OT: any CPA's here?

[Richard]

If so and you're willing, I'd like to ask you a tax question on a 401-K rollover/distribution.

ok, here goes... I've been debating on asking publically or via PM so if you care to answer feel free here or via PM/email.

background: I'm an investment advisor, recently had client pass away. Her 401 is being taken over by her two children (30/34 years old) and they're going to do a "stretch IRA"

Fine... no problems yet...all accounts & paperwork are in good order.

They have just received their rollover checks from their mothers plan. Checks are properly made out to their local "BDA" accounts (beneficiary distribution account) however... and here's the rub...

(using round numbers for sake of conversation)

The checks for each child are say, $100,000. Of which $95,000 is the true 401K taxable rollover money and another $5,000 of which is after tax contributions.

(total 401 was we'll say, $200,000)

"My people" say we can deposit the full 100K into each account. I said great...can we then do a distribution to get the nontaxable portion OUT???

Answer was no.

They are saying that the only way the children can get the nontaxable part out is, each year when they take their RMD's, then a portion of that will be the nontaxable part. Each year, the kids will have to remember (or calculate??) the nontax part of the distribution and adjust their returns accordingly...

Part 2... I'm told: each distribution (say, 2,000 RMD) would represent the first year, $1,900 taxable and the 5% ($100) would NOT be taxable

Part 3: Each kid (I'm told) COULD if they were so inclined... forget about the nontaxable part, because out of a $2,000 distribution, if $100 is taxable and they were in the 50% bracket, then we're really talking about a $50/year tax consequence... the kids can each decide if that IS a problem or they can "push the easy button" and forget the headaches & pay the tax...after all...they will still have the initial $5,000 in the account which will be growing tax deferred so it's not like this is a punative negative (having the nontax part inside the account)


Before someone suggests they talk to a CPA, I have in fact already TOLD them to talk to A (their?) CPA... Given how non-technical they are, I thought I'd also ask one so that I might possibly hear first hand the logic of how this might work.

In 22 years in this business, I've never come across this situation so it's a learning experience for me.

Ironically... (and this is just some extra in case it helps anyone)

Anyway, ironically, in 22 years I've never had a case like this and if anyone is reading this far, I STRONGLY urge you to read the next part carefully and then make sure you don't repeat the same mistake....


Scenario: I had an account with a guy. I 'inhereted' the account when another rep left so I never actually met the guy. We talked every now & then & got along very well... he lived in another city is why we never met.

I went a year without him returning any of my calls. Wife called me one day & let me know he had some kind of rare kidney disease and at 61 years old... it was a negative prognosis.

We spoke a while later and I knew he was weak so instead of taking his 'healthy time' on the phone, I let him go but still wanted to say some things, so I wrote him a 3 page (single spaced) letter with some concerns I had about his financial world.

Seems in hindsight, I was spot on with my fears. Another year went by and the wife finally called back... he had passed away several months prior.

He DID get my letter (a very heartfelt one I might add) but he got sick right afterwards, then went to nursing home, then passed away.

Ok, so I had an appointment with Mom to meet 'next monday".

Sunday prior, the daughter called, cancelling the appoitment with Mom. Seems the mother had cancer (58 years old) and had to go back to the hospital herself.

Long tragic (and very sad) story later...

Dad died, held 2 IRA's, 1 brokerage account, 401K NONE with me. He held with me, another (third) IRA account

Other than the account he held with ME, he did not have ANY beneficiary designations on ANY of his accounts, including his 401K.

That itself is a problem however, since his spouse was named on his death certificate, she is the presumptive beneficiary and she got it all... bad news here was... she's in the hospital with cancer and SHE has yet to roll HIS accounts, over to HER

They sent her home to die...saying she had but a week to live (she actually lasted about two)

So, here I am, seeing before me HIS IRA's with no beneficiaries, his 401 with none, HER two IRAs with NO beneficiaries... this was a real mess...

I got the daughter & said... you (fortunately) have a chance to minimize a major problem here (both parents not withstanding)

I explained to her that her fathers money WOULD go to her mother except if her mother passed away now, that all the money would then leave "her" IRA's and become taxable...

Bottom line... it was a herculean task but I got all the forms from these OTHER brokers, got them here, filled out, little 'stickies' where her mother needed to sign and put the 401K beneficiary form on TOP, telling the daughter that if her mother signed ONLY ONE of the forms that this was probably the most imporant one...

We got it all done (kudos to the daughter) and averted a REALLY big mess. Actually converted the brokerage accounts to "TOD" (transfer on death) accounts so the kids could have quicker access to those assets without having to go through probate (I'm not an attorney)

Lesson here:

If you've read this far...

1. Make sure that ALL of your beneficiary type accounts, have UP TO DATE beneficiaries and you might also contemplate contingent beneficiaries. Had this father put his kids down as contingent, none of this would have been an issue.

2. (again, I'm not an attorney)... talk to one & see if a living trust makes sense for you and if so...get it done "now" and not "sometime soon"

Let me put it this way... the more effort YOU put into cleaning up YOUR financial life is (in my opinion) really more of an act of love towards your loved ones...after all...if something happens to you, then SOMEONE is going to have to clean it up. The more you do 'now', then the less they'll have to do at what would be understandably, a VERY emotional & trying time for them (your loss)

Sorry for a book but every now & then I just get a feel to write one Just to let you know, this is the condensed story... (really )

 

[dmccarty]

Richard,

You gave some very good advice.

My grandfather had to be removed from his house last year and has been bouncing between the hospital and the nursing home. Last weekend he was expected to die so he was back to the hospital but he pulled through again.

My family had tried for years to get my grandparents to sign over/add, can't remember which, some of the investments they held. They just would not do it for some reason. There has also been a long struggle to get them to sign over power of attorney. Not sure where that stands at the moment. Mainly my grandparents did not want to bother with any of the paperwork, there was always next month.

For years my grandparents have said they did not want to be a burden on the family.

Well, now they are a burden. It could be worse that is for sure but if they had done as asked things would be much easier on my family. Its hard enough having to deal with a sick family member but add the burden of money issues and government process just makes things worse. Especially when my grandmother is no longer able to deal with the money issues and without power of attorney its kinda hard to get things done.

Since my grandfather has been moved into a nursing home they have to pay out of pocket until his assests are spent before the feds will take over payment. Sounds harsh but its the fair thing to do. Years ago the family tried to get them to do some paperwork that would have protected this money from being spent. My grandparents did not do the paper work so grandpa's life savings are being spent at the rate of $5,000+ per month.

If they had signed a few pieces of paper they could have protected that money for my grandmother and made things much easier for my mother who is trying to handle the money issues. But they did not do the paperwork.

What is a shame is that my grandparents, products of the Depression, worked hard and saved. When the finally could afford to spent some money they did not. They took a vacation to Europe once after they retired. They should have done more with the money. In the end the money will either go to the nursing home paying for his care or if he dies before using it up, it will be dispersed into little amounts around the family.

It would have been better if they had splurged just a little and lived some of their dreams.

Later,
Dan

 

[randy41]

I am a CPA. You are in an area that I am not familiar with. Not many CPA's will be. Your legal staff will know best. There are many different ways that 401K documents can be authored and they usually mandate how the distributions are handled.
I suggest you find a CPA who specializes in EB...or an attorney who specializes in that area.
The beneficiary advice is sound and should be done by all.

 

[Richard]

Dan... thanks for your comments. Unfortunately, the story you tell is all too common for me to hear and frankly, it drives me NUTS that people won't listen until usually, it's too late.

they sure are GREAT listeners after they go through what your family is now going through... I'm sorry to hear it's working out like that.

One reason to possibly now NOT sign over some assets (like a regular stock account)

Obviously I do'nt know your details but if they have a very low cost basis in it... then at the risk of sounding crass... it would be better for you (or whomever) to inheret it at the stepped up basis rather than take on their original basis. (not tax advice, I'm not an accountant)

You are right though... they should have a trust setup, power of attorney, their bank accounts, stock accounts could/should be setup as a "TOD" or POD (transfer on death for brokerage or pay on death for bank) accounts.

messy situation... I'm sorry you're exposed to it. I know it's tough.

 

[Richard]

I am a CPA. You are in an area that I am not familiar with. Not many CPA's will be. .

Randy,

Thanks for clarifying that... I didn't stop & think that CPA's might not deal too much in this area

 

[Bird]

Dan, we've probably all heard stories of some old person giving a family member, usually one of his/her children, power of attorney and that family member spending or stealing all the money. I don't think it happens often, but when it does, it makes the news and I suspect a lot of older people are reluctant to give anyone, even family, the necessary authority to do what needs to be done for fear of losing everything; perhaps most of all the fear of losing control. Hopefully, most of us have family members we can trust.

 

[Richard]

Dan, we've probably all heard stories of some old person giving a family member, usually one of his/her children, power of attorney and that family member spending or stealing all the money. I don't think it happens often, but when it does, it makes the news and I suspect a lot of older people are reluctant to give anyone, even family, the necessary authority to do what needs to be done for fear of losing everything; perhaps most of all the fear of losing control. Hopefully, most of us have family members we can trust.

Bird, you have a point to be sure... (and sad that it's sometimes true although in my years, I've personally never witnessed it)

I've got an account with a couple in their later 70's. He's already had a heart attack & 'died' for several minutes. Though they revived him, he lost part of himself and today if you met him, you'd think he had alzheimers.

The wife spends most of her time tending after him... he's able to get around however he simply forgets everything... like why am I at the store?

She's been to my office WITH the estate attorney we use... we all came to the conclusion that if something happened to her then he's got a real issue because he'd get all the assets, he is NOT considered invalid so someone could come along & 'buy' his house for $1,000 kinda thing...

Told her some of the benefits of a trust and how that could help HIM if something should happen to HER...attorney concurred... game plan was made for her to gather several items...and poof... she's never dealt with it. I even called her into office (I feel like the Principal lol ) and got on her about not having done it yet... she hung her head & said ya ya ya... I know... I'll get right on it again..... poof again!

I don't know why but folks seem to find any excuse to put some things off.

 

[Bird]

Richard, I don't know just why it is, but I kind of think some people just don't want to face the fact, or acknowledge, that someday they're going to die. I've known people who just keep putting off having a will made and die with no will. It almost seems as if they're afraid that by acknowledging that they're going to die, it might speed up the process and cause them to die sooner. Of course, I've also known some who just simply cannot make up their mind about what they want to put in a will, what they want done when they die, or who they want to be the executor, so they never get around to having a will of any kind made.

 

[dooleysm]

My wife and I (both late 20's) had wills/living wills/power of attorney made out recently. We happened to be out car shopping before an appointment with our attorney and when we told the salesman we had to leave to sign papers on our wills, he was amazed. He said he was 50, had 5 kids, and he didn't have a will. He almost seemed proud of the fact.

I agree with what has been said, it's very important to take care of this stuff while you're relatively healthy. It has no benefit to you, but it's very important to the people that are closest to you.

 

[Champy]

And don't forget that sometimes your children may not outlive you ......... keep your Wills updated.

My mother passed away in February '01, and then her mother (my grandma) died in May that same year. Guess what - grandma never revised her Will which left everything to my mother, who being already deceased could not inherit the estate. To further complicate this mess, my Mom was legally my "stepmother", and although the woman had raised me since I was 9 yrs old, I was not legally entitled to any of my grandmother's estate and it all went into Probate. Some 2nd cousins ended up spliting it up and walking away with everything the court and lawyers didn't take.

Lesson learned for me....now everything I have is "owned" by a Trust with multiple owners (wife, kids, me, etc..), to avoid Probate / issues with Wills.

 

[Bird]

keep your Wills updated

Yep, good advice. I'll have to admit I didn't have a will myself until we had two small children, so we got wills made that specified who would manage assets, who would raise the kids, etc. So, about 35 years later (should have done it sooner, of course), we had complete new wills made, along with general power of attorney, medical power of attorney, living wills, etc. I think we found a pretty good lawyer to do it all because he thought of things and asked questions that I probably would never have thought of.

 

[dmccarty]

Richard said,

and got on her about not having done it yet... she hung her head & said ya ya ya... I know... I'll get right on it again..... poof again!

I don't know why but folks seem to find any excuse to put some things off.Ric

That is my grandparents. They just did not want to deal with it. I'm not really sure why. They bought plots in a cemetary decades ago so its not like they had a problem with dealing with reality. They wanted to get all of this done so the family would not be burdened by their death but the paperwork just did not get done.

I suspect part of it may have been that they mentally where already declining and able to make these decisions.

I also wonder if Bird's comment about trusting family members was not part of the problem as well. The money was in three CDs with the idea being that the CDs would be given to the kids when the grandparents died. One of the kids might have spent the money before they died. Maybe. So that could have been a concern.

But I really wonder if mentally they were able to make these decisions. As we have had to churn through the finances we found out that there is an issue with the CDs. The money is locked up for quite a few years. Odds are the CDs mature well after my grandparents death. I'm sure they did this because it had a higher interest rate but it was not a good decision. My mom has been after the bank why they sold a CD with a long term to people in their 80s. For some reason the bank is not returning her phone calls...

Writing this up and having to think about it a bit really makes me draw the conclusion that when it was time to protect the money, my grandparents just where not there mentally...

Later,
Dan

 

[Bird]

My mom has been after the bank why they sold a CD with a long term to people in their 80s. For some reason the bank is not returning her phone calls...

Ah yes, when I bought the place in the country and moved my parents onto the place, I knew Dad had Alzheimers, but what I didn't know was that he hadn't balanced his checkbook in the past 2 or 3 years (he used to be a meticulous record keeper). And I discovered that about 6 months earlier a banker had sold him an annuity that wouldn't mature until he was over 100 years old. Fortunately, he didn't lose anything but about 6 months interest.

 

[Richard]

Lesson learned for me....now everything I have is "owned" by a Trust with multiple owners (wife, kids, me, etc..), to avoid Probate / issues with Wills.

Unfortunate path you had to take to get here but power to you for doing what I personally feel, is the best choice.

Interstingly enough, I've had many people say "I don't have enough money to need/use a trust"

I just shake my head... and try to explain to them that although a trust REALLY comes in handy if you've got a zillion dollars.... it has other benefits that it will provide for you or your loved ones if you DONT have the specific 'financial' need for it.

The funny part is... I'm not an attorney and if anyone ever listened to me as I play my pied piper role... I don't make a dime off it... so it's not like I'm trying to sell them anything regarding a trust... I'm really trying to give them my opinion on something that I feel will (potentially) save their loved ones some REAL hassels.

I once had a guy walk into office... he held I think six stock certificates in his hand. Some of the certificates were in his fathers name (deceased 20 years prior), mother and fathers name (mother deceased recently), mother and HIS name

I swear on my life... it took us about six MONTHS to clear these darn certificates up so they could be deposited into HIS account.

He had to go back and revisit his FATHERS estate from 20 years prior... to get the certificates out of his dad's name. This was the real stinker for him. Then after that, he of course, had to deal with taking care of his mothers estate stuff....

Had his mother dealt with this decades prior, then we could have taken care of him in a matter of a handful of forms and couple of weeks.

(side lesson there is don't take delivery of your certificates or if you DO have some, then shove them back into an account...it's MUCH easier for the owner to sign the certificate than a beneficary to have to get a court certified letter of testamentary, state tax waivers, stock powers....)

Double side lesson...

If someone DOES have to deposit certificates into an account after a loved one passes away...

I need a court certified letter of testamentary LESS than 30 days old, a tax waiver (depending on state, in TN, we need them), stock power... for EACH AND EVERY certificate that is being deposited. If you, or your grandparent has 25 different stock certificates (different companies) then I'd need 25 SETS of each of the above documents...

If however... the owner of the stocks THEMSELVES, put them into a stock account, then the person can sign them (or a stock power), deposit them and upon their demise... I would only need ONE SINGLE set of all that paperwork to rename the account and NOT a set of forms for each asset inside the account.

Now... if someone is giving YOU 25 different certificates, would you rather provide 25 sets of forms for me, or a single set?

If the answer is a single set and YOU have 25 different stock certificates in your name and in YOUR posession, then I'd ask you... why do you hate your children so much? GO deposit them NOW!!

 

[Richard]

And I discovered that about 6 months earlier a banker had sold him an annuity that wouldn't mature until he was over 100 years old. Fortunately, he didn't lose anything but about 6 months interest.

Not to write another book but I'm aware of a situation where doing that actually saved someone's assets...

I'm not saying this is the right or wrong thing do to... it's a story told to me from a collegue of mine and one of his clients.

Years ago, Mom retired, moved to Florida. Son went and bought her a condo for $50,000 using HIS money (first mistake). Seems the condo was put into HER name (second mistake) and she lived there for number of years.

Time marched on, she grew older and was heading to a nursing home. Son called my collegue & said "we've sold Mom's place, I've got $150,000 sitting here but since I bought it for her, I'm going to keep the money"

WRONG

The cash is his mothers and with the lookback medicair/medicaid has... they will take this 'gift" he's trying to do, divide it by the annual average expense of nursing home and will deny her any payment/coverage for that many months.

What to do....? The son didn't want to see "his" money frittered away so they bought for the mother, an immediate annuity (slightly different than the one Bird inferred his father ended up with)

Anyways... this immediate annuity was actually a purchase of cash flow. They did it with 10 years of cash flow guaranteed and now...instead of having $150,000 cash in mothers name, she had maybe $1,250/month guaranteed for the longer of either HER life, or 10 years....

(disclaimer: I'm making these numbers up to make the point, I don't remember what the actual numbers were)

She died about 3 years later and during that time, the nursing home ate up every dollar of her income (the $1,250 month, social security...) BUT once she died, the balance of the payments went to her SON so although he did not get a "wad" of cash, he ended up with 17 years of monthly income that might have otherwise (at $5,000/month) would have been easily eaten up over three years.

Food for thought (second disclaimer, I think some states are starting to see this and put the brakes on it, but I"m not sure about that)

 

[ultrarunner]

Very Interesting Read... Thanks for posting.

It raises all kinds of questions as to how do you plan, when you can't predict the future and you have no spouse or children?

I've seen estates where the Executor of the Trust was so secretive that I believe going to Probate Court would have been a good thing. At least the Estate would be public.

What is the conventional wisdom on Trusts... are Trusts always better than Probate?

What do you do with the old Homestead, Farm Equipment and Tractors when no one in the family has that kind of interest or it would be a burden to them?

 

[randy41]

trusts require annual tax filings of their own and any taxable income is taxed at a high rate.
your heirs will sell off any assets of yours they don't want.

 

[Richard]

At least the Estate would be public.

Which is exactly why some people choose to use trusts!

Again, I'm not an attorney so I'm not saying it's good or bad... just reporting various stories as I've been exposed to them.

Randy... my mother has a trust... it's in her SS number so maybe that's some kind of issue... but with that said, her trust doesn't do a tax return although I'm aware that anything it does is reported under HER SS number.

(I don't know if that's good or bad... it was a trust set up years prior to me not only being in this business, but...I think I was still a minor)

I know some trusts can/do have their own tax id number. I was kind of surprised that hers didn't.

 

[randy41]

sounds like your mother has a grantor trust which is not a real trust.

 

[California]

YOU have 25 different stock certificates in your name and in YOUR possession, then I'd ask you... why do you hate your children so much? GO deposit them NOW!!

Yes!!!

I finally persuaded Dad to establish an umbrella brokerage account and sign his stacks of paper stock certificates over to that single account. What he owned was mostly spin-offs from a single 1970's investment in ATT stock, then distributions taken in the form of stock certificates, then separate dividend reinvestment plans on many of these separate positions, - a big mess that he realized was out of control.

All he knew was that he was getting many little dividend checks from stuff he didn't even know he owned. AirTouch, Vodafone, etc, all successor phone companies that he didn't really understand. Fidelity Investments did a great job walking us through this consolidation so that every position was listed on a single monthly brokerage statement. Vanguard, Schwab, etc would probably be ok too.

As it turned out that was the last six months of his life. This was just as the market was crashing in spring 2000 so as POA and Trustee I sold everything the first business day after his death. Vodaphone, a british corp that had bought PacBell's cell phone division, was the only position I hadn't gotten into the account in time. It dropped from $45 to $13 per share before I could get control over it and get it sold.

Please, everybody, pool your assets so a successor can deal with a single umbrella account instead of the nightmare Richard and I have described.