Estate Planning Principles and Laws
Updated September 2023
Whether you are married or single a well crafted estate plan is the best "gift" you can leave your family and loved ones. The true starting point in planning your estate should be to ask yourself "what are my objectives?"
(i) security and privacy of plan for family and loved ones?
(ii) control over estate during your lifetime?
(iii) minimize tax liability and cost of administration?
The Federal SECURE Act of 2020
(SECURE - Setting Every Community Up
For Retirement Enhancement Act)
Under previous Federal law (2019 and before) when a non-spouse individual (i.e. the beneficiary) inherited a Individual Retirement Account (IRA), 401(k) or other similar workplace retirement plan from a deceased original account holder such beneficiary was required to receive or "take out" annual minimum distributions from such inherited accounts (i.e. Required Minimum Distributions) based upon the age and life expectancy of such beneficiary. The Required Minimum Distributions (RMDs) were based upon published Internal Revenue Service (IRS) Life Expectancy charts for individuals. As a result of such previous law many non-spouse beneficiaries could effectively delay or "stretch" out the full distribution of the assets of a inherited retirement account over many years based upon the age and life expectancy of such beneficiary.
Beginning on January 1, 2020 the provisions of the SECURE Act of 2020 require a non-eligible designated beneficiary of an inherited retirement account (including a ROTH IRA) to withdraw all assets of such account by the 31st of December of the 10th year following the original account owner's death. Such law does not apply to an eligible designated beneficiary.
A non-eligible designated beneficiary is defined as non-spouse individual who does not meet one of the requirements to be considered an eligible designated beneficiary.
An eligible designated beneficiary is defined as (i) a surviving spouse, (ii) a minor child of the original account owner, but only until such child attains the age of majority which in most states is age 18, (iii) a disabled beneficiary, or (iv) a beneficiary who is not more than ten years younger than the original account holder.
According to current IRS Letters Rulings issued in 2023 it appears that annual Required Minimum Distributions (RMDs) are required for non-eligible designated beneficiaries during such 10 year distribution period if the original account owner had already reached their "required beginning date" (RBD) i.e. being the date when the original account owner is required to commence taking their own RMDs. If the original account owner had not reached their "required beginning date" (RBD) then there are no required annual RMDs required of the non-eligible designated beneficiaries, but the assets of the account must still be completely withdrawn by the 31st of December of the 10th year following the original account owner's death. It appears from current IRS Letter Rulings that RMDs are also required of ROTH IRAs.
The annual RMDs for a non-eligible designated beneficiary are based on the original account owner's life expectancy or the non-eligible designated beneficiary's life expectancy, whichever is longer. Standard IRS Life Expectancy charts apply, as revised annually.
In addition, according to current IRS Letter Rulings (and due to the confusion of the application of the prvisions of the Secure Act of 2020) if a beneficiary was required to take RMDs for 2021 and 2022 and failed to do so, then such RMDs will be not need to be taken for such years and no penalty will be assessed. It appears RMDs will be required for 2023 and annually thereafter.
Your should consult with your financial advisor or your accountant as concerns these new laws and rules and whether they may apply to your particular situation.
The new SECURE Act of 2020 will be a major disadvantage for young non-eligible designated beneficiaries as they will be required to take out more money from inherited retirement accounts over a shorter period in time and most likely resulting in a higher federal income tax burden (and if applicable, state income tax burden) during the required 10 year distribution period.
Federal Gift & Estate Tax Considerations
Annual Gift Exclusion 2023
Every individual donor can gift $17,000 annually to any number of donees and not be liable to pay federal gift tax. Married couples can gift $34,000 per donee if they apply "split gift" rules. Annual donor gifts of more than $17,000 per donee will be sheltered from gift tax due to the donor's lifetime gift tax credit. In accordance with the Taxpayer Relief Act of 1997 the annual gift exclusion amount will be indexed for inflation annually and rounded to the next lowest multiple of $1000. In addition, a donor may also indirectly gift unlimited amounts of money to a donee by directly paying the donee's medical expenses and/or educational expenses. There will be no impact upon the annual gift exclusion or the lifetime gift tax credit as long as such expenses are paid by the donor directly to the medical provider and/or educational institution.
Gift Tax Exemption 2023
For the year 2023 the gift tax exemption will be $12,920,000 per individual. A 40% tax rate will apply to gifts over the $12,920,000 threshold. Any gifts made during life (above the annual gift exclusion amount) will decrease the estate tax exemption applied upon demise.
Estate Tax Exemption 2023
For the year 2023 the estate tax exemption will be $12,920,000 per individual. The American Taxpayer Relief Act of 2012 permanently extended the "portability" provisions which allow the executor of a deceased individual's estate to transfer any unused exemption amount to the deceased individual's surviving spouse. A 40% tax rate will apply to transfers over the $12,920,000 threshold.
Unlimited Marital Deduction
There is an unlimited marital deduction for property transferred between husband and wife during life or after the first to die. According to federal tax law unlimited amounts and value of property may be transferred and neither spouse will be liable to pay gift or estate tax as a result of such transfer. Upon the first to die of husband or wife the unlimited marital deduction applies by default to property held jointly between them.
Incapacitation and Durable Powers of Attorney
A well crafted estate plan will also address the issues of mental and physical incapacitation. Have you planned for the possibility of becoming incapacitated? Are you aware of the consequences of not planning for such event in your life? Who will manage your affairs during such period?
Guardianship and Conservatorship Proceedings
In the event you become incapacitated and you have not planned in advance to address such event your family or loved ones will be required to petition the Probate Court in order to have someone appointed as your Guardian and Conservator. Such legal proceedings are costly, time consuming and require direct Court supervision. You may avoid such legal proceedings by creating Durable Power of Attorney documents as part of your estate plan, but you must do so prior to becoming incapacitated.
Durable Power of Attorney for Health Care Decisions
You may avoid Guardianship proceedings by implementing the provisions of the Missouri Durable Power of Attorney for Health Care Act (as set forth in Chapter 404.800-404.865 of the Missouri Revised Statutes) and creating a Durable Power of Attorney for Health Care Decisions. Such document will thoroughly address all matters relating to your personal health care affairs should you become incapacitated. In such document you appoint a representative, known as your Attorney in Fact, to manage your health care affairs and it is recommended you also appoint two successor representatives.
Durable Power of Attorney for Financial Decisions
You may avoid Conservatorship proceedings by implementing the provisions of the Missouri Durable Power of Attorney Law (as set forth in Chapter 404.700-404.735 of the Missouri Revised Statutes) and creating a Durable Power of Attorney for Financial Decisions. Such document will thoroughly address all matters relating to your personal financial affairs should you become incapacitated. In such document you appoint a representative, known as your Attorney in Fact, to manage your financial affairs and it is recommended you also appoint two succcessor representatives.
Living Will/Advance Health Care Directive
It is also recommended you create a Living Will/Advance Health Care Directive (i.e. your right to die statement) declaring your desire to die a natural death. Such document is usually incorporated into a Durable Power of Attorney for Health Care Decisions as both documents work together to address your health care affairs. In such document you may set forth your desire to die a natural death in the event (i) you have sustained substantial and irreversible loss of mental capacity and are unable to eat and drink without medical assistance, and/or (ii) you have an incurable or irreversible condition in which death will occur within a relatively short period of time regardless of the application of life-prolonging medical procedures.
The Probate Process
An individual who dies with property titled solely in his or her name without having a valid Last Will & Testament in existence is said to have died "intestate." In such case the family or loved ones of such individual will be required to petition the Probate Court to commence probate proceedings of the deceased individual's estate. The laws of intestate probate administration as set forth in the Missouri Revised Statutes will apply and will dictate the manner in which the deceased individual's property will be distributed and to whom it will be distributed, possibly resulting in a distribution scheme not desired by the deceased individual.
Last Will & Testament
An individual may avoid the Intestacy Laws and dictate to whom his or her property shall be distributed upon demise by executing a valid Last Will & Testament. An individual who dies with property titled solely in his or her name with having a valid Last Will & Testament in existence is said to have died "testate." In such case the Last Will & Testament is submitted to the Probate Court and probate proceedings are commenced. The laws of testate probate administration as set forth in the Missouri Revised Statutes will apply, as will the provisions set forth in the Last Will & Testament.
A major consideration with planning an estate solely with a Last Will & Testament is whether such plan will effectively achieve all of an individual's plannng objectives, as there are several disadvantages associated with the probate process:
(i) Delay of full distribution of assets to the heirs (normally at least eight months to one year due to the need to file a 1041 tax return).
(ii) Fees are required to be paid to both the Personal Representative and the Attorney (e.g. a $400,000 estate = $11,500 fee paid to each).
(iii) Additional costs of administration, including various court costs and possible cost required to purchase bond.
(iv) The Last Will & Testament becomes a public document and the probate proceedings are public as well.
Many individuals seeking to avoid the probate process will plan their estate by retitling their assets with another individual as joint tenants. There are several disadvantages associated with joint tenancy ownership (with the qualified exception of assets held by married couples as joint tenants by the entirety) including:
(i) Upon retitling an asset into joint tenancy form a completed gift may have been made to the receiving joint tenant and if more than $16,000 in value (the current amount of the annual gift exclusion) the gifting joint tenant's then available lifetime gift tax credit is reduced by the excess amount over the $16,000 gift.
(ii) There may be a loss of a full "step-up" in basis for an asset retitled in joint tenancy form, as the basis "steps-up" only in proportion to the deceased joint tenant's fractional interest.
(iii) An asset retitled in joint tenancy form becomes subject to the claims of creditors of the receiving joint tenant.
(iv) Assets held in joint tenancy form may become "frozen" in the event of a joint tenant's incapacitation.
(v) The signatures of all joint tenants will be required for all transactions, including routine transfers.
The Missouri NonProbate Transfers Law
The Missouri NonProbate Transfers Law (as set forth in Chapter 461.003 - 461.081 of the Missouri Revised Statutes) provides an alternative estate planning method for various assets and property.
The provisions of the law allow an individual to retitle certain assets into a nonprobate form and thereby avoid the probate process. One of the best and most effective planning tools allowed under the law is use and implementation of a Beneficiary Deed for real estate.
There are several advantages to planning one's estate by implementing the provisions of such law, including:
(i) The owner retains legal title and full control of such assets during his or her lifetime.
(ii) Assets are distributed to the named beneficiaries upon the demise of the owner without proceeding through the probate process.
(iii) There is a full "step-up" in basis upon the transfer of such assets (if properly titled).
(iv) Assets are not subject to the creditor claims of the named beneficiaries during the original owner's lifetime.
The Living Trust
A trust is a legal entity which holds title to assets for the use and benefit of a person (the beneficiary). There are various types of trusts used in estate planning and the most popular type is the Revocable Living Trust. Such trust is normally created by an individual (the grantor) for his or her benefit during life and upon demise the assets of the trust estate are distributed outright or held in trust for the benefit of another person (the beneficiary). This type of trust is amendable and revocable by the grantor during his or her lifetime. The grantor funds the trust with appropriate assets by retitling such assets into the name of the trustee. The grantor may be the trustee of his or her trust and the trust provisions should provide for successor trustees to manage the trust upon the demise of the grantor.
Although trusts can be expensive to create and administer there are many advantages to implementing a trust as the main planning tool of an individual's estate plan, including:
(i) Continuity of management of assets held in trust, even during the incapacitation of the grantor.
(ii) Absolute control over assets held in the trust estate during the lifetime of the grantor and a secure method of distribution of such assets upon the demise of the grantor.
(iii) Assets held in the trust estate avoid the probate process upon the demise of the grantor.
(iv) Provides a private estate plan which is not public record.
(v) Provides an efficient method to plan for and avoid the assessment of potential estate tax.