Estate Planning Around Your Nest Egg
When
you think of “estate planning” you probably imagine writing a will and giving
instructions about who gets the house, the car, and grandma’s jewelry. But an
important asset for many people is their IRA and employer retirement plan.
Retirement plans are generally passed to beneficiaries directly, and are not
disposed of in a will. Talk to your lawyer about your arrangements for your
nest egg—they should be coordinated with your overall estate plan and with
your will or trust.
Traditional IRAs
A traditional IRA is a retirement plan for individual investors. You can open one if the funds you contribute come from taxable earned compensation made during the year of the contribution. The advantage of IRAs is that your contributions are not taxed at the time you invest or annually, but only at the time of withdrawal. At that point you’ll pay income tax on whatever you withdraw, but presumably at a lower rate because your income will be less at retirement. These rules mean that you invest every cent of what you put into the IRA, which can add up to a lot of money over 30 years.
You must start making withdrawals after you reach age 70 ½. The amount you must withdraw each year depends on your age, and is calculated so that you will use up your retirement income by the time you die.
You can name someone as the beneficiary of the account on the beneficiary designation form the account custodian gives you when you open an IRA. The beneficiary will inherit the balance of the account on your death. You don’t need to mention the IRA in your will or living trust—the beneficiary form is the only thing you’ll need to sign. And don’t worry, you can change your beneficiary at any time. It’s your money after all.
When the beneficiary receives the funds, he or she has several options. If your spouse is the beneficiary, he or she is allowed to roll over your retirement plan into his or her own IRA. No other beneficiary has this option, not even your children.
All beneficiaries have the option of withdrawing all the money from the IRA immediately, although if they do this they will have to pay income tax on the money they receive. With careful planning, however, your beneficiary may be able to spread distributions out over many years.
It’s important to remember when you’re planning your estate that your IRA passes to beneficiaries outside your will, and does not go through probate. However, it is not an ideal vehicle if your primary aim is to pass money to beneficiaries, because the compulsory withdrawal of funds means that the money will be depleted at your death, unless you die earlier than the actuarial tables suggest. If you want to build up your estate, pass money to beneficiaries, and avoid probate, a much better option is the Roth IRA.
Roth IRAs
Roth IRAs do not offer a tax deduction for contributions, but do provide tax-free withdrawals. In addition, they do not mandate compulsory withdrawals after you turn 70 ½. For these reasons, Roth IRAs are an appropriate vehicle for people who want to build their estate and avoid probate after death.
You can contribute up to $3000 per year to a Roth IRA (more if you’re over 50) and let the income accumulate, tax-free. After your death, the money will go to whomever you named as the beneficiary. The beneficiary will simply need to show a certified copy of the death certificate to claim the funds, quickly and without going through probate.
Employer Retirement Plans
Most of us are entitled to retirement benefits from an employer. One popular option is a 401(k) plan, which allows you to defer part of your salary into a retirement fund, so that you can save for retirement while simultaneously reducing your income tax.
Typically, an employer retirement plan will pay benefits to beneficiaries when you die. There are all kinds of rules that may attach to employee retirement funds, including stipulations that benefits be paid to beneficiaries in the form of a survivor annuity. A lump sum distribution may only be available if you file a waiver before you die.
In most cases, the law requires that some portion of these retirement benefits be paid to your spouse, who may roll the money over into his or her own retirement plan. Your spouse may waive the right to receive a portion of your retirement benefits only by giving a properly witnessed, signed consent. Why would your spouse waive the right? There are several possible reasons. Your spouse might not wish to pay income tax on the distributions from the plan, or perhaps the money might be better used by another beneficiary. If your spouse does waive the right, then your plan might allow you to name a trust or some other person, such as a child, as your beneficiary.
Be Clear About Your Beneficiaries
It might seem pretty easy to nominate beneficiaries to these retirement plans, but life has a way of making things difficult. Remember, the bank or plan will do what the form tells them to do, so it’s up to you to make sure that the form reflects your current intentions. If you get divorced, for example, you’ve got to remember to update your IRA beneficiary form, so that your ex-spouse is no longer listed as beneficiary.
Or what if your wishes are complicated? Say you want to leave your IRA account to your son and daughter, with the intention that your daughter’s children share any money left over when your daughter dies? This may not be a standard option in the forms offered by banks and brokers. If your bank or broker allows it, you should attach an additional beneficiary designation to the printed form provided. In this document, you can provide more detailed distribution planning. However, banks and retirement funds aren’t in the business of settling your estate, and there are limits to what you can ask them to do through beneficiary designations.
Trusts
The best way to undertake complex planning, make your wishes clear, establish a mechanism for carrying them out, and save time and heartache for your relatives down the line, is to name a trust as the beneficiary of your 401(k), IRA, insurance policies and other accounts. Then the money will go into the trust after your death, and will be distributed to beneficiaries as dictated by the terms of the trust. This means that you can be much more specific about where the money goes—if you like you can leave 10 percent to the ASPCA, 30 percent to your brother, and the rest to your daughter, with any unexpended funds to go to the Cancer Research Society after her death.
Other Issues
Beneficiary designations are key components of many other kinds of plans, including annuities, Keogh Plans, and a wide variety of retirement plans available to business owners. Each of these may have special rules, and all should be carefully coordinated with the rest of your estate plan.
Your lawyer may also be able to help to advise you and your beneficiaries on their options for receiving the bequest (lump-sum distribution, monthly payout, etc.); the interface between your decision about who to name as beneficiaries and your family situation, particularly in the case of blended families or divorce or separation; naming charities as beneficiaries; and how to handle contingent beneficiaries (those who you would like to receive benefits in case one of your primary beneficiaries dies).
If You’re Over
50, You Have Some Catching Up To Do
In 2001, Congress increased the maximum regular
contribution that investors over 50 can make to their IRA or 401k plans.
Congress’ motivation was in part to allow women who had taken time out of the
workforce to “catch up” in accumulating retirement savings, but of course men
can increase their contributions as well.
The
maximum annual contribution to a traditional or Roth IRA used to be just
$2000. Now investors can contribute $3000 a year, or $3500 if they’re over 50.
Investors participating in employer-sponsored retirement programs such as
401(k)s and 403(b)s can also contribute an extra $1000, raising the maximum
contribution amount to $12,000.
If you’re over 50, check your plan and talk to your lawyer about increasing
your contribution and coordinating the increased benefits with the rest of
your estate plan.
Computer Privacy on the Job
These days, computers are everywhere in the workplace. They’re a great tool for work—and a great source of fun too. To keep a lid on things, employers can monitor office computers. Employees should be careful about the websites they visit, the emails they send and receive, the games they play, and how long they spend online. Here is a quick look at this evolving area of law. Your lawyer is your best guide to particular problems you may encounter.
Q. May employers monitor computer activity?
A. The overwhelming majority of legal commentators, and courts that have decided such cases, say yes. The office computer, they note, is no different than the telephone on your work desk, the use of which employers have traditionally and quite legally limited to work-related communications (by prohibiting personal calls on company time, for example.)
In fact, many employers now have written policies saying they can and will monitor office computer use. These policies are usually included in the documents given to new employees. Employees are often instructed to sign a piece of paper confirming that they have received the policy document.
Companies defend their examinations of employee emails and website visits as necessary to protect proprietary information from being downloaded and emailed, to discourage harassment in the workplace, to reduce waste, fraud, and abuse of the company’s resources, and to ensure that office computers are being used for company business.
Q. May I use my work computer for personal email and online shopping?
A.
The official answer is, only
if your employer lets you. Such overt permission is very rare, but informally
employers often don’t object as long as the use is minimal, does not interfere
with doing your job, and is perhaps subject to other restrictions.
All in all, it’s best to be cautious. Before sending that email or visiting
that website, ask yourself if your company lets you make personal phone calls
or shop on company time. Now ask yourself if you mind having your employer see
the content of your email or discover when and where you shop. Even if your
employer allows these practices, it’s best to use your work computer sparingly
for personal business.
Q. If my employer does not want me to play games, why is solitaire on my computer?
A. Games such as solitaire come with many computer programs, including those destined for the workplace. Your employer does not install them. The fact that a work computer contains games should not be interpreted as the employer’s tacit approval of employees playing them. Employers may still prohibit employees from playing computer games on company equipment, particularly on company time.
Q. What if I am working from home on my own computer?
A. If you’re working at home and you’re connected to the company’s computer network, your employer can access records of the websites that you visit, just as if you were working in the office. Employers remain concerned about protecting proprietary information, preventing harassment and ensuring that company time is devoted to company work. Breaching any of these employment policies remains cause for disciplinary action even if you are working from the comfort of your home office.
Q. Must I return all the nifty software my employer allowed me to put on my home computer?
A. Yes. The software belongs to your employer, or is licensed from another company by your employer, who let you install it or download it on your computer for the very limited purpose of doing the company’s work. Once that employment ends, the law or perhaps an agreement with your employer may require that you return the employer’s goods to the company.
The law is not settled, however, on the issue of whether companies can require ex-employees to surrender their home computers for the former employer’s inspection.
Q. Do these rules also apply to freelancers and contractors?
A. Yes, unless the contract between the company and freelancer states otherwise. It would be a rare company that would cede any equipment to someone who is not an employee.
In this highly
computer-connected world, an increasing number of people are opening home
consulting businesses in which they perform outside work for many companies.
Their home computers become a smorgasbord of software programs from the
companies they serve. These workers are called contractors for a reason: they
are governed by a contract with each company.
The terms of the contract will generally spell out the terms under which a
company allows a consultant to use its software and related equipment. This
permitted use is often very limited so as not to blur any legal lines between
a contractor, who relies predominantly on his or her own materials, and an
employee, who has freer rein over the company’s equipment.
Even in the absence of a written contract, one hallmark of a freelance
relationship is that freelancers use their own equipment. Anything given to
freelancers by the company is for a limited purpose and must be returned.
Consultants, freelancers and contractors often are required to sign
nondisclosure agreements that allow for the inspection of their computers if
there is reason to determine compliance with the company’s policy.
Employees Take Heed
- Be careful how you use your computer at the office. A great safety rule is to imagine that your employer is looking over your shoulder whenever you access websites or send or receive email.
- Be aware that many employers have termination policies in place for employees who visit certain offensive websites.
- Exercise that same caution when you are working from home on the company’s computer network.
- Your company’s software belongs to the company even though it is on your personal computer. When the company wants it back, return it.
The Legal Side of Home Businesses
Sometimes it seems that home-based offices are as common as snowflakes in Alaska. Corporate downsizing has played a role. And personal computers, modems, and faxes have made it easy for a home office to communicate with the world at the push of a button.
Starting a business at home has lots of pluses. You’re comfortable there, the price is right, you can dress as casually as you like. But just because it's your PC in your den, you don't necessarily have the right to do whatever you want. There are a few legal hurdles to clear if you're starting a home-based business. As usual, it's better to deal with these early rather than late. Your lawyer can help in these matters, as well as with home-office taxes and insurance, which we’ll cover in a later issue.
But It's Not Really a
Business...
Don't be lulled into thinking that just because you work out of your home
you're not in business. If you’re a successful writer or graphic designer, you
may think of yourself as a freelancer who works today for this client,
tomorrow for that. From the law's standpoint, though, you’re not a temporary
employee of these clients but a business. You have to be concerned with
credit, collections, contracts, taxes, insurance, how to structure the
business, and a lot more, just as if you worked out of commercial space.
Zoning
Depending on what you're doing, and where you're doing it, your home-based business might mean you need to get acquainted with your locality’s zoning department.
Zoning is a way of keeping neighborhoods from getting cluttered with all sorts of things. That's why your town or city probably has zones for heavy industry, commercial space, and residential space, as well as some for mixed use.
A possible problem is that your neighborhood might be strictly zoned for residential use only. You can find out by asking your zoning officials some questions based loosely on the business you're thinking of starting.
The quieter and less obtrusive it is, the more likely that you're okay with the law. Red flags are apt to be raised by
- visibility
- noise
- smell
- signs
- increased traffic, and
- employees.
Taking Care of Wee Ones
Lots of people operate day care centers from their homes. These businesses are
often regulated by states and localities. Many states have special license
requirements for day care centers. You may get a break, though, if you're only
caring for a small group of children. In some states, the licensing and other
requirements for day care centers in private homes that care for only a few
children are less rigorous than those for larger group day care centers.
Either way, find out what regulations apply and deal with them early in the
process.
If your preliminary inquiries indicate that there might be trouble (or if trouble comes after you've started because the business has grown), you may have several options:
1. Adapt the business so you comply--make sure your signs are the right size, that you don't use too many parking spaces, and that you have only the maximum number of employees the zoning laws allow.
2. Try to get the law to adapt to your business. The zoning language may go back decades, long before your type of business ever existed. It may be possible to convince those in charge of enforcement that your business does not violate the spirit of the law.
3. If that fails, your zoning laws probably allow you to petition the powers that be for either a special use exemption or a variance. Either one essentially creates an exception for you. You'll have to make a formal request to the zoning board or a similar governmental body. There probably will be hearings, to let your neighbors complain if they're so disposed. It's a good idea to ask your lawyer to represent you. Be prepared to show that the business causes minimal problems. Try to secure testimony from neighbors who aren't bothered.
4. If you're on the edge of a zone, you could try to have the small area covering your home rezoned slightly, so you're in a permissible zone, rather than one in which you're violating the law. This probably requires a vote by the city council (or whatever your local legislature is called), and going this route might be a big deal.
Private Regulations
Even if the zoning folks don’t raise any problems, you might run afoul of other regulations. If you live in a condo or co-op, there is certainly a governing document (the declaration or master deed) that spells out the rules and regulations of living there. If you rent, there's probably a lease that tells you what you can and can't do. Sometimes residential developments have declarations of covenants and restrictions put in by the builder, to assure buyers that the quality of living there won't deteriorate.
All of these probably include some standard language designed to deter or limit the business use of the property. A good first step when you're thinking about starting up a business in your apartment or house is to look at whatever document sets the rules. Maybe what you're thinking of isn't prohibited.
If it is, it might be
possible to resolve any potential problems with a little negotiation. Maybe
the landlord or the condo board won’t think your proposed business will be
disruptive once you explain it to them. Let them know that the business will
be run during normal hours, with little extra noise and traffic. Try to have
it recognized by a rider in the lease or a waiver in the declaration.
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