Ensuring that Inherited IRAs Benefit their Beneficiaries.

As we have discussed in previous posts, there are many forms of trusts used in the estate planning process. While many planning strategies have greater benefit to individuals with more complex financial situations today’s post addresses one form of stand-alone trust which can be very beneficial to a wide variety of clients.

An “IRA Trust,” is a stand-alone trust, separate from a Living Trust that acts as the beneficiary of IRAs or retirement benefits. The provisions of an IRA Trust satisfy all of the regulations related to the distribution of IRAs and retirement benefits, allowing clients to create a situation where their beneficiaries can take advantage of their inherited benefits over their lifetime and enjoy extra protection from creditors and other potential problems.

The beneficiaries of the IRA Trust can be the same as those of the client's Living Trust. However, the distribution terms of an IRA Trust terms are often different from the Living Trust and frequently more restrictive in order to ensure that no matter what happens to the Living Trust assets, the IRA Trust assets will be available to help support children, grandchildren and other beneficiaries. Alternately, clients can use an IRA Trust to provide for a different group of beneficiaries than their Living Trust beneficiaries. For example, the Living Trust may benefit a second spouse while the IRA Trust has children and grandchildren as beneficiaries. Finally, an IRA Trust can help beneficiaries in more difficult or complex situations, such as beneficiaries who for any number of reasons are not prepared to handle large sums of money. In these situations, the IRA Trust Trustee can provide professional management of Trust assets, allowing the IRA assets to grow tax deferred, except for required distributions, and ensure that the beneficiaries do not waste those distributions.

Just like a Living Trust, the distribution provisions of an IRA Trust dictate how the beneficiaries receive distributions. One design option for an IRA Trust is the "conduit trust", under which the trustee has no power to accumulate plan distributions in the trust and must allocate any distribution received from the IRA or retirement plan to the beneficiaries. The conduit trust lessens the trustee’s ability to control the income but still allows control over principal distributions as necessary.

Alternatively, when it is desirable or necessary to impose greater control upon the dispersal of the Required Minimum Distributions (RMDs), an "accumulation trust" allows the trustee to hold the RMDs in trust for the beneficiary’s benefit. For example, if the beneficiary of the IRA Trust is special needs child, it is important to limit income distributions in order to avoid adversely affecting the beneficiary's right to receive state or federal benefits. It is important to remember however when using an accumulation trust that the federal government taxes income received from the IRA but not distributed to beneficiaries according to the potentially higher trust income tax rates.

Whether a client wants to provide for multiple generations, ensure a lifetime of income for a beneficiary in a difficult personal or financial situation, or simply ensure that different groups of beneficiaries receive the asset that provides them the greatest value, an IRA trust is an extremely useful tool for a wide variety of situations. Due to the complexities surrounding IRA and retirement plan distributions, it is important to work with experienced estate planning attorney familiar with those regulations in order for an IRA Trust to achieve a client's goals.

Matt

Property Tax Primer

Our practice focuses on estate planning, but because estate planning deals with finance, property, taxes, and a host of other complex concepts we also have knowledge and experience with those areas, which allows us to better assist our clients. As attorneys we are frequently called upon to explain things to our clients that fall outside the strict boundaries of the law. Recently a client called me with question that a bit of informal research indicates a lot of people need help answering. That question, "What does the Notice of Assessment, Taxable Valuation, and Property Classification, that IS NOT A TAX BILL, tell me?"

Understanding about their property tax liability is not simple. Many homeowners pay their property taxes via an escrow account connected to their mortgage and therefore the only time they think about property taxes is when a local election includes a millage resolution. In many cases, homeowners do not understand exactly how a millage will affect their property tax liability, except to know that it is likely to increase their property tax bill. 

Local municipalities, such as villages, cities, and townships, assess property taxes based upon the value of real estate. The “millage” is the rate of tax on real property and municipalities calculate that liability by dividing the value of the property by $1,000 and multiplying that number by the millage rate. This means that a piece of property valued at $200,000 subject to a millage rate of 30 will have a property tax liability of $6,000. On a tax bill, millage rates are broken out by what they fund, including schools, public safety, and other services provided by the municipality. Winter and Summer rates vary because municipalities collect millages for different services at different times of the year.

Since the municipality calculates property tax liability based on the value of property it is also important to understand how the municipality calculates that value. This is where the Notice of Assessment, Taxable Valuation, and Property Classification (the “Notice”) becomes relevant. The Notice is how the municipality informs the property owner of the taxable value of their property. The Notice also contains other information about the value of the property in addition to the taxable value and this information frequently surprises and confuses homeowners.

In addition to documenting whether a variety of property taxes exemptions exist for the property, the Notice includes a table showing the following information:

	2017	2018	Change
1. Taxable Value	256,639	594,700	338,061
2. Assessed Value	598,300	594,700	-3,600
3. Tentative Equalization Factor: 1.0000
4. State Equalized Value	598,300	594,700	-3,600
5. There WAS or WAS NOT a transfer of ownership on this property in 2017: WAS

Taxable Value is the value the municipality uses to calculate the property tax liability, depending on circumstances Taxable Value may change dramatically from one year to the next.

Assessed Value is the value of the property as determined by the Tax Assessor, the Assessed Value of the property is frequently different than the Taxable Value.
The Equalization Factor is part of a calculation that helps to ensure uniform property assessment across the state.
The State Equalized Value is the result of multiplying the Assessed Value times the Equalization Factor.
Knowing whether ownership of the property was or was not transferred in the prior year is relevant to understanding changes in values from one year to the next.

The municipality's Tax Assessor determines the Assessed Value of the property and the process used by the Assessor to make this determination is beyond the scope of this blog but in general, the Assessed Value for a property should be approximately half of the fair market value of the property. The Taxable Value for property differs from the Assessed Value due to legislation capping the amount the Taxable Value of property may increase from year to year as long as the same owner owns it. Thus if the property values in a particular area dramatically increase over time, the taxable value of a given property will not increase proportionately. However when ownership of a property is transferred (with certain exceptions) the limitation on allowable increase in Taxable Value goes away and the Taxable Value “uncaps” increasing to the Assessed Value of the property. In the example above, the transfer of ownership in 2017 allowed the 2018 Taxable Value to increase substantially.
The system is imperfect and it is possible to challenge the Tax Assessor’s valuation of the property, but doing so requires the homeowner to produce evidence substantiating their claim, it is not sufficient to simply request that the Assessor change their original Assessment. Under many circumstances, it is necessary to go beyond the local Assessor to a Tax Tribunal in order to receive significant changes in the valuation created by complex circumstances.

I hope that this information allows you to better understand a complex document or at least remind you that your attorney can be of assistance regarding a variety of subjects. As we remind our clients, taking the time to speak with an attorney can help address a problem the right way the first time, as opposed to calling an attorney after trying to handle a problem on your own and then needing assistance to correct mistakes. Much like calling a plumber under similar circumstances, it is likely to cost more for the attorney to correct a problem than it would have cost to get proper guidance in the first place.