Beware the Trust Mills and Their Peddlers

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A very good Times Herald article sheds light on the problematic practice of non-attorneys pushing estate planning documents on unsuspecting consumers.  Not surprising, this advice is given for the non-attorney’s own financial gain.  There’s big money in peddling “estate plans” on an unsuspecting public.

In Michigan, our State Bar has received numerous complains regarding estate plan salespersons practicing law without an attorney license by giving legal advice. The Michigan Attorney General and the Michigan Office of Financial and Insurance Services have received numerous complaints about deceptive sales practices by annuity and life insurance sales persons.  To counter these predators, the State Bar of Michigan Elder Law and Disability Rights Section and the Probate and Estate Planning Section have been promoting “A Living Trust Education Initiative,” the goal of which is to educate Michiganders about deceptive estate planning schemes and what to look out for.

These predators, commonly known as “trust mill peddlers,” use two primary schemes to separate you from your money. The first scheme is a free lunch or dinner presentation under the guise of providing “estate planning” or similar information.  (Who can pass up a free meal?)  The second is the home visit generated by a lead card mailed to you offering free estate planning information that you fill out and mail back to them. Some will even use a combination of the two.

Once they get in front of you, trust mill peddlers will attempt to sell you a trust plan without learning about your situation or your assets and income. They tell you they don’t need to know the specifics of your situation, your family, or how you want your assets distributed after your death, because they know what you need and their trust plan will protect you.  They will often times employ scare tactics to get you to buy their trust plan. Their ultimate goal, however, isn’t to provide you with an estate plan. It’s to get you to purchase expensive annuities, life insurance, and other investment products through the companies they represent, on the basis that the trust plan will work best with these products (which generate high commission income and fees for them).

So, how do you protect yourself from the trust mill peddlers? Most importantly, always rely upon trusted, knowledgeable, and licensed legal, insurance, investment, and tax professionals to help you with your financial and legal affairs. If you do not know any yourself, ask a friend or relative for a referral.  Second, avoid the common tactics used by trust mill peddlers, such as informational meetings including a meal, lead cards sent to you in the mail offering free estate planning information, and non-attorneys coming to your home to sell you an estate or trust plan.

Read the entire article here.

New Once-Per-Year Rule On IRA Rollovers Looms

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Beginning January 1, 2015, IRA owners will be limited to one IRA rollover per year under a new Internal Revenue Service rule. The IRS issued the rule in response to a recent US Tax Court decision which held that multiple rollovers between different IRAs owned by the same taxpayer violated the Internal Revenue Code. The new rule will be applied prospectively and will impact taxpayers owning more than one traditional IRA or Roth IRA.

Under the new IRS rule, an individual receiving an IRA distribution on or after January 1, 2015, cannot roll over any portion of the distribution into an IRA if the individual has received a distribution from any IRA (whether a traditional IRA or Roth IRA) in the preceding 1-year period that was rolled over into an IRA. The new aggregation rule, which takes into account all distributions and rollovers among an individual’s traditional and Roth IRAs, will apply to distributions from different IRAs only if each of the distributions occurs after 2014. This creates a special transitional safe harbor for those taxpayers who received a distribution from an IRA in 2014 and properly rolled it over into another IRA. Such a rollover will be disregarded for purposes of whether a 2015 distribution can be rolled over, provided that the 2015 distribution is from a different IRA that neither made nor received the 2014 distribution.  This gives IRA owners a fresh start in 2015 when applying the one-per-year rollover limit to multiple IRAs.

A conversion from a traditional IRA to a Roth IRA is not subject to the aggregation rule, and such a rollover is disregarded in applying the one rollover per year limitation to other rollovers. Note, however, that a rollover between an individual’s Roth IRAs would preclude a separate rollover within the 1-year period between the individual’s traditional IRAs, and vice versa.

The one-per-year rollover limitation does not apply to a rollover to or from a qualified plan [such as a 401(k) or 403(b)] (and such a rollover is disregarded in applying the one-per-year rollover limitation to other rollovers). More importantly, it does not apply to direct trustee-to-trustee transfers.

This rule will certainly encourage taxpayers to make direct trustee-to-trustee transfers when moving money between IRA accounts.  Trustee-to-trustee transfers expressly avoid the new rollover aggregation rule.

The rules governing distributions from IRAs and other retirement accounts are very complex, and very tricky. Even seemingly simple transactions involving an IRA or other retirement account can result in disastrous tax consequences. And the Internal Revenue Code is extremely unforgiving. Consult your CPA or other tax adviser, or give me a call. I can help.

Never Assume – Here’s Another Reason Why.

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People can be surprisingly nonchalant when it comes to beneficiary designations on retirement accounts and life insurance policies. They assume even if they have missed a beneficiary designation or it is out-of-date, the remaining account balance will automatically go to their surviving spouse or children upon death.

However, a recent survey done by the National Investment Company Service Association (NICSA), reveals that there is little consistency among IRA providers as to how default IRA beneficiary designations are handled. According to the survey, the default beneficiary will vary widely depending on the provider. For example, 43% of accounts default to a surviving spouse, then the estate; 30% default to the account owner’s estate (not a spouse or children); and only 22% percent default automatically to a spouse, then the children, then the estate. To complicate matters, many people have multiple IRAs at more than one institution, which means the default beneficiary treatment of each account will vary.

A beneficiary designation on an IRA or other retirement account is critical because retirement accounts are automatically excluded from an account owner’s probate estate as long as the account has at least one person designated as the beneficiary who survives the account owner. If there is no then living beneficiary, the account is deemed to have no beneficiary and it must be paid to the deceased owner’s estate. This has two very bad effects: First, a probate estate has no life expectancy and, consequently, the account has to be liquidated, which can result in a significant income tax bill; Second, because the account must be paid to the owner’s estate, it becomes subject to the claims of the owner’s creditors – and the creditors enjoy a prior right to the funds ahead of surviving family members, even a spouse.

IRA providers will include default beneficiary designation clauses in their account agreements so that if the account owner fails to designate a beneficiary before death, or the designated beneficiary dies before the account owner, the balance in the account will still pass to a default beneficiary per the account agreement. But as the survey shows, you cannot assume who that beneficiary is, and there’s a nearly 1-in-3 chance the default beneficiary will be the owner’s estate.

I’ve seen too many cases where a retirement account or life insurance benefits passed to an unintended beneficiary, and it’s next to impossible to correct something like that after the owner’s death.

One of the homework assignments I give to all of my planning clients is to verify all of their beneficiary designations on each of their retirement accounts and life insurance policies. It is very common for clients to come back to my office having discovered that they missed a beneficiary designation or one or more were out-of-date. At least they have a chance to correct them.

So, don’t leave it to chance. Do your homework and make sure your beneficiary designations are up to date.