Lynn Brenner's Family Finance

Can My Creditors Seize My Daughter's Trust Account?

Lynn Brenner — Sat, 20 Mar 2010 08:34:00 -0400

Q: I've gotten into trouble with creditors because I've been unemployed for some time now. I manage a New York State trust for my daughter, which was set up by my parents. It is registered using my Social Security number. Can my creditors invade or freeze this account? -- FW via email

A: No. Your creditors have no legal claim on this money because it doesn't belong to you.

As the trustee, you're responsible for managing the account and distributing its assets to your daughter according to your parents' instructions, but you don't own it. You should take two steps to make this clear.

First, the title on the trust account should reflect its actual ownership. If your daughter's name is Charlotte, for example, and your name is Frances, the title of the trust account should be something like 'Charlotte Smith Trust, Frances Smith trustee.' Ask the bank, brokerage, or mutual fund company where the account is set up to use the appropriate language; every institution has its own wording.

Second, the trust account shouldn't carry your Social Security number. That's going to confuse the Internal Revenue Service, as well as your creditors, because any income earned in the trust account that's reported to the IRS under your Social Security number will be reported as income to you.

A trust is a legal entity, and should have its own federal tax ID number. You can apply for one online. To learn more, go to www.irs.gov and download IRS Publication 1915, 'Understanding Your Individual Taxpayer Identification Number'.

Who Inherits an IRA That's Going Into a Trust?

Lynn Brenner — Thu, 11 Mar 2010 11:54:45 -0500

Q: My dad, who has no Internet connection, asked me to ask you this question: Who will get his IRA if he passes? He is 88 years old, and has a living trust set up. I'm his oldest son and he has given me the executor role. He just read your article in the March-April 2010 issue of AARP magazine ('Who'll Get Your IRA?' ) that has given him some concern on how to handle the IRA. -- GL via email

A: If the IRA goes into the trust, the trust beneficiaries will get it. But how fast it must be distributed -- and taxed -- depends on how the trust is written.

First, a basic fact that's often misunderstood. The legal document that controls who gets your IRA is your beneficiary designation form. When someone says he is leaving an IRA `to my will', or 'to my living trust', he means either that he didn't fill out the IRA beneficiary form at all, or that he used the form to name his will or his trust as the beneficiary.

In either case, the result is that he has made his estate his IRA beneficiary. His will (or his living trust) directs how his estate is to be distributed.

It sounds as if your father has left his IRA to his living trust. And that creates a potential problem:

When you name a human being as your IRA beneficiary, that person can stretch withdrawals from the account over his or her own life expectancy. If your heir has a long life expectancy, that stretch-out can make a huge difference to the size of his or her inheritance.

Let's say you leave a $400,000 IRA to a 40-year-old, for example. He can stretch his required annual withdrawals from the account over another 43.6 years. (His first required minimum distribution would be $9,174 —$400,000 divided by 43.6.) He'd owe taxes on the withdrawals, but the IRA balance could keep growing untaxed for more than four decades.

Assuming an 8 percent annual return and minimum annual withdrawals, by the time he turned 65, the IRA would be worth almost $1.2 million, says Barry C. Picker , a Brooklyn NY IRA expert -- and in the meantime, he would have received $671,000 in annual distributions!

But it's a different story when you name a non-human beneficiary. Legally speaking, your estate expires when you do. It has no life expectancy, so it can't stretch out its withdrawals from the IRA. Instead, the IRA must be emptied within five years of your death, or on a schedule that's based on your remaining single life expectancy according to the Internal Revenue Service actuarial table -- depending on the age at which you died. (The five year rule applies if you were under 70 and a half when you died. The IRS single life actuarial table applies if you were over 70 and a half when you died.)

Either way, the IRA must be emptied much faster than if your kids were using their own life expectancies.

You can avoid this problem if the trust is worded properly. If it's written right, for tax purposes it becomes only a conduit to the human trust beneficiaries. In that case, the IRA can be emptied over the life expectancy of the oldest trust beneficiary.

But your father doesn't have to worry about whether his trust is correctly worded.

There's a simple, cost-free way for him to make sure his IRA beneficiaries inherit the account in the most advantageous way. All he needs to do is to name them on his IRA beneficiary form. If he has already named his living trust, he can ask the IRA custodian for a new form and can change his beneficiary designation.

When your heir is a disabled or minor child who'll need help handling his inheritance, it makes sense to leave your IRA to a correctly worded trust (and to name a reliable trustee.) But otherwise, using a trust as your IRA beneficiary doesn't really provide any advantage -- and if it isn't done correctly, it could inadvertently hurt your survivors by making the IRA taxable much faster than necessary.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.

How Can a Spousal Benefit Boost My Social Security Income?

Lynn Brenner — Sat, 06 Mar 2010 14:30:00 -0500

Q: Here is our scenario. My wife will be 66 this year (her full retirement age). Her monthly Social Security benefit based on her work experience is $1,016. I won't reach my full retirement age for three years. My benefit at that point will be $2,165. My wife wants to start collecting this year, and my plan is to defer until I reach full retirement age.

Is there some way to maximize our situation by using the spousal benefits rules? My understanding is that she cannot claim spousal benefits this year because I haven't reached full retirement age. Is that right? Is it possible for me, when I reach FRA, to delay my application in order to accumulate additional credits, but to collect a spousal benefit -- one-half of her monthly amount until I reach age 70? -- SD, via email

A: You've chosen your best strategy.

Yes, at full retirement age, you can apply for a spousal benefit based on your wife's work record, without simultaneously applying for your own benefit. You can't do that when you're younger. (For information on what to do if your application is initially rejected, see my article 'Setting Social Security Straight'.)

The result: You'll get 50% of her monthly benefit until you're 70, while your own benefit earns extra credits. Then you'll switch from your spousal benefit to your own larger benefit.

You will have earned four years of 8% annual credits, boosting your benefit from $2,165 to $2,857.80. (Actually, you'll get more than $2,857.80 because of annual inflation adjustments.)

When your wife applies for Social Security this year at 66, she'll be applying for her own benefit. She can't apply for her spousal benefit at that time because you haven't yet applied for Social Security. A person who is married can't apply for a spousal benefit until his/her spouse files for Social Security.

(If you had already reached your full retirement age, you'd have a different set of options. You could apply for Social Security and then immediately suspend your application. Then she could apply for either her own benefit or her spousal benefit -- a choice available to anyone who has reached his or her full retirement age. But at 63, you're not allowed to apply for your benefit and then suspend your application.)

As things stand, when you apply for Social Security your wife will already have been receiving her own benefit for three years. At that point, she can ask to have her benefit check adjusted to take her spousal benefit into account.

But the adjustment probably won't add much to the amount she gets. The reason: From what you say, her spousal benefit and her own benefit are almost the same. She'll get an amount equal to the larger of the two. You can never collect your own benefit and your spousal benefit at the same time.

Please send your questions to Lynn@LynnBrennersFamilyFinance.com. I'm sorry I can't respond personally to every email. Questions are addressed only online.