February 2010 Archives

Debunking Five Common Estate Planning Myths

Estate planning is the process of providing for yourself and your family in the event of your retirement, disability or death. Through a properly-crafted estate plan, you put your legal and financial affairs in order so that the assets you have accumulated during your lifetime will be preserved and transferred to your heirs with the least amount of financial and emotional cost. Having an estate plan in place is better than no planning at all. However, having a great estate plan in place is ideal! It can save you and your family thousands of dollars.Unfortunately many people fall prey to one of the many myths about estate planning. This can cause their families and loved-ones to be left with a smaller inheritance, unnecessarily complicated probate court proceedings, and even costly lawsuits. Let’s debunk five of those myths!1. I only have a small savings and checking and some life insurance, I’m too poor to need an estate plan. NO WAY. Once you take into account the value of your home, your bank accounts, your retirement funds, and insurance policies, you might be wealthier than you thought. Anyone who is concerned about how their assets are managed now and how they will be distributed after their death needs to be concerned with his or her estate plan. 2. Once I complete my Will, that’s the only estate planning document I need. WRONG. Your Will only deals with your Probate assets after you die. If you become incapacitated during your lifetime, you also need someone to take care of your financial affairs and medical decisions while you are still alive. For that, you need a Durable Financial Power of Attorney, a Durable Health Care Power of Attorney and a Living Will Declaration. Plus, you may benefit from having a Trust Agreement.3. If I leave everything to my spouse, my assets will never be subject to any Estate Taxes. NOT TRUE. There is a special Estate tax credit for assets left to a spouse. However, if you simply leave everything to your spouse without some planning, you may be wasting half of the possible credit available. 4. Once I create and sign my Estate planning documents, I am done. Whew, I never have to think about that again!MYTH. Birth, death, adoption, divorce, debt, changes in asset values and many other factors can affect your Estate planning. You need to review your estate plan periodically, at least every three to five years or when there are major changes in your life.5. If I enter a Nursing Home, a Revocable Trust Agreement will protect my assets. INCORRECT. There are many ways to plan to protect assets, but having your assets in a Revocable Trust Agreement is not one of them. For that, you need Medicaid Planning. Revocable Trust Agreements, however, can be useful for probate avoidance, estate tax avoidance and other estate planning reasons.

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New Rules for Roth IRAs for 2010

1. CAN I CHANGE MY TRADITIONAL IRA TO A ROTH IRA?
Yes. Normally when you convert a traditional IRA to a Roth IRA, all of the converted amount is included in income in the year of conversion. However, If you convert in 2010, one half of income is included in income in 2011 and one half is included in income in 2012. The election to make the deferral of income into 2011 and 2012 must be completed by the date of filing of your 2010 Tax Return. With extensions that could be October 15, 2011.2. WHY WOULD I EVER CONVERT MY TRADITIONAL IRA TO A ROTH IRA?
A traditional IRA grows tax deferred while a Roth IRA grows income tax free. The decision to convert a traditional IRA to a Roth IRA is complicated.
Advantages of Conversion to Roth
• Tax free growth
• No minimum distribution for owner
• Reduces Federal and Ohio Estate Tax
Disadvantages of Conversion to Roth
• Payment of income taxes on IRA early distributions
• Inclusion of income will increase tax bracket potentially
• Will impact taxability of Social Security in the year of distribution
• May increase the cost of your Medicare premium since your income goes up. 3. WHO SHOULD CONSIDER CONVERTING TO A ROTH IRA?
There is no simple rule. The ideal person to convert from traditional IRA to Roth IRA fits the following description:
a. No need to access the money in the IRA.
b. Beneficiary of Roth IRA will be in an income tax bracket at least equal to or greater than the owner. (Even if the tax rate is lower, it still may make sense depending on factors such as time period for accumulation, the rate of removal of assets from the Roth IRA and the source of the funds used to pay taxes on conversion ).
c. Income tax liability is paid with assets other than the IRA.4. WHO IS ELIGIBLE TO CONVERT?
In 2010 anyone can convert their traditional IRA to a Roth IRA. In 2011, the rule goes back to conversions only if your adjusted gross income with some modifications is $100,000 or less. 5. IF I DECIDE TO CONVERT TO A ROTH SHOULD I CONVERT NOW OR NEAR THE END OF THE YEAR?
• Convert as early as you can in 2010.
• If the market goes up, all of the growth is now in a tax-free account
• If the market goes down, you can change your mind and convert back to the Traditional IRA. If you convert a Traditional IRA to a Roth IRA in 2010, the taxpayer has until he files his 2010 tax return to switch back to a Traditional IRA. With extensions that decision can be made as late as October of 2011 to reconvert back to a Traditional IRA.
• If you convert to a Traditional IRA from a Roth, you must wait the longer of the tax year after you converted to a Roth or 30 days before you can convert again. For example, if you convert to a Roth IRA in the beginning of 2010 and then change your mind on in July of 2010 and convert back to a Traditional IRA, you must wait until January 1, 2011 to elect again to convert to a Roth. If you wait and change your mind on December 31, 2010 then you must wait 30 days, January 31, 2011.6. IF I DECIDE TO CHANGE MY ROTH BACK TO AN IRA CAN I CHOOSE THE INVESTMENTS I WANT TO RECONVERT BACK TO A TRADITIONAL IRA?
No. You must reconvert the entire Roth IRA back into a traditional IRA. Consequently, you cannot pick and choose which investments to reconvert. For example, you cannot reconvert just the assets that dropped in value. To avoid this problem, set up several Roth IRA accounts when converting with different investments in each Roth. That way you can convert the Roth IRA that dropped in value back into a Traditional IRA while not converting the Roth IRA that increased in value.7. CAN I CONVERT AN INHERITED TRADITIONAL IRA TO A ROTH IRA?
Yes. The IRS allows a beneficiary of an inherited IRA to convert to a Roth IRA if he satisfies the requirements. 8. WHO SHOULD BE A BENEFICIARY OF A TRADITIONAL OR ROTH IRA?
That answer depends on both your financial situation and who you want to be a beneficiary. The beneficiary could be a spouse, child , grandchild or a specialized Trust for the benefit of a beneficiary or even a charity. A Traditional or Roth IRA does not have to liquidate on the IRA owner’s death if the beneficiary designation is done properly. You should sit down with your lawyer to discuss the options. 9. ISN’T IT TRUE THAT I WILL OWE 70-80% OF MY IRA IN TAXES ON MY DEATH?
No. The 70-80% tax would only happen if you are subject to both a Federal Estate and Income tax. In 2010 there is no Federal Estate tax . In 2009 the exemption was $3.5 million. Even if Congress does reinstate the Federal Estate tax, most people will not be subject to the Federal estate tax so that the IRA will only be subject to an income tax and Ohio estate tax.

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