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Here a Trust, There a Trust, Everywhere...
Curt's Quick Comment
Inheriting a Love One's Retirement Assets
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals

Happy Independence Day!  I know it was a couple of days ago, but I hope you had the opportunity to celebrate this country's birthday.  Welcome too, to the July edition of Financial Strategies.

This month's issue focuses on Estate Planning issues.  The first article introduces the world of trusts.  Trusts can be a very effective tool for financial and estate planning.  And...they are not just for rich people.

My Quick Comment talks about 401(k) fees.  Something that might surprise you.

The second article talks about the tax consequences and options of inherited retirement accounts such as 401(k)s and IRAs.

As always, I wrapped up this edition with two articles I thought were interesting.  The first takes a look at wash sale rules and how you can limit their impact. 

The final article looks at savings for college.  While this article talks about saving for college if you haven't saved for college, all is not lost.  There are other options that can help soften the financial impact of college.  I'll plan on talking about that next month.

Enjoy the summer but please keep in mind those who are having a tough time right now...those in the west up against horrific wildfires and those here in the east recovering from storms with too much rain (in Florida) and no electricity (Eastern Seaboard).
Curtis L. Sheldon, EA
C.L. Sheldon & Company, LLC
(703) 542-400 or (800) 928-1820
Here a Trust, There a Trust, Everywhere...


Dad and SonOne of the most valuable tools for Financial Planning and especially Estate Planning is the Trust.  Trusts can do a lot of different things for you and no, they're not just for rich people.  What I'll do in this article is introduce you to three types of trusts and how they can work in your Financial Plan.  But first, please remember that setting up trusts and estate planning are activities that need to be done with a great deal of precision.  You need to work with a qualified estate planning attorney along with your Financial Planner.  This is not a "do it yourself" project.  So let's take a look at Living Trusts, Irrevocable Trusts and Credit Shelter Trusts.


Living Trusts


Living Trusts are actually a revocable trust.  In a Living Trust you contribute Corpus (assets) to the trust and the trust actually owns the assets.  The key point with a Living Trust is you can change your mind.  If you want to take the assets out of the trust and own them yourself, you can.  So why would you want to set up a Living Trust?




Avoid Probate.  The assets in a trust are not subject to Probate.  Assets in a Living Trust pass to beneficiaries without going through Probate.  Probate is the process of distributing your assets in accordance with your will and there are expenses associated with Probate.  Additionally, any assets that pass through Probate are public record and if someone wants to find out about a Probate Estate they can.


Transfer of Control.  A Living Trust can be structured such that if the trustee becomes incapacitated someone else takes over control of the trust.  This can be used to help an aging parent who can currently act as his or her trustee but if cognitive impairment becomes an issue a new trustee can take over administration of the trust without too much of an administrative burden or having to go to court.


Estate Liquidity.  Assets in a trust can be immediately distributed by the successor trustee in the event of death.  There is no requirement to wait for the probate process to run its course.


What It Can't Do


Reduce Taxes.  Since the original donor to the trust maintains a level of control of the assets in the trust both trust income and trust assets can be subject to taxation.  Trust income will normally flow the beneficiary as taxable income.  The income will maintain its same character for the individual as the trustee.  For example, if the trust earns interest then distribution of that interest to the beneficiary will be characterized as interest on the beneficiary's Federal Income Tax return.   In the event of death assets in the trust are considered part of the donor's estate for Federal Estate Tax purposes.  Whether the estate is large enough to be taxed depends on the law in place at the time of death.




Contracts.  Transfer on Death (TOD), beneficiary designations, joint accounts and other contractual agreements can remove assets from the Probate Estate and also provide for estate liquidity.


Power of Attorney.  A General Durable Power of Attorney (POA) can also be used to plan for cognitive impairment.  It is, however, critical that the POA be Durable.  If the POA is not written to be durable it becomes void if the grantor loses the capability to cancel the POA.


Irrevocable Trusts. 


Like the name implies once you put an asset into an Irrevocable Trust you can't take it out.  It is pretty much as simple as that.  In the context of this article Irrevocable Trusts provide the following.




Estate Reduction.  Assets contributed to an Irrevocable Trust are not part of the donor's estate (there are limitations) and not subject to Estate Tax.  A common practice is to place a permanent life insurance policy inside an Irrevocable Trust and gift the premiums to the trust each year.  By doing this the death benefit is paid without being included in the insured estate.  This type of Irrevocable Trust is called an Irrevocable Life Insurance Trust (ILIT). 


Transfer of Control.  Like a Living Trust transfer of control from one generation to the next can be accomplished with an Irrevocable Trust.


What is can't do


Taxes.  An Irrevocable Trust may or may not reduce your Federal Income Taxes.




Transfer Ownership.  By transferring ownership you also remove an asset from your estate.  For instance, a father could transfer the ownership of an insurance policy to a daughter (if the daughter is the beneficiary) and gift the premiums to the daughter each year.  This would remove the insurance death benefit from the estate  (just like an Irrevocable Trust there are limitations...for example you can't do it on your deathbed).


Credit Shelter Trusts


Also called By-pass trusts these types of trusts are Testamentary Trusts which means they go into effect in response to instructions in the Last Will and Testament.  Testamentary Trusts are used for two primary reasons.


Use the Estate Tax Credit.  Until this year, if a married individual died and passed all of his or her assets to the spouse it was possible that the estate taxes would be higher on the second death than if the "first to die" had used some of his or her estate tax credit.  At the end of this year the law will revert to the old method unless Congress does something (Did I actually say "Congress does something"?).  By using a Credit Shelter Trust an individual can use the estate tax credit and thus reduce the overall taxation of the married couple's estate.  The trust can be set up to provide income to the spouse (under certain circumstances) without being a part of the spouse's estate.


Control Use of the Funds.  If an individual has minor children or children or other heirs that are not yet responsible with money, the trust can be set up to limit when the child can access the funds and how much of the trust assets the child can have at any given time.


This is, of course, just an introduction to trusts.  But you can see that trusts can have a use in almost anyone's Estate and Financial Plan.  Please remember though, this is not something you can do yourself regardless of what you hear on TV.  Seek competent legal advice before you draft any estate documents. 

Curt's Quick Comment
Did you know that you pay fees for your 401(k)?  According to a recent survey 70% of Americans don't know that they pay 401(k) fees.  That will change soon.  By the end of August, your employer will have to disclose 401(k) fees to you and your November statement will show how much you paid in dollars.  For more information, click here
Inheriting a Loved One's
Retirement Assets
Understanding the IRS Rules for Beneficiaries is Critical


If you recently inherited retirement assets from a deceased loved one, it is important to pay attention to IRS rules that govern this type of bequest. Your options in managing this money typically depend on your relationship to the deceased and the type of retirement account (401(k) or 403(b) plan, IRA, or annuity) that you inherited.

Employer-Sponsored Plans


When inheriting a deceased spouse's assets within an employer-sponsored plan, you are not required to pay federal estate or income taxes if the assets are left intact within the estate. After age 70, you must begin required minimum distributions (RMDs) based on your life expectancy. The formula for calculating the RMDs, which are taxed as ordinary income, is available in IRS Publication 590. This withdrawal schedule typically is preferred to cashing out the entire bequest at once, which is likely to trigger higher tax payments.


If the deceased was not your spouse, the plan's rules generally determine your course of action. Depending on the plan, you may have one or more of the following options: Leave the money in the plan, transfer the money to an IRA created for this purpose, or elect a cash distribution.


Some employer plans offer nonspousal beneficiaries the option of completing a trustee-to-trustee transfer from an employer-sponsored plan to an IRA established for this purpose. The nonspousal beneficiary is required to take annual distributions based on the beneficiary's life expectancy. Note that in this type of scenario, the IRA is opened in the decedent's name for the beneficiary's benefit, and assets transferred to the IRA cannot be comingled with other IRAs that the beneficiary may have established.


In other instances, employer plans can default to a five-year payout rule and require nonspousal beneficiaries to empty the account within five years of the death of the deceased. Distributions taken by nonspousal heirs are taxed as ordinary income.


Before taking any action, it is critical to determine the rules of the deceased's retirement plan and consult a financial advisor or a tax advisor to make sure that you avoid unnecessary taxes.



When inheriting a traditional IRA from a deceased spouse, you may designate yourself as the account owner and treat an inherited IRA as your own. This means you can transfer the assets to an existing IRA. These transfers typically do not trigger tax payments as long as you follow the rules for trustee-to-trustee transfers. You may also begin taking distributions, which are taxed as ordinary income. With a traditional IRA, after age 70, you are mandated to take annual RMDs, which are based on your life expectancy and are taxed as ordinary income.


If the deceased was not your spouse, you cannot transfer assets within an inherited IRA to your own existing IRA. Instead, you have two options: You may take all distributions within five years of the decedent's death or take annual distributions determined by the life expectancy of you or the decedent, whichever is longer.



If you receive a survivor annuity, the tax status of periodic payments to you is determined by how much the decedent paid for the annuity contract, which is known as the cost basis.(1) If the decedent did not pay for the contract (for example, if it was provided by an employer), periodic payments to you are taxable. Assuming the deceased had a cost basis, the amount up to the cost of the contract is not taxable, but amounts in excess of the deceased's cost are taxed as ordinary income.

Because determining the tax status of annuities and other inherited retirement assets can be complicated, you may want to consult an estate planning attorney or a financial advisor to answer any questions you may have.

(1) An annuity is a long-term, tax-deferred investment vehicle designed for investment purposes and contains both an investment and an insurance component. They are sold only by prospectus. Guarantees are based on the claims-paying ability of the issuer and do not apply to an annuity's separate account or its underlying investments. The investment returns and principal value of the available sub-portfolios will fluctuate so that the value of an investor's unit, when redeemed, may be worth more or less than their original value. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal.

Required Attribution

Because of the possibility of human or mechanical error by S&P Capital IQ Financial Communications or its sources, neither S&P Capital IQ Financial Communications nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall S&P Capital IQ Financial Communications be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.  

2012 S&P Capital IQ Financial Communications. All rights reserved.

June 2012 - This column is provided through the Financial Planning Association, the membership organization for the financial planning community, and is brought to you by C.L. Sheldon & Company, LLC, a member of FPA. 

From the Financial Presses
Four Wash Sale Rules to Help Clean Up Taxes


If you're an experienced investor, you're probably familiar with the "wash sale" rule. Under Section 1091 of the Internal Revenue Code, you can't deduct a loss from the sale of securities if you reacquire substantially identical securities within 30 days of the sale...(To read more click here)
College Savings: How Much Do You Need Each Month?
The ever-rising cost of college shows no sign of abating. According to the nonprofit College Board, tuition and fees for the 2010-2011 academic year at four-year public colleges increased on average by 7.9% from the previous year, to $7,605, for in-state students, and by 4.6%, to $8,535, for those from out of state...(To read more click here


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Military Professionals have unique financial benefits and unique financial unique financial needs.  If you think you would like some help developing your Financial Strategy please give us a call at (703) 542-4000 for a free initial consultation or for more information go to our website at .