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DEAR TRUST OFFICER:
I’m planning to remarry, and I know that means I should review my will and estate plans. Right now, I’ve left my property to my kids from my first marriage. I need to include my new spouse in my plan, yet I don’t want to cut out the children completely. Is there an easy solution? —SECOND LIFE
DEAR SECOND:
In situations such as yours, we’ve seen a lot of interest in the Qualified Terminable Interest Property Trust, or more commonly, QTIP Trust. The trust is “qualified” for the marital deduction from the federal estate tax, provided the surviving spouse is a U.S. citizen. The trust is “terminable” because it ends at the spouse’s death, and the spouse usually doesn’t have the right to change who gets the property at that point. In other words, the inheritance for your children is secure.
Another benefit of the QTIP trust is that the executor can elect a full or partial marital deduction, depending upon what’s best for tax purposes. That flexibility is especially welcome during these volatile times when asset values can change suddenly. What’s more, the amount exempt from federal estate tax is scheduled to be cut in half in 2026, another reason to give your executor as much flexibility as is practical.
Article ©2022 M.A. Co. All rights reserved. Used with permission.
In 89 of the last 97 years, inflation was lower than the total return in the stock and bonds markets. So says the annual compendium of investment returns from Ibbotson Associates, “Stocks, Bonds, Bills, and Inflation: 2023 Yearbook.” In only eight years did inflation outpace investment returns, but 2022 was one of those years. As inflation reached 6.45%, the total return from large company stocks fell by 18.11%, and those of long-term government and corporate bonds by over 26%.
The table below has examples of returns in the four post-war years when inflation beat the financial markets.
Selected investment returns and inflation
|
Year |
Large company stocks |
Long-term corporate bonds |
Long-term government bonds |
Inflation |
|
1973 |
(14.69) |
1.14 |
(1.11) |
8.80 |
|
1974 |
(26.47) |
(3.06) |
4.35 |
12.20 |
|
2018 |
(4.38) |
(4.73) |
(0.57) |
1.91 |
|
2022 |
(18.11) |
(26.18) |
(26.08) |
6.45 |
Source: “Stocks, Bonds, Bills, and Inflation” 2023 Yearbook; Ibbotson Associates.
For investors in the accumulation phase of the financial life cycle, a down year for stocks and bonds means that securities are on sale, at prices that could prove to be bargains. In the longer term, the bad years are fully offset by the good ones. On the other hand, for those who are retired, whose time horizon for drawing down principal has arrived, a down year can have very negative long-term consequences. Projections such as that a 4% withdrawal rate can be sustained for an entire retirement tend to work less well in an inflationary environment. Retirees are well advised to have some cash on hand so as to not have to sell stocks at a low point.
Past performance does not predict future results, but what has happened in the next year, after inflation beat the stock and bond markets? As the table shows, 1974 was even worse for the stock market than was 1973. Recovery came in 1975, when large company stocks rose 37.23%. In 2019, stocks rose 31.49%.
Professional investment managers tend to focus on controlling the downside risks for their clients. In general, the pain of loss is larger than the satisfaction of gain for many people. If you would like a portfolio review by one of our investment officers, please give us a call to arrange an appointment at your convenience.
Article ©2022 M.A. Co. All rights reserved. Used with permission.
Inheriting an IRA, as welcome as it may be, comes with complications. If you are a surviving spouse, there are special favorable choices for you, and this article is not for you. Nonspousebeneficiaries need to know a number of rules.
Do not contribute to your inherited IRA. This is not allowed, because the requirements for personal and inherited IRAs are different.
Do not try to convert your inherited IRA to a Roth IRA. This is not allowed.
Do change IRA custodians if you are not happy. However, moving the IRA to a new custodian must be done by direct transfer. Do not try to take a distribution and roll it over in 60 days, as this approach is not available for nonspouse beneficiaries of inherited IRAs.
Do take distributions from the inherited IRA, regardless of your age. If it is a traditional IRA, there will be income taxes to pay, but no penalty taxes, even if you are under age 59½. If it is a Roth IRA, there will be no taxes or penalties.
Do not leave the money in the inherited IRA for more than ten years. With a few limited exceptions, the money in an inherited IRA must be disgorged in ten years. In some cases, there may be annual Required Minimum Distributions before the ten years are up.
Do name a successor beneficiary. Failure to name a beneficiary can add time and cost to estate settlement.
Do consider a Qualified Charitable Distribution (QCD). If you are age 70 ½ or older, you may direct a transfer of up to $100,000 from your inherited IRA to a qualified charity. The amount of the transfer will not be included in your taxable income (which means you don’t get a corresponding tax deduction if you itemize).
If you don’t already have a professional tax advisor, inheriting a substantial IRA is a good time to consider getting one.
Article ©2022 M.A. Co. All rights reserved. Used with permission.
Antawn Sanders received a deficiency notice from the IRS that stated he had until December 12, 2022 to file with the Tax Court to challenge the notice. The Tax Court’s electronic filing system is called DAWSON. Sanders set up a DAWSON account to file his petition electronically.
On December 12, at 9:59 pm, Sanders began his filing process. He downloaded the required PDF form to his android phone, and completed it. Unfortunately, when he logged back into DAWSON from his phone, Sanders was unsuccessful in uploading the form. Logging out and logging back in several times did no good.
Sanders then sent the forms to his Windows computer, to see if that device could do what the phone could not. At 11:56, a login attempt failed, but it succeeded at 11:57. There were, according to the filing, “three other steps” required before the petition could be filed, plus Sanders had to refer to the instructions several times. At nine seconds after midnight, the upload of the petition began, and it was completed at 11 seconds after midnight.
In the Tax Court, the IRS said that, because Sanders’ appeal was tardy, it could not be heard by the Court. The Tax Court agreed.
It’s true, the Court observed, that when an appeal was filed late because federal offices were closed due to a snowstorm the deadline was extended. But that is not the case here. There was no systemic failure affecting all taxpayers.
Ironically, had Sanders filed his petition on paper, and had he delivered it to a post office during business hours on December 12 (or earlier), it would have been timely filed even if the IRS had not received it until a week later, as opposed to 11 seconds late. The postmark rule then would have applied, and a postmark of December 12 would have been sufficient.
Article ©2022 M.A. Co. All rights reserved. Used with permission.
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