Unintended Consequences 101: The effect of the waiver of RMD in 2009 upon so-called "conduit trusts"

Previously I mentioned the fact that Congress has waived the Required Minimum Distribution (RMD) requirement for IRAs for this 2009 tax year, However, there are always unintended consequences. Here, certain trusts may not be sufficiently flexible to take this tax law change into account. According to a recent article in the Redland Daily Facts:

The new tax law could present problems for trusts that are set up to control post-death distributions to beneficiaries. Many trusts did not take suspension of the RMD into account. If the trust was set up as a conduit trust (or a "trusteed IRA"), where all RMDs (and only RMDs) would be paid out from the inherited IRA to the trust, and then from the trust to the trust beneficiaries, then the trust beneficiaries will receive nothing in 2009, since there are no RMDs for 2009. Chances are this is not at all what the IRA owner would have wanted. I would guess there are going to be some very unhappy trust beneficiaries that will not like this kind of tax relief. IRA expert Natalie Choate suggests if you are considering such a trust for your beneficiaries, consider giving the trustee more flexibility - for example, directing the trustee to distribute to the trust beneficiary each year the minimum required distribution "and such additional amounts, if any, as the trustee deems advisable for the beneficiary's health, education, and support," or to distribute "the greater of the RMD or the income of the IRA each year".

A chance to perhaps help someone else...

I received the following e-mail solicitation from Katherine, which I promised to pass along. It is self explanatory, and relates to a cable television program currently in production:

"WHAT IS YOUR WILL EXPERIENCE?" Have you ever had a will of a loved one read in your family? Were you surprised by the outcome? How did it make you feel? How did it affect your family and their personal relationships with each other?

Most people don't realize upon the death of a loved one how a will, with its web of legal complexities, can generate unexpected tensions that challenge the stability of family relationships. When shocking secrets or unexpected conditions evolve, families often react in ways they could not have predicted. People fight for financial gain or perhaps for physical possessions that may seem like greedy actions to an outsider, but in fact they are often struggling expressions of deep sadness and grief.

We are looking for people who are willing to share their "will" inheritance stories with us. Your testimonies will be invaluable in raising awareness to the difficult issues so many families experience surrounding wills and how they can be avoided in the future. Your participation in our series will help viewers gain a deeper, personal understanding of the complex world of wills.

If you're interested in helping others reach closure on their feelings concerning a past will, or want to make sense of your own experience with a will, I would be very interested to hear your story. Thank you very much for generously sharing your story with me. My name is Katherine and I can be reached at: storiesthewill@gmail.com.

Thank you again - I look forward to hearing from you soon.

Planning Interrelationships: Some Random Thoughts for 2009

Have you ever considered the interrelationship between different types of planning? One aspect of planning affects the other. Here are some examples:

Estate Planning vs. Financial Planning. With estate planning you plan your estates for the benefit of your heirs. But, if your financial plan goes awry (more debt, less income, and/or less savings) it could easily affect your strategy. For example, if your estate plan includes charitable giving as a part of your strategy (if you have a charitable remainder trust, as an example) a decrease in the amount of your available assets could affect the amount you can practically give. In other words, with the recent market turmoil, you might now be “giving beyond your means.”

Also, if your financial and investment plan is hugely successful, you may have estate or inheritance tax issues which you might not otherwise have.

College Planning vs. Retirement Planning. As Deborah Fox recently wrote in the January 2009 issue of Financial Planning, “college planning is retirement planning.” Every cent plus future never-realized appreciation which you spend on college is taken away from retirement. Thus, if you sink $100,000 into college for your children the future value of that amount in 25 years, even at a modest 4% rate of return, would be well over $260,000. Of course this is highly simplistic, because college funds do not (poof!) appear out of the air, but are saved over a substantial period of time. That means that there is a potential for even more never-realized income.

So, what do you do? Here are just a few suggestions:

● Get a financial planner. Many don’t do this, but consider getting professional assistance.

● Get an estate planner. So many people decide to “save a buck” and do their own estate planning. Often this is with less than desirable results. It’s hard to integrate your strategies when there is no strategy.

● Integrate saving and borrowing into your college planning. I will admit: There are many disputes on this score between planners on this issue. Many planners find borrowing an anathema, while others embrace it. Consider this, however: Your children (or, potential children) have a much greater number of earnings years than you do as parents.

Also, consider this analogy: the logic behind a city borrowing to pay for a public improvement is that the resurfaced street, for instance, is to be used for many years by many taxpayers and motorists. It would not be fair to saddle the present taxpayer with all of the cost, but to spread it out over time. The same could be said for college borrowing.

I suggest postponing borrowing as long as possible by using savings, but recognize that borrowing (especially through the federal student loan program) is a perfectly appropriate way to go.

These are just a few suggestions, and each of them could be discussed in a separate article or blog entry. There are more, which I will discuss at a later time. However, the first step in moving forward is...taking the first step.