The economic downturn caused by COVID-19 will unfortunately be with us for the foreseeable future. There has never been a better time to try to make the best financial decisions possible.
I have been working in the Bankruptcy Law area for over 20 years along with my paralegal, Vicki Craver. We have seen decisions made by folks, sometimes out of panic or frustration, that have led to regrettable outcomes.I can share some of those decisions with you.
Although it is sometimes difficult to know what to do in any given situation, I can point out traps to avoid regardless of the situation. First, normally a debt relief company is not a good idea. I have seen hard working people pay large amounts of money to these organizations only to find themselves in several collection lawsuits. This is sometimes caused by someone having, for instance, 7 credit cards or other debt problems. The debt relief outfit says: Great news! We have worked out deals with 4 of your accounts. Well, guess what happens to the other 3! Also, if you are not able to make the payments to the debt relief organization (and, of course, they keep part of your money), the other 4 that were “handled” come after you in court as well.
Creditors are also quick to tell you not to file bankruptcy. That is a self-serving statement for them because they know that a bankruptcy filing protects you from creditors (them) and they are no longer in the driver’s seat.
Another ‘trap’ is raiding your retirement accounts. Normally, retirement accounts are protected in bankruptcy and, therefore, safe. However, folks tend to see the 401k as a way keeptheir accounts current. Tragically, they deplete the retirement account and have only bought themselves a short amount of time only to be back where they started.
When a financial crisis hits, another common trap is to use available credit card limits to keep your life together. Once again, that only results in creating an even more difficult situation down the road. To be sure, credit card companies are not concerned about you putting food on the table for your family. All they want to know is when are you going to send them more money.
I would be happy to meet with you at no charge for the initial consultation to assess your situation and possibly help you avoid having to file bankruptcy. Please do not hesitate to contact me. It may be one of the best financial decisions you make.
With less than 1% of taxpayers now being subject to federal estate tax under the new tax laws, the emphasis for tax planning for most of us has shifted from estate tax planning to income tax planning. Many people have retirement accounts of sufficient size to warrant more attention to income tax planning for those assets.
A participant’s retirement account is funded with tax-deductible contributions during his or her high earning years, presumably when he or she is in a higher income tax bracket than after retirement. By making contributions during a participant’s high-earning years, the participant not only delays the payment of taxes on the contributions, but also is likely to have lower tax rates when distributions are later made.
The participant gets tax deductions for contributions to the account, and the account builds value tax-free until distributed. Maximum funding of a retirement account during one’s working years is usually a very effective tax planning technique.
DISTRIBUTION RULES DURING OWNER’S LIFETIME
With a traditional IRA, the owner has to begin taking required minimum distributions (RMD) for the calendar year in which he or she reaches age 72, by April 1 of the following calendar year.
Prior to the adoption of the “Setting Every Community Up for Retirement Enhancement” (SECURE) Act in December 2019, the required beginning date for IRAs was April 1 of the year after which the IRA owner attained age 70½. The old rule is applicable through 2019, but not to 2020 or later years. Under the old rule, if the IRA owner’s birthday was on or before June 30, the required beginning date would be April 1 of the following calendar year, but if his or her birthday was on or after July 1, the required beginning date was one year later, also on April 1. The new rule under the SECURE Act makes April 1 of the following year after you attain age 72 as the required beginning date, no matter whether your actual birth date is in the first six months or the last six months of the year.
There is a “uniform lifetime table” whereby the RMD or required minimum distribution is determined, based on the life expectancy of the account owner and the life expectancy of a second person who is 10 years younger, but if a taxpayer is married to a spouse who is more than 10 years younger, the account owner may use a “joint and survivor table,” based on the taxpayer’s age and the actual age of the younger spouse. The Life Expectancy Factor under the uniform lifetime table for an IRA owned by for a person who is age 70, is 27.4 years; for age 80 is 18.7 years; for age 90 is 11.4 years; and for age 100 is 6.3 years. The reason those life expectancies seem so long is because they are based on the life expectancies of the second to die of two lives, using 2-life tables, based on the age of the account owner and the age of a person who is ten years younger.
Please be aware that the uniform lifetime table applies to every IRA owner (not including owners of “inherited” IRA accounts), except someone with a spouse who is more than 10 years younger. It applies to someone with an older spouse, to someone with no spouse, and to a participant who has not named a beneficiary at all for his or her retirement account. It also applies to someone who has designated his or her children, grandchildren, or others – except for a spouse who is more than 10 years younger – as beneficiaries of his or her account.
Distributions from an IRA or qualified plan before the taxpayer reaches age 59½ are ordinarily subject to a 10% early withdrawal penalty, but there are exceptions to the general rule: If the IRA owner qualifies as a first-time homebuyer, for example, he or she can withdraw up to $10,000, penalty-free, to use as a down payment or to help build a home. With the cost of higher education spiraling, people are also allowed to turn to their IRAs to help pay certain college expenses, penalty-free, from their IRAs – for tuition, books and other qualifying expenses – as long as the student (you, your spouse, your child, or your grandchild) is enrolled more than half-time at an eligible educational institution. Distributions for those purposes are not subject to the 10% early withdrawal penalty, but they are subject to regular income tax.
Early withdrawals also may be allowed penalty-free through a “Substantially Equal Periodic Payment” (SEPP) plan, with specified annual distributions for a period of five years or until the account-owner reaches age 59½, whichever comes later. Again, income tax must still be paid on the SEPP withdrawals, but no penalties. A SEPP plan is best suited to those who need a steady stream of income prior to age 59½, perhaps to compensate someone whose career has ended earlier than anticipated.
SEPP plans can be boons to those who need access to retirement funds earlier than age 59½, but starting a SEPP early – or even withdrawals for educational expenses or for a down payment on a new home – will have implications for your security later, in retirement. If you spend the money now, it will not be available when you are older. Before you embark on a SEPP plan, you should get the advice of your financial planner.
DIRECT TRANSFER FROM IRA TO CHARITY
If you are fortunate enough that you do not need your IRA distribution for living expenses, and if you are charitably inclined, you can avoid income tax by making a direct distribution from your IRA, up to $100,000/year, to a charitable organization. This is called a “Qualified Charitable Distribution” or QCD. If you file a joint income tax return and if your spouse also has an IRA, your spouse can also make a QCD of up to $100,000 from his or her IRA, which will not be taxable on your joint tax return. The gift will also reduce the value of your IRA account, thereby reducing your required minimum distributions (RMDs) in the future.
QCDs may be made only from IRAs – not from 401(k)s or other similar retirement accounts – but you can roll over funds from a 401(k) account to an IRA, then make the gift from the IRA to the charity. This takes extra time, and you must meet the deadline (usually December 31) for completing the charitable gift.
The charity to which you make the gift must be a 501(c)(3) organization, eligible to receive QCDs, but may not be (a) a private foundation, (b) a “supporting organization,” which is an exempt organization which carries out its exempt purposes by supporting other exempt organizations, or (c) a Donor-Advised Fund of “sponsoring organization,” which is a public charity which accepts and manages such funds, and from which distributions may be made to other charitable organizations, as recommended by individuals or families.
Please note that the QCD is not included in your taxable income, so you cannot claim an itemized charitable deduction for your gift on your income tax return. Otherwise, you would be getting a double benefit, i.e., (1) the distribution to charity would not be taxable income on your tax return, and (2) if it had been deductible, you would also get an itemized charitable deduction on your tax return. That would be too good to be true and is not allowed. However, you can still claim a standard deduction on your personal return – not an itemized charitable deduction – in addition to excluding the income.
Another benefit is that, since the qualified charitable distribution is not counted as part of your income, it will not be subject to the limitation to charitable deductions on your income tax return – that is, charitable deductions cannot exceed 60% of your adjusted taxable income. Consequently, it is less painful tax-wise to make large charitable contributions in this manner, for those with ample other means of support.
THREE WAYS TO MINIMIZE TAXES ON REQUIRED MINIMUM DISTRIBUTIONS
One simple step, if the account owner is still working after age 72, would be for him or her to continue making contributions after that age to his or her IRA or 401(k) or similar account, which would provide an income tax deduction to offset income from the required minimum distribution. For example, if a 75-year-old person has an RMD of $5,000 from his or her IRA, and if he or she contributes $7,000 to his or her 401(k) from his or her earnings, the deduction would more than offset the taxable income from the RMD. The age limit for IRA contributions – formerly 70½ – has been removed by the SECURE Act.
There is another exception for calculating the required minimum distribution for a taxpayer older than 72 who works for a non-profit entity or who works for a for-profit company in which he or she owns less than 5% of the company, if the employer has a 401(k) program which accepts rollovers from IRAs. In that case a taxpayer may be able to roll over his or her IRA into the company’s plan, and thereafter not be required to take required minimum distributions applicable to IRAs from that account until actual retirement from that employer. If you are still employed, you will need to inquire with your employer, to see if you can roll over your IRA to the company’s 401(k) plan and if so, whether you can defer distributions until you retire.
Another (more complicated) alternative, allowed by the IRS since 2014, would be to purchase a Qualified Longevity Annuity Contract (QLAC) inside your IRA. Many consider an annuity to be a poor investment for an IRA, since both annuities and IRAs are “tax shelters” – and to hold a tax shelter within a tax shelter is a redundancy and wastes the tax benefit of one of the shelters. You get the benefit of only one tax shelter when an IRA owns an annuity.
But the purchase of a QLAC within an IRA offers a different kind of tax advantage: the purchase of a QLAC is a retirement strategy in which an IRA owner can defer a portion of his or her required minimum distributions (RMDs) until a certain age (maximum limit is age 85). A QLAC is an annuity bought with a chunk of money from an IRA now, for payouts starting years later, but no later than at age 85. Money tied up in the QLAC is not counted in calculating your RMD, so the QLAC reduces your required minimum distribution (RMD). Also, it allows the value of the annuity to grow tax-free until you reach the annuity starting age, typically at age 85. Qualified longevity annuity contracts (QLACs) can be bought inside an IRA with (a) up to 25% of the IRA’s value or (b) the amount of $135,000 (in 2020) – whichever is smaller. The annuity would be paid to the annuitant or annuitants for life after the starting age, which provides a guaranteed stream of income which the annuitant or annuitants will not outlive.
The tax benefit of purchasing a QLAC is to reduce income taxes by removing money from the calculation of the required minimum distributions (RMDs) from your IRA after attaining age 72. QLACs are legal creatures created by the IRS to address the fears of many individuals as they grow older, of outliving their money. A QLAC is an investment vehicle to guarantee that some of the funds in a retirement account may be turned into a lifetime stream of income without violating the required minimum distribution rules. The annuity will be paid, no matter how long the individual lives – that is, the recipient cannot outlive the annuity payments.
Annuities provide guaranteed payments to the annuitants during their lifetimes, but at the death of the annuitant (or surviving annuitant, as the case may be) the payments stop. Consequently, an annuity itself is not a good vehicle for passing wealth to persons other than the annuitants. If an annuitant dies (or both annuitants die, if applicable) unexpectedly early, the annuity would prove to have been a poor investment, but if the annuitants outlive their actuarial life expectancies, the annuity may prove to have been a very good investment. Even though nothing would pass to the family at the death of the last surviving annuitant, the annuity payments would presumably allow the annuitant or annuitants to preserve other assets, which would pass to the annuitants’ survivors.
To prevent a total loss of premiums paid for an annuity if the annuitant or annuitants die early, the annuity (including a QLAC), may be custom-designed in some respects to meet your needs. For example, (a) a QLAC could be a joint annuity with the primary annuitant’s spouse, whereby the annuity payments continue for the lifetime of the spouse, if he or she survives, (b) the annuity may guarantee that any unused premium at the annuitant’s death will be refunded, and/or (c) the annuity payments may be adjusted for inflation. Under (b) above, if the annuitant originally paid $100,000 for an annuity, and if the annuitant died before the annuity had paid out $100,000 in total annuity payments, then the remainder of the $100,000 would be refunded.
There are negatives to owning a QLAC in your retirement account. For example, (1) if you need money sooner than originally expected, you could not get payments from the annuity in advance, and (2) your annuity would be only as secure as the company which issued the annuity – so your money would be at risk if the company became insolvent. You need to consult with your financial advisor before embarking on such a strategy.
PROS AND CONS TO ROLLING OVER IRA TO 401(k) – AND VICE-VERSA
An IRA-to-401(k) rollover offers benefits, such as (a) earlier access to the money at age 55 without penalty (as compared to age 59½ for an IRA), and without a Substantially Equal Periodic Payment Plan (SEPP) , (b) postponing required minimum distributions if still working for the employer with the 401(k) plan, and (c) in some instances, easier conversions to Roth IRAs. Also, in some states (other than North Carolina), 401(k) accounts have protections against creditors that IRAs don’t provide; in North Carolina, IRAs are protected against creditors. Also, loans are allowable from 401(k)s, whereas loans from IRAs are not allowed. Generally, you do not want to borrow against your 401(k) account, but, if you have a temporary need which can be repaid in the future, you may, as a last resort, be able to borrow from your 401(k) and to repay the loan with interest.
There are a lot of circumstances where a traditional IRA has a leg up on a 401(k) account, which is why so many people roll their 401(k) accounts into IRAs. Advantages can be wider investment selection, often lower investment costs, and looser rules for hardship withdrawals, without penalty – for reasons such as higher education expenses and first-time home purchase (limit $10,000).
DISTRIBUTIONS AFTER DEATH OF IRA OWNER/PARTICIPANT
It is very important for you to complete the beneficiary designation forms for your retirement account. Sometimes participants fail to fill in the necessary paperwork, or when they do fill in those documents, it is without professional advice. If no beneficiary is named, the default beneficiary is often the participant’s estate. Although naming an estate or trust as a beneficiary may seem logical, you’ve got to be careful. Doing so may subject an estate or trust to unexpected rules and implications, and sometimes imposes them with tax results which might seem unfair or even nonsensical.
Some rules which apply to beneficiaries of IRAs are:
If a spouse is the beneficiary of the owner’s IRA at the owner’s death, the spouse can “roll over” the balance in the account into his or her IRA, or into a “rollover IRA” opened by the surviving spouse, on which the spouse will be subject to similar distribution rules as an original IRA owner. That is, the RMD will be based on the joint life expectancies of the surviving spouse and an individual who is 10 years younger. If the spouse is under age 72, distributions from the rollover IRA will not be required until the spouse reaches age 72. However, the surviving spouse may take discretionary withdrawals before age 72 and can receive distributions in excess of required minimum distribution (RMD) after reaching age 72.
If a beneficiary is someone other than a spouse, the account may not be “rolled over” into the beneficiary’s IRA or a rollover IRA, but the IRA may be transferred to an “inherited IRA” account, which is not the same as a spousal “rollover” account. A beneficiary other than a spouse must take RMDs from the inherited IRA account starting the following calendar year, no matter what the age of the beneficiary. That is, the beneficiary of an inherited IRA cannot wait until he or she reaches age 72 before taking distributions. Since annual distributions are mandatory, there is no 10% penalty for distributions from inherited IRAs made to beneficiaries under the age of 59½. Under the old rules applicable prior to the enactment of the SECURE Act effective December 20, 2019 – an inherited IRA was subject to a one-life mortality table instead of a two-life table, and life expectancy was not recalculated as the beneficiary grew older. Under the SECURE Act applicable to accounts of participants who died on or after January 1, 2020, an inherited IRA must generally be distributed to the beneficiary over a period of no more than 10 years.
On a different related topic, the IRS has not issued guidelines – but there have been several private letter rulings (requiring some expense to taxpayers) – to allow spousal rollovers of qualified plans and IRA benefits when an estate or trust is the beneficiary of the account, (a) when the spouse is sole beneficiary of the estate or trust, and (b) has a general power of appointment over the trust. This can apply where there is no named beneficiary and the “default” beneficiary is the participant’s estate.
In a 2018 private letter ruling, a decedent failed to designate any post-death beneficiary and the plan was payable by default to the decedent’s estate. The decedent had no will, and under state law the estate was split among the surviving spouse and the children. The children were adults with no children of their own and all executed valid disclaimers, leaving the spouse as sole beneficiary of the estate. The IRS approved a spousal rollover in that case.
“STRETCH” IRA STRATEGY
“Stretch IRAs” have been popular for many years as a strategy for slowing down the mandatory payout of IRAs, by designating much younger beneficiaries at the owner’s death – such as grandchildren – to take advantage of their longer life expectancies (and consequently, lower required minimum distributions) than older beneficiaries. Until adoption of the SECURE Act discussed in the following paragraph, an IRA left to a beneficiary other than a spouse was payable over the life expectancy of the beneficiary. That is, if the beneficiary had an actuarial life expectancy of 30 years , the required minimum distribution (RMD) for Year 1 would be 1/30th of the account’s value, for Year 2 would be 1/29th of the account’s value, etc. If the beneficiary died before the account was closed out, his or her successor would continue, on the original beneficiary’s schedule until the account was depleted.
That tactic has been brought to a screeching halt – the SECURE Act, signed into law on December 20, 2019, and generally effective on January 1, 2020, has changed that all, by generally requiring that inherited IRAs by beneficiaries other than spouses must be paid out in no more than 10 years. That is, inherited IRAs left to much-younger beneficiaries will generally need to be paid out in 10 years, instead of over the actuarial life expectancy of the beneficiary. There are exceptions applicable to certain “eligible designated beneficiaries.” If your current estate plan includes a “stretch” IRA, you should go back and re-visit your plan, to see whether it still fits your needs, given the new 10-year payout rule.
An “eligible designated beneficiary” who is not subject to the 10-year payout requirement includes an individual who is (i) the employee, or IRA owner, (ii) a spouse of the participant, (iii) a minor child of the participant, (iv) a person who is disabled or “chronically ill,” as defined in Internal Revenue Code Section 401(a)(9)(E)(ii)(IV), or (v) any individual who is not more than 10 years younger than the participant. But upon the death of the “eligible designated beneficiary,” the 10-year rule kicks in, instead of continuing to be distributed over the remaining life expectancy of the original “eligible designated beneficiary.” When a minor beneficiary attains the age of majority applicable in his or her state (usually age 18 or 21), the 10-year rule kicks in, but a child may be treated as though he or she had not reached the age of majority, if he or she (a) has not completed a specified course of education as described under Internal Revenue Code Section 401(a)(9)-6 and is under 26 years of age, or (b) if applicable, so long as the child continues to be disabled after reaching the age of majority, see Reg. § 1.401(a)(9)-6, A-15.
The new legislation will not affect the terms of payout for original designated beneficiaries of participants who died before January 1, 2020, and it will be applicable only to accounts of participants who die on or after January 1, 2020, subject to the proviso that, instead of continuing to follow an original designated beneficiary’s minimum distribution schedule if the original designated beneficiary dies on or after January 1, 2020, the distribution schedule for any successor beneficiaries will be re-set to a 10-year payout schedule.
A POSSIBLE ALTERNATIVE WHICH SPREADS OUT RETIREMENT DISTRIBUTIONS
An alternative strategy which is still available would be to leave an IRA upon death to a charitable remainder trust (CRT), which would pay a flat percentage each year to the beneficiary or beneficiaries, either for their lifetimes or for a term not to exceed 20 years, whichever the Trust Grantor selects, following rules applicable to IRAs. A CRT is a tax shelter itself, and no income tax would be payable when the IRA was paid to the CRT, but distributions from the CRT to individual beneficiaries of the trust would be taxable to those individual beneficiaries when distributed. In the meantime, the investments inside the CRT could accrue tax-free, perhaps allowing the value of the CRT to grow. At the death of the last surviving beneficiary, the trust would terminate, and the account would be paid to a charitable beneficiary or beneficiaries, as set forth in the trust agreement for the CRT.
Because laws are changed from time to time, and because it is possible for a retirement account owner to become incapacitated, it is a good strategy for the owner to have a durable power of attorney which would be effective in the event of incapacity, specifically empowering the Agent under the durable power of attorney, on behalf of the owner, to change the beneficiaries of retirement accounts and even to create entities such as charitable remainder trusts.
SECURE ACT OF 2019
The SECURE Act was enacted in December, 2019, to expand the opportunities for individuals to increase their savings and to make administrative simplifications to the retirement system. In addition to some of the changes discussed above (moving the required beginning date to age 72 instead of age 70½, permitting deductible IRA contributions after the required beginning date for withdrawals, generally eliminating “stretch” IRAs, etc.), the SECURE Act makes it easier for small businesses to offer multiple employer plans by allowing otherwise-completely unrelated employers to join the same plan, and It also makes it easier for long-time part-time employees to participate in elective deferrals, and it allows penalty-free distributions from qualified plans and IRAs for births and adoptions. Also, penalty-free distributions are allowed from defined-benefit plans or IRAs for the birth or adoption of a child. These withdrawals may be repaid to such a retirement account.
The old rules were not repealed, but the provisions of the SECURE Act were superimposed on the old rules. Consequently, the ins-and-outs of the SECURE Act are very complicated, and there is a separate blog on our law firm’s website which discusses that Act in more detail.
Donor-Advised funds are a tax-advantaged way to make gifts to charities over time. A donor-advised fund is basically an account with a public charity which has a donor-advised program and which qualifies as a “sponsoring organization.” Gifts are made to the fund, which is held in the name of the donor or in the name or names of the donor’s family members. Gifts from donors to the fund qualify as charitable deductions for income tax purposes, and distributions are made from the fund to charitable organizations over time. Distributions from the fund do not count as additional charitable deductions for the donor, since the donor has already gotten a charitable deduction when the original gift was made to the fund.
Donor-advised funds are usually opened during the lifetimes of the donors, and distributions are made to charitable organizations which the donors select. Since the sponsoring organization is responsible for seeing that the tax laws have been complied with, the donors make “recommendations,” and not binding directives, as to the distributions to tax-exempt organizations. Normally those requests are honored unless the requested done does not qualify as a tax-exempt organization. Donor-advised funds may also be created, or increased at death under a will or trust agreement of the donor, often with family members of the donor to make distribution recommendations to the charitable organization after the deaths of the donors.
Donor-advised funds may be used to support a number of public charities. They are sometimes used as alternatives to private foundations.
Private foundations are separate legal entities created by a donor or donors. They require ongoing maintenance and expense. Also, the donors receive smaller tax benefits than they would receive with a similar gift to a donor-advised fund at a public charity. Legally, a private foundation allows the donor or donors to retain more control over the investments, grants, and control of the entity.
Donors often prefer a donor-advised fund instead of a private foundation for convenience, reduced costs, greater tax benefits and ease of gifting, with no worries about minimum distributions or the tax issue of excise tax on net investment income, which would be applicable to a private foundation.
The donors may make a large charitable gift to the donor-advised fund, and have the gift used to make periodic distributions over time, with the donors not having to worry about compliance costs and requirements.
“Bunching” of Charitable Deductions
Under the new tax laws with higher standard deductions, donors who traditionally have made charitable gifts of several thousand dollars a year in deductible contributions now often receive reduced or no tax benefits from making their customary annual distributions.
For example, consider married donors with $120,000 annual income, who traditionally give about $5,000 per year to charitable organizations. On their tax returns, they cannot claim medical deductions of less than 10% in 2019 (formerly 7.5% in 2017 and 2018), so often the
taxpayers would not itemize medical deductions. They cannot deduct more than $10,000 per year in state and local taxes, and there is no longer a deduction for miscellaneous itemized deductions. Unless they have high home mortgage interest, if they donate $5,000 to charitable organizations in 2019, their total deductions may be less than their standard deduction of $24,400 (in 2019), in which case they would receive no income tax benefit for charitable gifts totaling $5,000.
In the alternative, let’s consider “bunching” their contributions by the use of a donor-advised fund. For example, they could give $50,000 to a donor-advised fund in 2019. If their itemized deductions otherwise would be $10,000 in state and local taxes and $5,000 in home mortgage interest, the gift to the donor-advised fund itemized tax deductions would now total $65,000 ($50,000 gift to the donor-advised fund, plus $10,000 in state and local taxes and $5,000 in mortgage interest), as compared to a standard deduction of $24,400. Their income taxes for 2019 would be reduced by over $10,000, assuming they were in a 28% marginal tax bracket.
The donor-advised fund would receive $50,000 in gifts, but it would be possible to distribute from the fund only the donors’ customary $5,000 to charitable organizations, as requested by the donors. The charities would receive their customary gifts in 2019 and the donor-advised fund would retain the remaining $45,000. In future years similar gifts could be made from the donor-advised fund each year, as directed by the donors or their family.
The donors could resume claiming a standard deduction on their subsequent income tax returns, until the fund was depleted. If the donors died or became incapacitated, their families could continue to make charitable contributions from the fund.
The above example illustrates moderate gifting and the effect of “bunching,” but donor-advised funds are often utilized for very large gifts, often at the death of a donor, sometimes in lieu of a private foundation.
Families With Existing Private Foundations
If the donors already have a private foundation which they find expensive and burdensome to maintain, the private foundation could distribute its assets to a donor-advised fund with a sponsoring organization. The sponsoring organization would then be responsible for compliance with federal laws, instead of the donors or their family’s being responsible.
Another possible benefit would be to bring one’s children into the gifting process during the donors’ lifetimes. After the donors’ deaths, the children would continue to make recommendations for charitable gifts from the donor-advised fund.
Most sponsoring organizations allow grantors or designated family members as advisors for charitable gifts for at least one generation, and some allow two generations.
Most community foundations have donor-advised fund programs and sometimes other organizations such as colleges and universities maintain similar funds, where a certain percentage of contributions must go to the sponsoring organization itself, such as 50%, and the remainder can go to other charitable organizations.
A donor who wishes to establish an ongoing philanthropic program – for themselves and/or their families – should consider establishing a donor-advised foundation as part of their ongoing gifting, and possibly establishing the habit of ongoing gifting to charities for their families.
In Winston-Salem, the Winston-Salem Foundation, Suite 200, 751 West Fourth Street, Winston-Salem, NC 27102, (336) 725-2381, can be contacted about the establishment of a donor-advised fund. See https://www.wsfoundation.org/contact.
Several larger cities and counties in North Carolina have large community foundations, similar to The Winston-Salem Foundation. The North Carolina Community Foundation is a single statewide community foundation with a network of affiliate foundations across the state, which serve many rural and less-populated counties, and which can serve as a sponsoring organization for donor-advised funds in their communities. A list of affiliated community foundations funds can be found at nccommunityfoundation.org/communities.
It is very easy to set up a donor-advised fund with a sponsoring organization. Just contact the organization and see whether it is a sponsoring organization for donor-advised funds. If so, they will meet with you and draft a letter whereby the organization agrees to be the sponsoring organization for your donor-advised fund, which describes the purposes for your fund, etc. They will make it easy for you.
Many employers offer benefits to their workers as part of their total compensation package. These employee benefits can take the form of disability insurance and retirement plans, including 401(k) plans and pensions. These benefits are often governed by ERISA, the Employee Retirement Income Security Act of 1974.
ERISA is intended to protect the interest of employees who are enrolled in employee benefit plans to make sure they receive the benefits they were promised. If you are an employee and have been denied benefits from an employer-sponsored plan, you may have a claim. It is important that you get timely legal advice about how to assert and preserve your claim to receive these benefits. If you file a hasty or incomplete appeal, you can lose your rights. Many pitfalls can trap the unsuspecting claimant and lead to the denial of legitimate benefits.
In most cases, if an ERISA claim is denied, an employee must follow the procedure for administrative appeals set out by the insurer or plan sponsor. Only those issues raised during administrative appeal are typically preserved. For example, if you are appealing the denial of disability benefits, you should submit your medical records that show you are disabled and opinions from your doctors that support your claim. You must also raise all issues underlying your claim for benefits. If you do not resolve your claim with the company, a court will consider only the issues you raised in the administrative process and the records contained in the administrative appeals. Getting advice early can help preserve important rights.
ERISA is a specialized area of law that not all lawyers practice. If you have an ERISA claim, you should find an attorney with experience in this field. We would be happy to meet with you to help you to better understand your options and to pursue your claim.
ERISA claims are typically filed in Federal Court. A judge will hold a bench trial or hearing based on the paperwork you presented in the administrative record. There is no jury trial. ERISA claimants cannot recover claims for emotional distress or punitive damages. In some cases, however, a court may award attorney’s’ fees to the claimant. The court can award only past benefits that have accrued, and cannot award benefits for future expenses.
In 2019, 6,619 ERISA cases were filed, down from a peak of 8,938 in 2010, according to a report that analyzed court filings uploaded to the federal Public Access to Court Electronic Records, or PACER, database. Last year, 3,797 workers sued over benefit claim denials, according to the report. In 2010, 3,118 people filed these suits. The overall amount of damages awarded in ERISA suits has also remained relatively consistent, though the number of cases in which damages are awarded has fallen. Last year, 740 cases resulted in damages awards (roughly 20 percent of claims), resulting in a total of $280 million being awarded. In 2017, $343 million went to claimants in 806 cases, and in 2016, $232 million went to 843.
The SECURE Act (acronym for Setting Every Community Up for Retirement) was enacted on December 20, 2019. It is intended to encourage Americans to save for their futures and to incentivize businesses to make retirement saving opportunities more accessible to their employees. The bill makes some substantial changes to retirement plan legislation which will affect both individual and business taxpayers.
Here are some of the significant provisions:
The age at which required minimum distributions (RMD’s) must begin went from 70 ½ to 72. Note that if a taxpayer was 70 ½ in 2019, RMD’s must be withdrawn for 2019 and 2020 even if he or she won’t be 72 until 2021.
Previously, an individual aged 70 ½ or older on December 31st could not make contributions to a traditional IRA. This restriction no longer applies. (There was and continues to be no age restriction for Roth IRA contributions.)
Taxpayers may withdraw up to $5,000 from a defined contribution plan or IRA as a “qualified birth or adoption” distribution without incurring a penalty. The distribution is still subject to income tax. The distribution must be made during the one-year period beginning the day the child is born or the day the adoption is finalized.
Tax-free 529 Plan distributions of up to $10,000 (lifetime limit) may be made for certain apprenticeship programs and student loan payments. However, taxpayers may not deduct interest paid on a qualified education loan to the extent the interest was from a tax-free distribution.
Employer-sponsored retirement plans may provide arrangements whereby participants may borrow from their accounts under various arrangements. Beginning December 20, 2019, loans which an employee can access by using a credit card are prohibited. Accordingly, such loans will now be treated as taxable distributions.
Taxpayers may not contribute more than their taxable compensation to an IRA. Previously, stipends and non-tuition fellowship payments to graduate and postdoctoral students were not treated as compensation. For tax years beginning after December 31, 2019, these payments are treated as compensation for purposes of calculating allowable IRA contributions.
Benefits of the “stretch IRA” – long an estate planning tool – have been severely curtailed. Previously, those who inherited IRA’s and defined-contribution plans could withdraw distributions (and pay tax on the withdrawals) based on their life expectancies. Beginning in 2020, beneficiaries will have 10 years to spend down these amounts. The five exceptions to this change are when the beneficiary is –
the surviving spouse,
a minor child of the deceased,
a disabled person,
a chronically ill individual, or
a person not more than 10 years younger than the owner.
Once minors reach the age of majority, the 10-year rule applies. Defined benefit plans do not fall under the new rule.
Before the SECURE Act, small business employers were allowed an annual tax credit for three years equal to 50% of the costs – up to a maximum of $500 – of starting and administrating a plan. Beginning in tax years starting after 2019, the $500 maximum has been increased to the greater of –
the lesser of $250 times the number of non-highly compensated eligible employees, or $$5,000; or,
An additional credit of $500 per year is granted to small business employers that adopt automatic enrollment provisions.
Previously, automatic enrollment arrangements could not exceed 10% of employees’ pay. Starting in 2020, the 10% limit still applies for the first year, but goes to 15% thereafter.
Before 2020, retirement plans had to be adopted as of the end of the employer’s tax year. For business tax years beginning after 2019 employers have until the due date (including valid extensions) of the tax return for the year to adopt a plan.
Previously, employers could exclude from their defined contribution plans any employees who worked less than 1,000 hours per year. Under the new law, 401(k) plans must allow employees who are at least 21 years old and have worked 500 hours per year with the employer for at least three consecutive years to make elective deferrals. The three-year time window cannot include 12-month periods beginning before 2021.
Multiple Employer Defined Contribution Plans (MEP’s for short) are plans adopted by two or more unrelated employers. Because of economies of scale and shared administrative costs, many small businesses that otherwise would find them cost prohibitive are able to offer retirement benefits to their employees through MEP’s. However, the unified plan rule (also known as the “one bad apple” rule) meant all participants suffered if one employer neglected to meet the various qualifications. For plan years beginning after December 31, 2020, an exception is available if one participant fails to meet the qualifications and either can’t or won’t make the necessary corrections.
Costs of the SECURE Act are largely being offset by increased penalties when filing requirements for plan forms are not met on a timely basis.
Estate planning is more than simply deciding who gets your assets after your death. It includes a wide range of matters, such as (1) planning for yourself and for your family in the event you become incapacitated; (2) the appointment of guardians for your minor children, if any, in the event of the deaths of both parents; (3) the protection of assets for minors, or for beneficiaries who cannot manage money, are incapacitated, or otherwise need asset protection; (4) planning for family members who are nonresidents or noncitizens of the United States; and (5) planning for a myriad of other personal issues for your family, including tax planning.
Please note that the reasons listed above for estate planning are not necessarily limited to wealthy individuals. It can be very important to a person of modest means to see that his or her assets are used to benefit the proper beneficiaries in a wise and appropriate manner.
We hope the following discussions will be helpful:
Wills are a common estate planning tool and are the most basic device for planning the distribution of an estate upon death. Wills that are 100% handwritten by the Testator and which are either kept with the decedent’s valuable papers or are given to someone else for safekeeping, are called “holographic” wills and do not have to be witnessed, provided that two witnesses attest to Probate Court as to the Testator’s handwriting, when the holographic will is presented to the court for probate after the decedent’s death. North Carolina wills that are not entirely in the Testator’s handwriting must have two witnesses, and preferably both witnesses and the Testator will sign in the presence of a Notary Public. If there was no notary public for the signatures of the testator and the witnesses, the Clerk of Superior Court may still probate the will, after the witnesses’ signatures have been duly proven to the Court.
Unless the Will is filed with the Court and is found by the court to be valid, a purported Will has no legal significance, so any paper which purports to be a will should be filed with the Court and you should request the Court to “probate” the Will (i.e., to certify the document to be valid). By the way, a Will can be probated (i.e., certified) without having a full court administration.
Probate (Court Administration):
One meaning of “probate” is the process whereby a decedent’s will is presented to the Probate Court (i.e., The Office of the Clerk of Superior Court) and the Court determines whether or not the will is valid. In an effort to avoid confusion, we will refer to that process as “probate (certification).”
If the will is found to be valid, an Executor or other personal representative will be appointed to take control of the decedent’s assets, and to notify creditors by direct notice and/or publication of a newspaper notice to creditors. That person will be responsible for tax filings, if applicable, and for paying debts and administration expenses. This process is also called “Probate” of the Estate, and to avoid confusion we will sometimes refer to this process as “probate (administration).” The executor pays valid claims and the remaining assets are distributed to the beneficiaries pursuant to the terms of the will. After these things have been done properly, the Probate Court will close the estate file.
Probate Avoidance (or Avoiding Court-Supervised Administration of an Estate):
Since probate (administration) documents are matters of public record, the family can maintain some privacy, while saving some court charges, by avoiding probate (administration). Probate (administration) can be avoided in several ways, such as by joint ownership of assets with survivorship or by naming beneficiaries in ownership documents, which will pass outside probate. Revocable trusts also hold assets in the name of the trustee, and the trust’s assets do not pass through court probate (administration).
Consequently, many individuals seek to avoid probate (administration), or at least to minimize the process, by a combination of joint accounts with survivorship, by naming beneficiaries for transfer on death of bank and brokerage accounts, and by naming beneficiaries for other assets, including life insurance and retirement accounts. Real estate can pass by survivorship to a joint tenant with survivorship rights, or to a surviving spouse under a “tenancy by the entirety” (a form of joint ownership applicable only to husbands and wives).
Irrevocable Trusts may be used as estate planning tools, sometimes to hold life insurance policies and often for the distribution of assets for the benefit of family members who are minors or developmentally-disabled beneficiaries, and sometimes to prevent wasteful spending by a spendthrift child, or to protect assets for a family member who is in a shaky marriage or who is in a high-risk job or profession. Also, certain types of trusts can provide for management of assets and the disposition of assets to protect family wealth for several generations and are typically called generation-skipping trusts (GST) or “Dynasty” Trusts.
This article cross-references you to other related topics, such as the following:
Who gets your assets if you die without a will? This is not as simple as one might think. North Carolina has laws which deal with the disposition of the estates of decedents who die without wills, called the North Carolina Intestate Succession Act, some provisions of which might surprise you and likely would not be what you would want. Also, please be aware that some assets pass by beneficiary designation or by survivorship to individuals and do not pass under the Intestate Succession Act.
Do you need a Durable Power of Attorney, a legal document which authorizes someone to act for you and to sign legal papers on your behalf if you are incapacitated?
Do you need a Health Care Power of Attorney and Advance Directive, to authorize someone to make health care decisions for you, which may include decisions whether or not to resort to extraordinary means to prolong your life if you are terminally and incurably ill, and to allow you to die a natural death in those circumstances?
Should you have a Revocable Living Trust to avoid the need for court probate at your death, i.e. court supervision, to insure that any assets belonging to you at the time of your death are used to pay your debts, funeral and administration expenses, etc., or can you rely on family members or other trusted individuals to administer your assets without court supervision? A revocable trust is not a matter of public record and affords your loved ones with some privacy concerning the assets which you own on the date of death and to whom those assets have been left.
Would it be appropriate to create Irrevocable Trusts for the benefit of others, either during your lifetime or after your death?
If you are a business owner or partner in a business or LLC, should you consider having a Business Succession Plan for the transfer of your business interest upon your retirement, death or disability?
Would your family benefit from tax planning? With the federal estate tax exemption equivalent at $11.4 million in 2019 and increasing each year, the need for estate tax planning is not very important to many of us. But there are other tax issues, such as income tax considerations, which could benefit a family of moderate wealth, such as step-up in the cost basis of assets upon death.
This article cannot include all the estate planning possibilities and alternatives, but it is intended to give an overview of the issues involved.
It is becoming more frequent for one spouse to be a non-citizen of the United States. A different set of rules applies to non-citizen spouses than to US citizens, even if the non-citizen spouse has resided in the US for many years, and even if he or she has children who are US citizens.
When it comes to basic estate planning, residents who are non-citizens should have documents similar to those of citizens. The estate of a resident spouse who is a non-citizen must be administered in the United States, just like the estate of a US citizen, and the same rules generally apply to estate tax returns for non-citizens as for citizens. Both spouses should have wills, durable powers of attorney for financial matters, health care powers of attorney, declarations of desire to die a natural death, and sometimes revocable trusts, just like spouses who are both U.S. citizens.
A US citizen can leave property to someone who is not a US citizen or a resident, the same as he or she can leave property to US citizens. This applies not only to wills, but also to joint bank accounts, retirement accounts, life insurance, etc. However, there are some tax issues and complications about which married couples, one of whom is a non-citizen, should be aware – especially if they have high net worth, but in some instances when they have moderate wealth.
PROPERTY TRANSFERRED TO A NON-CITIZEN SPOUSE
The most notable differences between estate planning and estate administration, where there is at least one non-citizen spouse – as contrasted with estates with two spouses who are both US citizens – concern gift and estate taxes. A US citizen or resident may make unlimited transfers of assets – either during life or at death – to a spouse who is a US citizen, without gift or estate tax consequences, but if one spouse is a noncitizen, (a)transfers to the non-citizen at death generally do not qualify for the estate tax marital deduction, and (b)lifetime transfers to a US citizen or resident to a non-citizen spouse without gift tax consequences are limited per year to $155,000 in 2019, indexed for inflation in the future – which is generous, but is not unlimited.
The simplest and best way to deal with tax issues arising out of the fact that one spouse is not a US citizen would be for the non-citizen to apply for US citizenship. He or she does not necessarily have to give up citizenship in his or her native country. The US allows dual citizenship, but some countries do not. A person with dual citizenship gets all the tax benefits of being a US citizen.
In the planning process for a married couple, one of whom is a non-citizen and does not want to apply for citizenship, the tax benefits of making gifts to the non-citizen spouse within the annual gift tax exclusion limit, should be considered as a possible useful tool.
Because the threshold for estate tax is so high ($11.4 million in 2019 and indexed for inflation) it is not important for most of us to utilize the estate tax marital deduction in our planning, but (a) for couples with high net worth, estate taxes may be a very important consideration, and (b) the current lifetime exemption is scheduled to expire in 2025, and it is possible that the laws could be re-written before that date, so it is advisable to consider addressing those possible eventualities in one’s estate planning.
When both spouses are U.S. citizens, the first spouse to die can leave any amount of money or other assets to the surviving spouse, either outright or in a “marital trust,” completely free of estate tax. By utilizing the unlimited marital deduction, a couple can completely avoid federal estate taxes at the first spouse’s death, even if the deceased spouse has an extremely net worth. If the surviving spouse is a non-citizen, on the other hand, the transfers from the decedent to the surviving spouse will not automatically qualify for the estate tax marital deduction, and other steps must be taken, if the deceased spouse has a large estate, to avoid unnecessary estate tax.
Those assets may be made to qualify for the estate tax marital deduction, even after the death of the US citizen or resident spouse, if (a) the surviving spouse becomes a U.S. citizen on or before the filing deadline for the decedent’s federal estate tax return (within nine months after the date of death unless a six-month filing extension is obtained, in which case the filing deadline would be 15 months after the date of death, instead of nine months), or, (b) in the alternative, those assets are put into a Qualified Domestic Trust (QDOT) for the benefit of the surviving spouse prior to that estate tax filing deadline, and a QDOT election is made on a timely-filed estate tax return for the decedent.
Because there may be unexpected delays in an application for citizenship, a QDOT trust agreement should be drafted in favor of the noncitizen spouse, even if the spouse has applied for citizenship, and if the citizenship application has not been approved some time prior to the filing deadline, the assets should be transferred to the QDOT. If the QDOT is created and funded in a timely manner, and if the appropriate tax election is made on the Form 706, US Estate Tax Return for the decedent’s estate, the QDOT assets would qualify for the unlimited marital deduction.
If a surviving spouse becomes a US citizen after the QDOT has been created and funded, the trust assets may later be distributed to the spouse and the trust terminated, if the terms of the trust agreement so allow.
BEWARE “TAX TRAP” WHEN A DECEASED SPOUSE IS A NONRESIDENT ALIEN
Because the lifetime gift and estate tax exemption applicable to a U.S. citizen or resident is so high ($11.4 million in 2019), many people (including many attorneys) are not aware that a different set of rules is applicable to “US-situated” assets belonging to nonresident aliens, including spouses of U.S. citizens, and they may have to pay extremely high estate taxes, if a nonresident alien spouse dies first and leaves his or her “US-situated” assets in a manner which does not qualify for the estate tax marital deduction.
An estate tax return (Form 706-NA) must be filed if a nonresident alien’s “US-situated” assets exceed $60,000 in value – a much lower threshold than one might expect. “US situated” assets include real estate, tangible personal property (i.e., “things” like jewelry, furniture, collectibles and home furnishings) in the United States, and securities of U.S. companies. Certain countries have treaties with the U.S. government, which may impact the taxation of those assets.
Please note that lifetime taxable gifts made by a nonresident alien are taken into consideration in determining whether or not the tax filing threshold for an estate tax return has been met, as lifetime taxable gifts are included in the taxable assets belonging to a deceased nonresident alien. That is, gift tax and estate tax are unified for nonresident aliens in much the same manner as for US citizens and residents, but with a much lower exclusion amount.
Property left by a nonresident alien spouse to a spouse who is a US citizen will qualify for the estate tax marital deduction on the Form 706-NA, Federal Estate Tax Return for Nonresident Aliens, but property left to a non-citizen spouse must be put into a Qualified Domestic Trust (QDOT) and all the QDOT requirements must be met, in order to qualify for the estate tax marital deduction on the estate tax return for a nonresident alien decedent. If the deceased spouse is a nonresident alien, there is a good possibility that the other spouse will be a US resident only, instead of being a US citizen, so special care should be taken in order to qualify property left to a non-citizen spouse for the estate tax marital deduction. .
A determination as to which assets are “US-situated” assets and which are not, is often difficult to determine – that is, which assets may be subject to US estate tax for the estate of a nonresident alien. For example, currency which is physically located in the United States is subject to estate tax, but cash deposits in US banks are not subject to estate tax. Go figure?? It is possible that bonds would be taxable if owned directly by the decedent, but would not be taxable if owned by a partnership which is not subject to US estate tax.
Consequently, we recommend that you consult with an experienced tax professional concerning possible estate tax on US-situated assets for a nonresident alien.
This material is intended for informational purposes only and should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified tax professional.
If a loved one passes away, and after the funeral and other personal matters have been attended to, someone needs to determine whether an estate administration will be needed, whereby a personal representative for the decedent (usually called an “executor” or “administrator”) will be appointed by the probate court (the Clerk of Superior Court in North Carolina) to pay debts, funeral and administration expenses, file tax returns, etc., and to distribute the remaining assets to devisees (under a will) or to heirs (if there is no will).
Whether or not you make an appointment with our office, we suggest that you make a copy of the attachment linked to this article, titledItems to Bring to Your Initial Appointmentand gather the information included on that list, in order to determine how to proceed. That information will be needed to determine whether an estate administration will be needed or is not needed. If you would like, an attorney in our office will be happy to meet with you to make such determination.
A North Carolina Will should be filed and probated in the office of the Clerk of Superior Court in the county of the Decedent’s residence. The word “probate” has two common meanings concerning estates: The first is that the probate of a will is the process by which the Probate Court determines a Will to be valid or not valid. If valid, the Court “probates” the Will, or certifies it to be the Decedent’s Will; we will refer to this meaning as “certification,” in an effort to minimize confusion. The second meaning of “probate” refers to the process by which the estate of a decedent is administered, i.e. The probate of an estate is the administration of the estate with the Court. We will refer to this meaning as “administration,” to minimize confusion.
If there are no assets or very few assets in the Decedent’s name, it may be possible to avoid a full administration of the Decedent’s estate. For example, it may be possible to have the title to a motor vehicle transferred to a new owner without having to go through a full estate administration. Likewise, tax or medical refund checks can often be cashed without a full administration of an estate, but other procedures will need to be followed. See linked article describing alternatives to full administration of a decedent’s estate.
Please be aware that assets payable at death to a named beneficiary, or assets owned in joint names by co-owners with survivorship rights, etc. are generally not required to go through a full administration in Probate Court. Also, real estate left to specific individuals under a Will generally goes directly to the named individuals, and does not technically go through court administration, but if title is to be transferred by those individuals within two years after death, it will usually be necessary to have an administration of a decedent’s estate. In that case, an Executor would be appointed by the Court, who could release the real estate from potential creditors’ claims.
If you gather the information shown in the Items to Bring to Your Initial Appointment, our office will be happy to meet with you and advise you whether or not a full administration will be needed, and to discuss what you will need to do.
Whether or not a full administration is required, the original Will should be filed with the Court and certified by the Court to be a valid will. Occasionally assets are overlooked at the time of death and are discovered later, perhaps years later, in which case it is easier to transfer those later-discovered assets to the proper recipients if the will was certified to be a valid will shortly after the date of the decedent’s death, rather than waiting until later to have the will probated.
If you have a preliminary meeting with our office to evaluate what you will need to do to settle a Decedent’s Estate, you will not be required to retain our firm to represent you. You may go to another attorney or even try to administer the estate by yourself without an attorney, if you wish.
When someone dies, the person who will be responsible for handling the estate needs to look for the deceased person’s original will and to have it filed with the probate court (the Office of the Clerk of Superior Court in North Carolina) in the county where the decedent resided.
If there is a will, the will probably names an executor, who will be responsible for handling the estate. If there is no will, the closest family member will generally be responsible for handling a decedent’s estate and will be called the “administrator,” rather than the executor.
If you do not know whether there is a will, the person or people who were closest to the decedent should look for a will and take responsibility for it, if one is found.
If you do not know where to look, look in places like desk drawers, file cabinets, and boxes of personal papers at home (or at work, if applicable). Some people keep wills in a safe deposit box at a bank or credit union, but it may be difficult to access the box unless you are a co-owner or you have been specifically given access by the decedent by signature card at the bank or credit union. If you locate a box and cannot access it, you may need to contact the office of the clerk of court for permission to enter the box.
If you know who the decedent’s lawyer was, the lawyer may have the original signed Will, so you should contact him or her, or notify him or her of the decedent’s death. If the lawyer has the will, he or she may insist on filing it with the court himself, instead of giving the original to you, but the lawyer should be willing to give a copy to the named executor.
If you find a copy of the will, but cannot locate the original, and if the attorney does not have the original or notes which indicate where the original was to be kept, one possible place to check is with the probate court in the county where the decedent was residing at the time the will was written, as well as the county where he or she resided at death. The Office of the Clerk of Superior Court in North Carolina will hold original wills filed for safekeeping. The clerk’s office will not give you the original will if one is being held there, even if the decedent had moved to a different county before his or her death, but will advise you if they have a will and they will cooperate with the clerk’s office in the county of the decedent’s residency at death. Most jurisdictions permit a later discovered will to be admitted to probate, even though a previously probated will has not been set aside. There are no specific procedures in the North Carolina General Statutes dealing with the situation. The clerk of court is vested with exclusive original jurisdiction over wills, but will caveats or probates in solemn form can eventually be determined by a superior court judge. North Carolina case law appears to require the first will to be set aside before the second will can be admitted to probate, since the probate of the second will is considered to be a collateral attack upon the probate of the first will. This presents a conundrum, or a chicken-or-egg problem, concerning how one should proceed.
Since there are no guidelines in the General Statutes, different counties may follow slightly different procedures. We suggest filing the second will with the clerk of superior court, who may decline to proceed until a caveat or probate in solemn form of the first will has been concluded. But the upshot is that the first will can be set aside, and the second will can eventually be probated.
Wills are typically headed by a title like, “Will of John Doe” or “Last Will and Testament.” A will which was prepared by a lawyer might be stapled to a piece of colored paper (often blue or gray) and might be kept in an envelope marked “Will” or “Estate Planning Documents”, etc.
You might find a handwritten document, which may or may not be titled as a will, but the substance of which may actually be a will. Handwritten wills (called “holographic” wills) may be valid in North Carolina under certain circumstances. Sometimes, a signed document which simply says “I leave my personal residence to Mary Doe” might be a valid will, even though it is not titled as a will. Holographic wills must be 100% in the Testator’s handwriting and holographic wills are not witnessed. If a handwritten will is witnessed, it must be probated as a witnessed will.
Holographic wills in North Carolina should be kept with the decedent’s valuable papers or given to a third party, to hold for safekeeping.
“Codicils” are documents which change or add to the terms of a will without entirely revoking the prior will. Most people simply write new wills and revoke their old ones, but sometimes they write codicils, instead. Each apparent codicil should be filed for probate with the probate court. Codicils may be witnessed, just like a will, or they may be handwritten. Holographic codicils are subject to the same rules as holographic wills. A witnessed will may be modified by a holographic codicil. Both documents must be probated by the probate court.
Whether or not a full estate administration is necessary, the person who has possession of the original will must file it with the probate court in the county of the decedent’s residence after the death of the will-maker (the “Testator”) .
If you find only a copy of the will and cannot find the original, it is possible that you can file the copy with the probate court and present evidence that it should be accepted as the original. To prevail, however, you will need a credible explanation as to why the original document is not available, and to present evidence to that effect.
If you have reason to believe that someone has an original will but does not want to produce it, you can ask the clerk of superior court to bring that person in front of a probate judge, and to produce the original will.
It is suggested that you ask an experienced probate attorney to assist you.
It is more common now than it was, even a few years ago, for United States citizens to make financial provision in their estate planning documents for non-US citizens and nonresidents of the United States.
We have linked an article concerning Qualified Domestic Trusts (QDOT’s) for noncitizen spouses of United States citizens or residents. Bequests to non-citizens do not qualify for the federal estate tax marital deduction, even where the noncitizen spouse has been married to a US citizen or resident and has been living in the United States for many years. Perhaps he or she has several children who are US citizens. That discussion deals with United States Estate Tax, which is a special tax on large transfers of wealth from a person at death to other persons, which is separate and apart from income tax. Large lifetime gifts to non-citizens, including non-citizen spouses, are subject to United States Gift Tax, linked is a discussion of Gift Tax, Estate Tax and GST tax. Gift Tax was originally adopted to prevent individuals from avoiding Estate Tax by making lifetime gifts. Estate Tax and Gift Tax work in tandem with each other.
This article deals with a tax with which most of us are very familiar – income tax. The rules are very complicated for nonresident alien beneficiaries of US estates and trusts, as discussed below.
That is, this article discusses the income tax complications when an estate or trust has beneficiaries who both are noncitizens and nonresidents of the US – called nonresident aliens.
For income tax purposes, a non-US citizen who is a resident of the US pays income tax on his or her income just like citizens, and he or she is considered a “US Person” for income tax purposes.
Beneficiaries may be classified for US tax purposes as “US persons” and not as nonresidents, under certain fact situations. US persons include United States citizens, resident aliens (holders of green cards), and residents who meet the “substantial presence” test (generally those in the United States for 183 or more days each year over a 3-year period), or residents of Mexico or Canada who regularly commute to jobs inside the US. Others who may be classified as U.S. persons include certain government-related individuals, certain teachers and students, and some individuals with medical conditions which were originally contracted within the United States.
Generally traditional estate planning tools such as wills, trusts, life insurance, Section 529 educational savings plans, and annual gifting may be used for transfers to nonresident beneficiaries who are not US citizens. Some financial institutions require the completion of special forms and registrations for life insurance or for brokerage accounts that are payable to a nonresident alien beneficiary. But the transfer of income-producing assets to nonresidents can create income tax complications, whether or not they pass through an estate or trust.
Naming nonresident aliens as beneficiaries of US estates or trusts can be tricky because they may be subject not only to US tax laws, but also the laws of the country where foreign beneficiaries reside. There may be US taxes to be paid and/or taxes of the foreign country, and there are regulations, tax treaties, tax credits, etc. which may be applicable.
When a decedent dies and leaves assets to foreign beneficiaries, the executor or administrator of the decedent’s estate must determine the tax status of each foreign beneficiary, and whether it is necessary to withhold United States income tax on distributions of income from the US estate to each foreign beneficiary. The executor or administrator is required to file tax forms which are not required for estates that have no foreign beneficiaries.
Similar issues arise when a trust is created which has nonresident beneficiaries. Unlike most decedents’ estates, which are temporary in nature, trusts often last many years, during which time the trust must continue to comply with the laws of the United States and the laws of the applicable foreign country or countries.
In order to determine the tax status of a foreign beneficiary, the executor, administrator or trustee (collectively as referred to as Fiduciary) should provide to each foreign beneficiary a Form W-8BEN, to be filled in by the beneficiary and returned to the Fiduciary. That form requires the name of the individual beneficiary, his/her country of citizenship, personal residence address and mailing address, and foreign tax identification number, if any. If a foreign beneficiary also has a US Tax Identification Number (e.g. SSN), it must be included also.
Generally, a Fiduciary can rely on the information provided by the foreign beneficiary on that form for up to three years, but a new Form W-8BEN must be obtained from each foreign beneficiary every three years, updating his/her information, if he or she remains an income beneficiary.
The withholding rate for income distributions to foreign beneficiaries is usually 30%, which a Fiduciary is required to withhold from income distributions. The Fiduciary has a legal responsibility to pay those withheld income taxes to the United States Treasury each year. In many instances the foreign beneficiary receives a deduction or credit on his or her income tax return in his or her home country for US taxes paid, which softens the impact of the high US withholding tax rate but that does not simplify the filing requirements for the Fiduciary.
Withholding tax is required for a foreign beneficiary, for income which is distributed to the beneficiary – as a general rule there is no withholding tax on distributions of principal, such as a monetary bequest which does not include income earned on the monetary amount.
The withholding rates for some countries are sometimes less than 30%, due to tax treaties between the United States government and the foreign country. The rules for tax credits also vary from country to country.
Another complication for a US estate or trust is the requirement that the estate or trust must file Forms 1042, 1042-T and 1042-S in a timely manner for each applicable tax year. Form 1042 concerns how much income will be withheld for income tax withholding purposes for US-source income, for tax withholding purposes. Form 1042-S is concerned with payments of US source income made to foreign persons, and a separate Form 1042-S is required for each beneficiary. Form 1042-T is the Annual Summary and Transmittal of Forms 1042-S for the estate or trust.
Nonresident aliens who have US income from an estate or trust are required to file a Form 1040NR or a Form 1040NR-EZ in the United States, as well as any necessary tax filings in the beneficiary’s home country.
In summary, it is important for someone administering an estate or trust to know of these requirements when there are foreign beneficiaries of the estate or trust. They should also be aware of foreign beneficiaries of retirement accounts or life insurance policies, or persons who will receive assets as a surviving co-owner of assets, even if those assets do not go through probate. Often even an experienced estate planning or administration professional should seek advice and assistance from other professionals who deal regularly with nonresident beneficiaries.