

For all or some of these reasons, one Partner may wish to leave a large qualified plan to help care for a Partner, but may also wish to retain the right to name who receives any money remaining at the surviving Partner’s death, provide protection from the Partner's creditors and to avoid inheritance and estate taxes at the surviving Partner's death.  

A Trust is a great solution for these cases.  At our firm, for simplicity we call these trusts, "IRA Trusts", even if they hold other qualified plans such as 401k or TIAA-CREF accounts.   Since 2006 congress has mandated that every qualified plan must allow you the use of an IRA Trust.  The IRA owner names the IRA Trust as beneficiary, but during his lifetime he continues to own the IRA as he always has.  Nothing happens until the IRA owners dies.   

For example, Joe in Philadelphia formed an IRA Trust for his Partner, Bob and at Bob's death the trust says any remaining money passes to Joe's niece (lets call it the "Bob IRA Trust").  Joe then names the Bob IRA Trust as beneficiary of his IRA.  During his lifetime Joe owns and controls the IRA as he always had.  At Joe’s death, because he named the Bob IRA Trust as beneficiary, the IRA pours into the Bob IRA Trust.  The Trustee, who could be Bob, then elects to “stretch” the IRA over Bob’s lifespan.  This defers income tax recognition so the IRA funds can be invested for Bob's retirement.  The Bob IRA Trust owns the IRA so the IRA funds are sheltered from Bob's creditors.  Later, at Bob's death, the remaining IRA funds pass to Joe's niece free of Joe's creditors' claims and without paying inheritance or estate taxes. 

 

These trusts have many uses.  You can find more information at my website (klenklaw.com) or feel free to contact me with any questions you may have.

If Your Partner Dies, Can You Survive Financially?

Talking about money is hard.  Talking about money and death is even harder.   Worse yet, if you are in a long-term relationship with someone, is avoiding the conversation until it is to late.  Take a deep breath and start the conversation, as it will protect you both.  Here are some discussion starters, pick one to break the ice and the rest will follow. 

• No matter how high or low, you both have a standard of living to which you are accustomed.  If your partner should die, will you be able to maintain that lifestyle?  Are you willing or able to live with less?   
• Is your partner leaving you money and if so, how much and are there strings attached? 
• Inheritances might come outright or in a protective trust.  Either have advantages and disadvantages.  Is there an advantage to you if the money you receive is sheltered from future creditors?  
• Are you leaving a 401k, which means you will pay income tax when taking the money out later in life, or is it a tax-free inheritance, like life insurance?  The total amount in a 401k might sound adequate to care for your partner, but will it still be enough after you calculate the income taxes due as you take the money out?
•  Can you afford to maintain the house on your own income and the inheritance, or will the house have to be sold?  The same calculation must be done for that shore house in Atlantic County, the Pike County Pocono cabin or that time share in Mexico.  
•  Will you still have health insurance, or does that benefit die with your partner?  

Lots of questions…and there are more.  Meeting with a good financial planner and your estate planning attorney is a good idea.  Run through the questions, make plans for your future.  If your partner or you should die unexpectedly there will be many things to worry about, try to reduce the stress and anxiety with a little planning now.  (for more on estate planning,  go Klenklaw.com).

Estate and Asset Protection Planning for Same Sex Couples after DOMA

In case you have not heard….the U.S. Supreme Court recently struck down the Federal Defense of Marriage Act (DOMA). This results in married same-sex couples now having the same legal rights as heterosexual married couples under Federal Law. What does this mean for estate and asset protection planning for LGBT couples?

First, to qualify for benefits you need be married. We shall see if the regulations that are finalized recognize a New Jersey Civil Union as a marriage or not. Same-sex married couples will now be able to:

• Claim the marital deduction for gift and estate tax planning;
• QPRT (Qualified Personal Resident Trust) planning for the surviving same-sex spouse and children becomes an interesting option;
• Spouses named as beneficiaries on qualified plans (IRAs, 401ks, Roths, 403bs, etc.) will have the option to roll the plan into a “Spousal IRA” deferring income taxes;
• The surviving spouse can elect portability of the deceased spouse’s unused estate tax exclusion;
• Calculating the basis of the surviving spouse’s jointly held property becomes much more simple;
• Formation of non-reciprocal irrevocable trusts for asset protection and estate tax planning becomes more manageable;
• Now same-sex couples can gift split for gift tax purposes;
• The surviving spouse will have access to Social Security, Medicare ad Medicaid benefits that once only applied to heterosexual married couples; and
• There will be more! It will be fascinating to watch the changes that will be taking place over the next year.

Voluntarily Stopping Eating and Drinking: V.S.E.D.

Sometimes, after a long struggle with illness and with full knowledge that death is certain and the future holds nothing but suffering, a person will decide to voluntarily stop eating and drinking (VSED), which hastens the inevitable end. In theory, your right to make decisions about your body is sacrosanct. However, in practice legal and family issues can conspire to block your stated desires. I have placed a full article about this subject on my website, but wanted to emphasize an important LGBT aspect to this issue. Should you ever decide to VSED, expect there to be a response from your family. It is important that you have completed a valid Medical Power of Attorney* naming a person who is aware of your desired plan and is possessed with a personality to stand up to the pressures, and perhaps legal actions, that your family might bring.

* Sometimes called a Living Will, Health Care Directive or Advanced Directive.

IRA Designations for Minors, A potential trap.

Do not fill out those IRA designations without some thought! If you are a single parent of a minor child and name your child as the beneficiary of your qualified plan (IRA, 401k, 403B, etc), at your death the financial institution managing your plan will likely require the child's financial guardian to execute certain elections that pertain to qualified plans. This means incurring an unnecessary expense in petitioning the court to appoint a financial guardian (or "Guardian of the Estate"), which could be a bank or an individual that you would not have selected. Instead, form an IRA Trust...an option that every qualified plan must give you since 2006. This way you select the person or bank that manages your child's IRA and, as a bonus, the IRA is protected from your child's creditors, spouse, and you get to select the age your child gains control over the funds.

Pennsylvania Inheritance Tax

If I have a Philadelphia County registered same-sex relationship can I
avoid the Pennsylvania Inheritance Tax?

No. Unlike the Commonwealth of Pennsylvania of which Philadelphia is
part, Philadelphia has recognized domestic partnership status and
allows partners to register formally as domestic partners. Philadelphia
then recognizes the couple as married for tax issues such as real
estate transfer taxes. Unfortunately, the Pennsylvania Inheritance
Tax is a Commonwealth Tax, not a Philadelphia Tax, so Philadelphia's
recognition has no effect on the Inheritance Tax. This means that
instead of paying the 0% married couple inheritance tax rate a registered Philadelphia domestic partner will pay the 15% rate of inheritance tax between unrelated persons.

Civil Union in One State, Divorce in Another...

If I have entered into a New Jersey civil union with my partner, but
now we are Pennsylvania residents, can we get a Pennsylvania divorce?

In limited circumstances when both parties are in complete agreement
Pennsylvania courts have dissolved same-sex marriages and civil unions
but when there is not complete agreement the parties are not allowed
to use Pennsylvania courts. To get your divorce you have to return to
New Jersey, or whatever state created your same-sex marriage, civil
union or domestic partnership, become a resident then file for divorce
or dissolution. This is a changing area of the law, so don’t be surprised if in 2012 or sometime soon after this answer changes.