March 29

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Getting an Inheritance From Your Ex

It's official! Senay has committed to the University of Florida. She's already purchased football season tickets and is on the lookout for roommates.

The process of finding roommates has evolved significantly since I attended college. With the advent of social media, you can now thoroughly investigate potential roommates by checking out their profile, texting, and even video chatting to ensure you'll get along.

Additionally, there is a website called www.RateMyProfessors.com that allows you to research your professors before you take their classes. I wish this resource had been available when I was in college, although it must put a lot of pressure on the professors to perform at their best.

We are attending an orientation in May, so I'm sure I'll have more details then. In the meantime, we are stocking up on all the orange and blue "merch" we can find.


A tremendous amount of confusion and misinformation surrounds your beneficiary arrangements (leaving moo-lah to your heirs).

It’s time for: Dave’s Quick and Easy (and Important) Guide to Understanding Beneficiary Arrangements.

It is essential that your beneficiary arrangements match your desires, and today, I will dispel some common misconceptions. Get ready to learn.

Retirement Accounts

You can name primary and contingent beneficiaries on any retirement account (IRA, 401k, Roth IRA, etc.).

Example:

IRA Account Holder: Joey Jenkins

Primary Beneficiary: 100% going to Joan Jenkins (wife)

Contingent Beneficiaries: 50% going to Johnny Jenkins (son)

50% going to Jackie Jenkins (daughter)

If Joey (husband) were to die, Joan (wife) would take possession of the retirement account assets and directly roll over the money to her own retirement account. There is no taxation on this kind of transaction.

If Joey and Joan were to die in an accident, then Johnny (son) and Jackie (daughter) would each receive half of Joey’s retirement account.

Johnny and Jackie then have two options:

Option #1– Take the money in cash. With this option, Johnny and Jackie must pay taxes on their full share of the inheritance.

So, if Johnny (the son) were to receive his portion of $300,000, he would then be required to claim all of that money as income on his tax return for that year. He very well could pay $100,000 to Uncle Sam in federal income tax.

Option #2- Roll the money over into an Inherited IRA. This option would allow Joey to pay no taxes for now. However, as he withdraws money from the account over time, he must pay income taxes, based on his tax bracket, on whatever amount he withdraws.

An Inherited IRA is a great way to stretch out the tax liability, as the beneficiary has up to ten years to withdraw the money.

Also, the 10% tax penalty does not apply to an Inherited IRA (normally you need to be 59 ½ to withdraw money from retirement accounts without penalty).

Roth IRAs pass tax-free, have no timetable for withdrawal, and are tax-free when the money is withdrawn.

Important Notes

You can change primary and contingent beneficiaries at any time.

If you have a 401k, by law, your spouse must be the primary beneficiary (unless they sign a waiver). This is not the case with IRAs.

Beneficiary arrangements on retirement accounts supersede your last will and testament. This is essential to understand.

If your will instructs your IRA to go to your son and your IRA account names your daughter as beneficiary, the daughter gets the money. It doesn’t matter what your will says; the beneficiary designation trumps the will.

Non-Retirement Accounts

Now, let’s move on to non-retirement assets. These include cash, savings, brokerage accounts, stocks, bonds, or anything else you possess outside your 401k or IRA. Your home and other properties would also fall under this category.

These assets fall under completely different rules.

You can have a non-retirement account "held jointly." So, if one person dies, the other automatically takes full control of the account.

You can also set up a Transfer Upon Death designation (commonly referred to as a TOD). So if Joey Jenkins has a savings account titled in his name, and his desire is for the account to transfer to his daughter upon his death, the account would look like this:

Owner: Joey Jenkins TOD Jackie Jenkins.

Important Notes

A TOD designation avoids probate. The money will be transferred to the beneficiary immediately upon your death. Jointly held accounts also avoid probate.

You can name more than one person on your TOD instructions. You can split up the beneficiaries just like a retirement account.

In Florida, while your home can be owned jointly, you cannot place a TOD on it or any other real estate.

Setting up a trust can accomplish the same things as mentioned above, but a TOD might be more straightforward in many situations.

Annuities held outside of retirement accounts require you to name a beneficiary. Therefore, annuities operate very similarly to retirement accounts. Life insurance also operates under beneficiary rules similar to retirement accounts.

Wow! That was some technical (and important) information. This information can help you avoid probate and ensure the right people get the right money.

It's important to remember that you've put in a lot of hard work and effort to accumulate your wealth. So, take a moment to consider all the time and energy you've invested in building your estate. It's crucial to take the necessary time and care to ensure that your beneficiaries are designated correctly and your assets are distributed according to your wishes.

I have seen too many unfortunate situations arise due to simple mistakes in beneficiary arrangements, which can lead to chaos and confusion. So, do yourself and your loved ones a favor and make sure your beneficiary arrangements are up-to-date and accurate.

Be Blessed,

Dave

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