Photo: ROBERTO SCHMIDT, AFP/Getty Images

Prince Died without a Will …

Photo: ROBERTO SCHMIDT, AFP/Getty Images

Photo: ROBERTO SCHMIDT, AFP/Getty Images

Prince Died without a Will…

and You?

Legendary musician, Prince, recently died suddenly at age 57.  Prince had a reputation as a meticulous businessman and had accumulated an estate worth $300 million.  It’s inconceivable that he would never take the time to draw a last will and testament, but that’s exactly what happened.  My best guess is that as a result, his estate representative will spend millions of dollars and perhaps decades settling his estate.  What a financial tragedy!

That brings me to you and your estate plan and two questions.  Do you have a will?  If your answer is, “Yes, of course I do!”, my next question is, “Is your will up-to-date and are you certain what it says?

If you die intestate, or “without a will”

Let’s deal with the first question by assuming you don’t have a will.  In Alabama, any assets that don’t pass at your death by either title or beneficiary designation will pass as follows:

  • Married, no children or parents living. If it’s just you and your spouse, 100% goes outright to your spouse.
  • Married, no children, one or both parents living. Here, your spouse will receive the first $100,000 of assets plus one-half the balance.  The remainder goes to the surviving parent(s).
  • Married with children. If you have children, the state dictates that the first $50,000 goes to the surviving spouse plus one-half of the remainder.  The balance goes outright to the children.  Note that if the children are ‘minors’, they cannot receive property outright and, generally, the probate court judge will appoint someone as the ‘conservator’ (something like a financial custodian) to oversee the money for the benefit of the child or children.  While you may assume your surviving spouse would manage the money for your children, there is no assurance of this since it’s up to the court’s discretion.  Don’t forget, the conservator gets paid from your assets!
  • Unmarried, no children but one or more parents living. If you are not married and have no children, then 100% of your probate estate will go to your parents equally.
  • Unmarried, with children. If you are unmarried and have children, then 100% of your probate estate will pass equally to your living children.  Note that if any of them are minors, the same rules regarding the legal conservator apply.
  • Unmarried, without children or surviving parents. In this case, your probate assets will go to your siblings, equally.

Is Your Will up-to-date?

Under my second question, if you do have a will, take a moment to review it in light of the current value of your estate including your home and other real estate, life insurance, retirement and other investment plans along with personal property.  If you’re married, your assets likely go to your spouse but think for a moment about the next level of heirs.  If it’s your children, are they capable of handling the amount of money they will receive?  If not, consider the value of using a trust.

One final thought.  While your will directs the transfer of probate assets, many assets move based on either title or beneficiary designation.  I encourage you to double-check how these assets are set to transfer.  I cannot tell you the number of times a client has been ‘certain’ of a beneficiary designation or joint title only to find out they were wrong once we reviewed the actual documents.

Having a valid will is very important for every adult.  Intestate laws vary by state.  For a state-by-state guide, visit; click on ‘Resource Center’; then ‘Links’; then ‘Intestate Succession Laws- State by State’.  Your best choice is to consult with an attorney who is skilled in wills and estates.

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Contingent Beneficiary

What is a Contingent Beneficiary?

Why Contingent Beneficiaries Matter

Question: I have named two family members as beneficiaries in equal shares on my portfolio. I was advised to also name contingent beneficiaries.

What is a Contingent Beneficiary?

Will you explain what a contingent beneficiary is and what might happen if none are named? Also, I have named a different family member as POD (Pay on Death) on my savings accounts. Should a contingent beneficiary be designated on them as well? G.H.

Answer: A contingent beneficiary (a person, trust or charity) would receive your assets if the primary beneficiary (your first choice) should die before you and you fail to make any changes. For example, assume you buy a life insurance policy. It’s common to name your spouse as the primary beneficiary of your life insurance and your child as the contingent beneficiary. If your spouse predeceased you and you died having not made any changes to your beneficiary designation, your child would automatically receive the life insurance proceeds. If you had no contingent beneficiary, the proceeds would transfer according to your will. If you did not have a will, the proceeds would transfer based on the state laws (called intestate) in which you reside.

Your beneficiary designations are very important and should be thought through very carefully since a mistake can have unintended consequences. In this reader’s case, certainly no contingent beneficiary is required as long as she is ok knowing that if one of them predeceases her all of the portfolio will go to the remaining beneficiary. Of course, she can change beneficiaries at any time.

Estate Planning: Review Your Will

Have You Reviewed Your Will Lately?

Have You Reviewed Your Will Lately?

Take one moment and think about what your will says…  Who does your will leave your assets to if you were to die today?  If you are married and both of you died today, who would your estate go to?  Would it go outright to those beneficiaries or would it go into a trust?  And if it goes into a trust, when does the trust terminate?

Including any life insurance, what is the total size of your estate?  Are your heirs well equipped to handle the money or assets they will inherit?

This week is Estate Planning Week all across the nation and we want everyone to know how important it is to have a properly drawn will and accompanying estate planning documents.

If you have not reviewed your will within the past twenty-four months, then right now is the perfect time to get with your attorney or professional advisor.  A few issues you’ll want to consider are:

The Death Tax.

The American Taxpayer Relief Act of 2012 (ATRA) significantly raised the value of an estate that is not subject to the death tax (called the estate tax exemption amount).  You can leave an unlimited amount of assets to a spouse plus up to $5,430,000 of assets to a non-spouse such as a trust or directly to children.  If you are married, you can each leave up to this amount to a non-spouse for a total of $10,860,000.  This exemption amount is indexed for inflation so we expect it to rise in future years.  If your will was written before 2012, it is particularly important that you have it reviewed by a professional since many of the estate tax reduction strategies used prior to that time are less appropriate based on the new laws.

Double check beneficiary designations and account ownership.

Have you had any significant life changes in the past few years…death of a family member, divorce, significant inheritance, birth of a child or grandchild?  Take a moment and make a list of all of your retirement accounts (401k, IRAs, Roth’s), life insurance policies, and annuities.  Next, list the beneficiaries for each account.  Finally, the hard part, list the ‘contingent’ beneficiaries for each account.  Lots of folks don’t remember who their contingent beneficiaries are and the results can be disastrous.  For example, one person had his wife as the primary beneficiary of his IRA but left the contingent beneficiary blank.  The wife predeceased him and he didn’t remember to change his beneficiary.   He died and the IRA went to his estate instead of directly to his son.  As a result, instead of being able to spread out the income taxes over his life expectancy, the son had to pay the income taxes within five years.  We’ve seen a number of similar disasters related to divorcees.  Remember, minor children (under age 19 in Alabama) should not be named direct beneficiaries of any assets.

Power of Attorney (POA).

Effective January of 2012, the State of Alabama adopted a new model Power of Attorney agreement which compels financial institutions to accept and follow its terms.  POAs drawn prior to this change may or may not be accepted by various institutions.  You’ll want a new one that complies with current law.

Is a trust needed?

If you have minor children, your will should make provisions for holding your assets in a trust at least until the age of majority (age 19).  In many cases, we find that young adults are not prepared to handle even relatively small amounts of money and are better served using a trust and trustee to help manage money until they have had time to experience ‘the real world’ for several years.

Elder Care issues.

As our population ages, many of our elder citizens and their family face complex issues related to healthcare, aging and personal finances.  With careful planning, you can improve the quality of life while preserving financial assets.

Income Taxes.

Liz Hutchins, Birmingham-based lawyer and president of the Estate Planning Council of Birmingham added, “Income tax planning can be more important than estate tax considerations in many estates, especially when the total assets are less than the $5.43 million estate tax exemption. Plans may need to be revised to allow heirs to take full advantage of income tax savings after your death.  If you have a closely held business and your business succession plan includes trusts, special attention needs to be given to the appointment of the trustees due to the 3.8% net investment tax that went into effect in 2013.”

Often, estate planning involves the teamwork of a number of professionals including attorneys, Certified Financial Planner™ professionals, CPA’s, trust officers and Chartered Life Underwriters.  That’s because there needs to be a coordination of estate taxes, income taxes, multigenerational financial planning, life insurance planning and trust planning.  It’s these combined efforts that typically create the most effective estate plans.

Medicare & Social Security Questions – Be Very Careful

Social Security Question

Can I suspend Social Security and receive the 8% annual increase until I resume SS?

I’m retired and turning 65 soon. I have been receiving Social Security since I was eligible (age 62).

Answer: “No, suspending benefits to collect the eight percent delayed retirement increase is not an option since you have been taking benefits for almost 3 years. Social security will allow you to start your benefit over within 12 months of the first month of entitlement and limited to one withdrawal.  You must file a request for withdrawal of application and your benefits stop immediately. Social Security Administration will tell you how much you are required to pay back. After your repayment of benefits, you can reapply at the age your choice”, says Kimberly Reynolds, CFP and partner at The Welch Group.

Healthcare Planning for Retirment

Medicare & Social Security Decisions-Be Very Careful

Medicare & Social Security Decisions-Be Very Careful

Question: My wife and I are both elderly, and she has dementia.  At some point, she

will probably have to go into an assisted living facility.  Since I have her power of attorney, I

changed the beneficiary on my IRA’s (3 traditional and 1 Roth) to my daughter.  She is our only

child.  If I die before my spouse and she is in or out of an assisted living facility, will the IRA’s

be subject to the 5 year lookback before she can receive Medicaid?

Answer: The Medicare rules and laws are very complex so I turned to Birmingham lawyer and elder care specialist, Melanie Bradford for her insights. Here’s what she had to say:

“Medicaid rules vary from state to state.  In Alabama, there is a prohibition against a spouse disinheriting

another spouse; such an act should cause Medicaid to impose a transfer penalty for the statutory

elective share.  Currently, there is no prohibition or transfer penalty against a spouse changing

his or her non-probate estate plan; however, this can change at any moment.  The safer course of

action is to work with an elder law attorney that can prepare an estate plan that places assets

equaling the elective share in a special needs trust for the incapacitated spouse.  Such a trust does

not disqualify the spouse for Medicaid.  Instead, it provides for any needs the spouse has that

Medicaid does not cover.    Any funds remaining at the spouse’s death are passed to the children.

This effectively accomplishes all goals by providing for the spouse, preserving the rights to

Medicaid, and passing on remaining assets to children.”

When should I update my Power of Attorney?

A Power of Attorney (POA) is a document you have drawn, typically by an attorney, whereby you appoint someone as your ‘agent’ to make financial decisions on your behalf under certain circumstances.  In the typical POA, this means if you become incompetent due to sickness or injury, this person is able to step in and sign checks on your checking accounts, withdraw and deposit money into your bank account and generally act in your place for any and all financial decisions.  Often the ‘agent’ is a spouse or someone you trust to make these types of decisions for you.  Typically the POA comes in one of two forms: a general and durable POA or a ‘springing’ POA.  With a general and durable POA, your agent can act on your behalf at any time…even when you are fully competent.  With a springing POA, your agent must have a letter from your physician declaring you incompetent.  The general and durable POA is less trouble to use since your agent doesn’t have to prove incompetence but we only recommend it where you have a very high level of trust your agent won’t use it unless necessary.  Otherwise, we often recommend the springing POA.  I should note that there are many different forms of POAs that are drawn for specialized purposes.

Prior to 2012, we were finding it increasingly difficult to get financial institutions to accept validly drawn POA’s.  For example, we had a case where we submitted a request for a Required Minimum Distribution (RMD) from an IRA using a POA for an incompetent person.  The financial institution rejected the POA saying it lacked specific language that the institution required.  Failure to take a RMD in a timely manner results in a 50% federal penalty and getting an updated POA from an incompetent person is not possible…so you can see the dilemma.  We did figure a work-around in this case but the situation got so bad that a group of attorney’s drafted legislation which was passed by the Alabama legislature effective January 1, 2012, which now compels the financial institutions accept the POA.  So if you have a POA dated prior to that time it may, or may not, be valid depending on the institution.  It’s vitally important that you have a POA for if you don’t have one and become incompetent, someone will have to hire an attorney, go before the court and get a court issued POA.  This can be expensive, time consuming and the document will likely lack the flexibility that you’d prefer.  Be sure your attorney is familiar with the new law.

Can I Buy Real Estate with my IRA?

Question: I recently read about using an IRA to own real estate. I am very interested in taking money in my IRA and buying a rental property. Do you have to have a specific kind of IRA? What are the pros and cons of this strategy? L.B.
Answer: It is possible to own rental properties in your IRA and a lot of people do this. However, it generally cannot be done through a traditional brokerage firm or bank. You’ll have to open up a self-directed IRA account with a firm that specializes in custody of these types of ‘private’ investments (Google: Self-Directed IRA). The obvious advantage of holding assets in an IRA is that all income and gains will be tax deferred until you choose to make withdrawals. Owning real estate inside an IRA can have some disadvantages including:
· Depreciation tax benefits lost. One of the big benefits of owning rental real estate is that you get to depreciate the building and equipment. This benefit is lost when the real estate is held in an IRA.
· Interest deduction is lost. If you have a mortgage on the property, your interest payments are not deductible.
· Converts capital gains into ordinary income. Another advantage of owning rental real estate outside an IRA is that profits from a sale are treated as long-term capital gains, typically taxed at a maximum federal rate of 15%. Any gains from a sale of your property held inside your IRA will eventually come out as ordinary income.
In addition, there are a number of prohibited transactions. For example, you cannot buy a beach home for rental and also use the home personally. This goes for both you and family members. If you get a mortgage on the property, you cannot personally guarantee the loan.
Perhaps the best strategy for dealing in real estate inside your IRA might be to act as a lender where you hold a mortgage with the real estate as security for the loan. This way you don’t give up any of the tax benefits and the interest payments to you, which normally would be taxed at ordinary income rates, will be tax deferred.
Be sure you fully understand the fees charged by the custodian and remember that all expenses related to the property must be paid from your IRA so you’ll need to be certain that you have the necessary cash to pay unexpected bills.
Question: If I want to make a sizeable transfer to a Roth have you seen cases where a bank would loan for the taxes? B.M.
Answer: Wow! Now this is a question I have never been asked before! And no, I’ve never heard of someone taking out a bank loan to pay the taxes on a Roth IRA conversion but that does not mean it’s not possible. You could not put up your Roth as collateral for the loan but assuming the bank would give you a signature loan or accept other collateral, there are no rules that I am aware of that would prevent this. Obviously, you want to have a specific plan for repaying the loan. If you used a home equity line of credit, your interest payments might be deductible but you’d need to check with your tax advisor to be certain.
If you’d like to have me answer your financial question email me at and place in the subject line. Consult your own professional legal, tax or financial advisor before acting upon this advice.