Using a Roth IRA as an Estate Planning Tool

A Roth IRA does not have to be used as just a retirement plan; it can also be a way to transfer assets tax-free to the next generation. 

Unlike a traditional IRA, contributions to a Roth IRA are taxed, which means that the distributions are tax-free. Also, unlike a traditional IRA, you are also not required to take any distributions on a Roth IRA, regardless of your age. If you don’t need the money for retirement, you can leave all of it in the IRA to grow tax-free and eventually pass on to your heirs. 

If your spouse is the beneficiary on your Roth IRA, your spouse can become the owner of the account. Your spouse can either put the IRA in his or her name or roll it over into a new IRA, and the IRS will treat the IRA as if your spouse had always owned it. Just like you, your spouse does not need to take any distributions from the IRA if they are not needed.

The rules for a child or grandchild (or other non-spouse) who inherits an IRA are different than those for a spouse. They must withdraw all of the assets in the inherited account within 10 years. There are no required distributions during those 10 years, but it must all be distributed by the 10th year. 

Certain non-spouse beneficiaries are treated like spouses, which means they can treat the IRA as their own:

• Disabled or chronically ill individuals

• Individuals who are not more than 10 years younger than the account owner

• Minor children. Once the child reaches the age of majority, he or she has 10 years to withdraw the money from the account.

The benefit of a Roth IRA for your heirs is that the assets will be distributed tax-free. As long as you opened and began making contributions to the Roth IRA more than five years before you died, the distributions will not be taxed when the beneficiary takes distributions. 

Another consideration is that money you leave your heirs in a Roth IRA does not go through the probate process. This can make it easier for your beneficiaries to access the funds quickly. But make sure that you name a beneficiary on your account. If no beneficiary is named, the account will go to your estate and will then have to go through probate. Also, be sure to regularly check that your beneficiary designations are up to date.

Leaving your heirs a tax-free Roth IRA may not always be the best plan. In figuring out the best type of IRA to leave to your beneficiaries, you need to consider whether your beneficiary's tax rate will be higher or lower than your tax rate when you fund the IRA. In general, if your beneficiary's tax rate is higher than your tax rate, then you should leave your beneficiary a Roth IRA. Because the funds in a Roth IRA are taxed before they are put into the IRA, it makes sense to fund it when your tax rate is lower. On the other hand, if your beneficiary's tax rate is lower than your tax rate, a traditional IRA might make more sense. That way, you won't pay the taxes at your higher rate; instead, your beneficiary will pay at their lower tax rate.

To determine if a Roth IRA should be a part of your estate plan, consult with your attorney. Find an attorney near you.

Learn more about inheritied IRAs.

How Long Does an Executor’s Job Take?

Being the executor of an estate can be a time-consuming job, depending on the size and complexity of the estate. While a simple estate can take a few months and not require a huge time commitment, if there are problems, the job can drag on for years. 

An executor is the person responsible for managing the administration of a deceased individual's estate. Although the time and effort involved will vary with the size of the estate, even if you are the executor of a small estate you will have important duties that must be performed correctly or you may be liable to the estate or the beneficiaries.

The first thing an executor should do is to consult with an attorney to learn the deadlines in the state where the decedent lived. To start the probate process, the executor must file the will for probate. Some states have strict time limits on how long after a decedent dies the executor has to file the will with the court, while others have no time limits. In addition, there may be deadlines for the executor to prepare a list of all of the deceased's assets and file this inventory with the court. It is important that the executor to understand what is required and when. 

How much actual time an executor will have to devote to the job can range widely. Settling an estate takes an average of 16 months, according the software company EstateExec, and the settlement process requires an average of roughly 570 hours of work on the part of the executor. Average compensation for executors was $18,000. 

While executors must adhere to deadlines set by the state, other factors can make the estate administration go faster or slower. The following are the issues that can add or subtract time:

• Debts. The executor must notify potential creditors about the decedent’s death. Usually, the executor must inform all known creditors by letter and publish a notice in a local paper for unknown creditors. Each state gives creditors a certain amount of time, which can range from a few months to a year, to file claims against the estate. The executor must wait for the deadline to pass and then settle all the debts before distributing assets to the beneficiaries of the estate.

• Location. The location of the executor and the beneficiaries can affect the time it takes to settle the estate. If the executor does not live in the same state as the decedent and the beneficiaries, it can take more time to send documents back and forth.

• Assets. The more complicated the assets, the longer it will take the executor to sort everything out. If the estate consists of just a house and bank account, things will go more quickly than if the estate consists of multiple bank accounts, stocks, brokerage accounts, valuables, and/or a family business.

• Contested Estate. If the beneficiaries are fighting amongst themselves or with the executor, the probate process is going to take longer. One way an unhappy family member can hold up probate is by contesting the will, based on mental incapacity, undue influence, fraud, or allegations that it wasn’t executed properly. A beneficiary can also prolong the process by challenging the executor’s actions.

Every family situation is unique, so there is no set time that an executor can expect to work. If you are named as an executor, check with an attorney in the decedent’s state to find out what to expect. To find an attorney near you, click here. 

Why Small Business Owners Need an Estate Plan

Running a small business can keep you busy, but it should not keep you from creating an estate plan. Not having a plan in place can cause problems for your business and your family after you are gone.  

While an estate plan is important for everyone, it is especially important for small business owners. Planning allows you to dictate what will happen with your business after you die or are no longer able to manage it. It can help you avoid excess taxes and debts and facilitate your business’s continued success. 

Before sitting down to start the estate planning process, you should think about your goals for the business. What do you want to have happen if you die or become incapacitated? Should the business continue with current partners or be sold to new owners? Should your family take over? Should the business be shut down? Consider your family dynamics when thinking about these questions. Once you have come up with your goals, you can create a plan to meet them. 

The basic building blocks of any estate plan include a will, power of attorney, and medical directives. The will allows you to direct who will receive your property at your death while the power of attorney and medical directives dictate who can act in your place for financial and health care purposes. 

Following are some additional things a small business owner should consider as part of an estate plan: 

• Tax Planning. If your business is not a separate entity, you may want to consider ways to minimize estate taxes. The current estate tax exemption ($12.06 million in 2022) is so high that most estates do not pay any estate tax. However, a small business could put an estate over the limit. Also, the fact that the estate tax exemption is set to be cut in half in 2026 and that states have their own estate taxes means that tax planning is important. You may want to put your business assets into a trust or a separate business entity like a limited liability company to lower your estate tax burden.

• Trust. A trust can be useful not only to reduce estate taxes, but also to ensure the continued running of your business if you die or become incapacitated. Because a trust passes outside of probate, the assets in the trust can be transferred immediately to the person you want to run the business without waiting for the whole estate to go through probate. In addition, if you become incapacitated, the trustee can continue to run your business without court involvement.

• Buy-Sell Agreement. If you own your business with others, a buy-sell agreement can be very useful. Buy-sell agreements are used if one of the owners dies, leaves the company, or becomes incapacitated. It specifies who can buy an owner’s share of the business, under what conditions, and for what price.

• Life Insurance. When you own a business, life insurance takes on new importance. A life insurance policy can ensure that your family continues to receive an income in the event of your death. It can also provide funds to keep the business running and be used to fund a buy-sell agreement.

Your estate planning attorney can help you come up with a plan to meet the needs of your business. Find an attorney near you. 

How Community Property Affects Estate and Tax Planning

In most states, spouses can purchase and own property separately from one another. However, in certain states – called community property states – if one spouse purchases property, it is considered the property of both spouses. How marital property is owned has implications for both estate and tax planning. 

There are currently nine community property states. They are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. A few other states (for example, Alaska) allow couples to opt into community property arrangements. 

Community property is property acquired by a husband and wife during marriage. In community property states, property held in only one spouse’s name can still be community property. For example, the paycheck that a spouse brings home every week is community property even though only one spouse’s name is on the check. If that check is used to buy an asset, then that asset is community property, regardless of whose name is on the account or the asset. 

Property that is not community property is property that one spouse brings to the marriage, inherits, or is gifted. A spouse can turn separate property into community property by putting an asset owned by one spouse into both spouses’ names. 

Depending on the state, partners may be able to change whether property is separate or community via pre-nuptial agreement, post-nuptial agreement, or exceptions in the law. Changing community property into separate property may be appropriate in second marriages or when one spouse is bringing significant separate property into the marriage. For example, if, at the time of the marriage, one spouse receives significant income from owning a business, the spouses may decide that it is appropriate that the business remain that spouse’s separate property and the income from that property will remain that spouse’s separate property. 

One advantage of community property is with regard to capital gains taxes. If one spouse dies, the cost basis of the community property gets “stepped up.” The current value of the property becomes the cost basis. This means that if, for example, the couples’ house was purchased years ago for $150,000 and it is now worth $600,000. The surviving spouse will receive a step up from the original cost basis from $150,000 to $600,000. If the spouse sells the property right away, he or she will not owe any capital gains taxes. In non-community property states, if one spouse dies, only the deceased spouse’s interest (usually 50 percent of the value) is stepped up. 

When estate planning in a community property state, it is important to fully review assets to determine which assets are community property and which are separate property. A surviving spouse in a community property state is entitled by law to half of the community property, regardless of what the spouses may have wanted to do with the property (such as pass it on to children). Community property can be a factor even in non-community property states if the couple owns property in a community property state. 

If spouses move from one type of state to another, it is especially important that they have their estate plan reviewed by an attorney in the new state to make sure the plan still does what they want. Find an attorney near you.