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Elder Law and Estate Planning Blog - Lancaster, PA

Thursday, August 9, 2012

Questions of Estate Planning Advisors

While perusing the internet recently, I came across an article on Forbes by Deborah L. Jacobs.  At a recent online conference for estate planning advisors, she noted the questions these advisors had.  Most of these questions had to do with inherited IRAs and 529 college savings accounts.  Since some of the advisors didn't know the answers and because some are tricky, we thought it'd be in the best interest of our clients if we shared some information on them.

Inherited IRAs

The person who inherits your IRA, like other assets, isn't necessarily the person you named in your will.  Your beneficiary designations on all accounts take precedence over wishes stated in a will.  So what happens if there's no beneficiary on file?  The heir is determined by the IRA custodian's policy.  Usually the IRA is first awarded to a living spouse, then to the estate, so if you want to pass on your IRA directly to your kids, you need a beneficiary form.  To give your heirs maximum flexibility, name both primary and alternate beneficiaries.

If you've inherited an IRA, do nothing until you know what rules apply.  For example, if you are not the spouse and have inherited an IRA, you must begin taking distributions by December 31 of the year after inheriting.  Also, unless you are the spouse, you must retitle the IRA to include the original owner's name.  And once you've inherited an IRA, make sure to designate beneficiaries.

An advisor asked if you can write on the beneficiary form "according to the terms of my will."  While this will most likely be accepted by the custodian, there's no guarantee that there won't be complications.  By writing this, you have to verify that the custodian has the will on file and that they have the latest version of the will.  Still, they may not accept the designation this way, so your best bet is still to name a beneficiary.

529 Plans

A 529 Plan is an education savings plan designed to help families set aside funds for future college costs.  As long as the plan satisfies a few basic requirements, federal tax law provides special benefits to the plan participant.  This can include gift and estate tax benefits.  You can give anyone $13,000 annually without eating into your exemption from gift or estate tax.  When it comes to 529s, however, you can deposit as much as $65,000 (or $130,000 for a couple) and treat it as five years' worth of gifts.  Once in the 520, the money can grow tax free.

One advisor said he heard that if the grandparent is the owner of a 529 plan, distributions are considered income to the child and jeopardize their financial aid eligibility.  He is correct with this.  If a grandparent makes a distribution from a 529 to pay tuition, that amount counts as income and must be reported on the following year's FAFSA (Free Application for Federal Student Aid).  A student is expected to apply 50% of all income above a certain limit to education, so if a grandparent with good intentions pays the first year's tuition, he might exhaust the 529 and endanger the student's aid eligibility.  In such a case, the 529 would be best spent paying senior year tuition.

Unfortunately, it gets more complicated.  About 250 of the most expensive private colleges use a different form to award aid.  This form requires the student to report all 529 savings accounts that name him as a beneficiary and that are not owned by his parents.  These accounts can have a huge impact on aid eligibility.  You might be able to mitigate the impact on aid by transferring the account ownership to the student's parent a year before the student applies for college.  However, this raises another question: could the transfer of ownership be a taxable gift to the parent?  While the IRS hasn't ruled on this specific issue, the answer is probably not, but still be cautious.


To read the original article, click here.

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