Newman Law Group

Tustin Estate Planning Law Blog

What are the tax issues re the inheritance of a 401(k) plan?

In California as well as nationwide, it is not unusual for an heir to be the named beneficiary of a 401(k)-retirement plan. One positive factor of inheriting a retirement plan is that the beneficiary usually does not have to wait for the decedent's estate to be probated to receive the retirement funds. If one's inheritance includes a significant 401(k), complex rules and regulations may require a consultation with one's estate planning attorney and, in some cases, with a tax expert.

There may be various options that can be exercised with respect to how one handles the receipt of the plan balance. Those options can have a significant tax effect. They will differ based on whether the beneficiary is a surviving spouse or not. Depending on whether the plan is a traditional one or a Roth plan, the beneficiary may have to pay taxes on the amount received.

Estate planning may use health savings accounts in some cases

Health Savings Accounts, or HSAs, are increasingly used in California and nationwide. At the end of 2016, there were about 20 million of these accounts in operation, which was a 20 percent rise from the year before. There are big tax benefits that may motivate some people to open an HSA as part of an estate planning program, but these are usually persons who are relatively healthy and wealthier than most.

These accounts work by putting money into the account pre-tax, the money then grows tax-free and the distribution of the money is also tax-free if it is used for qualified medical expenses. For many, a high deductible health plan, combined with an HSA, is the only health benefit that their employer offers. To own an HSA, one must be enrolled in a high deductible health plan.

Asset protection in long-term care planning requires foresight

Many people residing in California will prepare for the possibility of future long-term care assistance by directing that the expenses of that assistance be paid by federal Medicaid. However, the desire for that method of asset protection is easier said than done. That is because Medicaid has a myriad of qualifying rules that must be met to be qualified for coverage.

One major requirement is that a person's financial net worth must be less than $2,000. Secondly, the person must not have given away anything of significant worth in the last five years prior to death. It is typical for household items and belongings to be valued at garage sale amounts, making that part of the formula relatively easy to meet.

Probate nightmares surround entertainer's estate administration

The California courts often are called upon to administer the estates of deceased celebrities and entertainers. Sometimes the probate of such matters is simple, and  other times it is complicated. Possibly none can compare in complexity and chaos to the estate of Prince, which has been litigated in another jurisdiction for over a year.

The problem is that Prince left no will. That meant that identification of his heirs would be by the succession statutes of state law. Naming the sequence of heirs entitled to share in the estate under state law was easy; identifying the individuals who qualified in those categories became extremely demanding and contentious.

Family meetings can prevent probate battles by children

Family conflict is unfortunately a fact of life that exists in California and everywhere else. It can be a bitter dynamic when it erupts in the context of probate of a deceased parent's estate. Probate contests not only may drain the estate of funds, but they also contribute to bad feelings among family members that can last for a long time.

When an aging parent is thinking about how to divide his or her estate, issues of the different needs and desires of the children often interfere with an easy decision. The parent often brings these considerations up with an estate planning attorney for assistance in resolving them. The advice to the parent will likely be to have a family meeting or otherwise confront the potential complications now rather than letting them manifest in full bloom after one's death.

Appointment of a strong executor protects the heirs and assets

There are several options that an individual or married couple residing in California may choose when deciding who to appoint in the will as a personal representative of the after-death estate. The first thing that people generally try to do is to appoint a trusted friend or family member to manage the estate and make the ultimate distributions to the heirs. In the case of a husband and wife with mutual wills, they will generally appoint each other as personal representatives, with an alternative who will act if both spouses die within a short time of each other.

The choosing of a family member or trusted friend may not work for several reasons, including death of the person or a personal squabble with the potential choice. There may also be a fear of appointing a relative who is known to have difficulties with his own financial affairs. Where the choice of a family member or other individual is not possible or feasible, there are other options that may be chosen.

Estate planning provides asset protection for one's heirs

In California and elsewhere, the process of estate planning serves several useful purposes. One of the most important is the protection of assets on behalf of one's selected heirs. Having everything in order at one's death will prevent unnecessary family squabbles and monetary expenses and will assure that the maximum value of assets will go to the family members and friends that the maker chooses.

Without an estate plan, one's death is a license for the state to move in and prescribe all of the rules for disposition of one's assets, regardless of what the decedent may have wished or preferred. With an estate plan, each heir will be provided for in the way determined most desirable by the decedent. Making these determinations during life, preferably at an early age, will thus assure a smooth and efficient passage of a decedent's assets.

Estate planning may use beneficiary designation to avoid probate

Avoiding probate is a popular subject in California and elsewhere. It is often blogged about online and discussed in general by persons contemplating or in the process of putting together estate planning components. Some people prefer to have their heirs avoid the time-consuming and public nature of the probate process.

One way to avoid probate on some assets is by filling out beneficiary forms on life insurance policies. This will cause payment of the death proceeds to go directly to the designated beneficiary and not to the probate estate. Such proceeds will escape probate treatment.

Avoiding probate may be an effective estate planning goal

Many people who go through estate planning in California express the desire to avoid the probate process. What does that mean? Probate is the legal process of distributing one's assets after death, either pursuant to the instructions in one's will or without a will. Avoiding probate is not currently done to lessen the tax burden because most people are exempt from federal estate taxes under the current laws.

The main reason to avoid probate is to have one's heirs save months of time waiting for the assets to be liquidated or otherwise prepared for distribution, filling out considerable paper work, avoiding public scrutiny and reducing the cost of legal fees. Many assets can be set up to pass automatically upon death. This requires titling the asset in the name of the decedent and the surviving heir, and designating that the right of survivorship applies.

Wills and pet trusts allow owners to provide for beloved pets

For many people throughout the country, including here in California, there is nothing more important than the well-being of their beloved pets. The thought of one's pets being dropped off at a public shelter upon the owner's death is anathema to the great majority of pet owners. That is why providing for pets in wills and other estate planning documents can deliver precious peace of mind to the individuals and couples who own pets.

If a situation occurs where planning was not done, one can only hope that the person given the task will have the good sense to use a no-kill shelter. However, even that less than optimal choice cannot be assured without estate planning documents making it very clear what should be done. Most people who take the time to plan will likely choose to have a family member or close friend adopt the surviving pet.