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Ethical Wills

We have heard about a Will – a Last Will and Testament, which names someone to take care of wrapping up our affairs and directs the distribution of our assets.  But, have you heard of an Ethical Will?

What exactly is an Ethical Will?  Simply put, it is a communication to your loved ones to share some personal thoughts.  It is written by you, not by an attorney, and simply provides some explanation to your loved ones.  Here are some examples of issues that can be addressed in an Ethical Will:

  • You can explain in your own words the reasons that you have prepared your estate plan as you have.  What made you do what you did with regard to decisions you made during your lifetime.  What are your views about money, charitable giving, what you hope the future will hold for them with their inheritance and your hope for how they will spend their lives.
  • This could be an opportunity to share thoughts with your trustee on such ideas of the use of distributions from a trust by a beneficiary, i.e., if the beneficiary requested a distribution to start a business, return to school, buy a house – decisions of what you feel would be a reasonable use of the distribution.
  • You could reflect on lessons you have learned along life’s path and how they have impacted you, people who may have influenced you, experiences you have had, relationships that have been important, how you might hope they will carry on in life without you.
  • Acquiring wealth can occur in a variety of ways and explaining how you acquired your assets and your philosophy is another option. 
  • Last, but not least, just leave a message of love and gratitude for your feelings toward your loved ones left behind – basically this could be a real tear jerker! 

Among the advantages of such an ethical will are an option for communication to express things that may be difficult to share during your lifetime, to share your thoughts at a time when your thoughts may be better received, to provide guidance that is put down on paper and enable it to be referred to as often as wanted, to share special moments about your ancestors and perhaps events shared with them and the list could go on and on. 

And, don’t forget the benefits you could derive from writing your ethical will, just knowing that you have put your important thoughts on paper for your loved ones to hold on to after you have passed.

New Required Minimum Distribution Rules

A few years ago, the Required Minimum Distribution (RMD) rule changed from requiring distributions at the age of 70-1/2 to 72 years.  Life expectancies are increasing (sans Covid) and the Consolidated Appropriations Act of 2023 has extended the starting age for RMDs to the age of 73 for those who turn 72 after December 31, 2022.  If you turn 72 in 2023, you can now delay the withdrawal until the tax year for 2024.

Looking to the future, if someone turns 74 in years 2033 or later, the beginning withdrawal age goes to 75 years. 

But, do not despair and think that you must wait to withdraw from your retirement assets.  Once you reach 59-1/2 years, there is no penalty/surcharge for early withdrawal and these assets are available to you. 

Remember that prior laws have changed the time one has to withdraw from retirement-type assets they receive as a beneficiary to a maximum of ten (10) years, with a few exceptions.  These withdrawal requirements are separate from a retirement asset you own and have access to during your lifetime. 

It is likely that any withdrawals, whether from your own retirement assets or from retirement assets you inherited, will be subject to income tax (except for Roth IRAs) and you will need to provide for the additional income being reported on your income tax returns so that you will not be subject to underpayment penalties and/or interest, which can add up quickly. 

If you need assistance with the decision of when and how to receive your RMDs, speak with your financial advisor or the plan administrator/financial institution.  Don’t think that the distributions will automatically begin when you reach the “magic” age, for there will always be paperwork to be completed!

Retirement Account Differences

You hopefully have an IRA, 401(k) (or another 401 account with a different letter), pension or another type of retirement account.  But, do you know the differences?  Here is a quick look at the differences:

Pension – This is something that we are seeing less and less.  Pensions are usually employer sponsored and employees receive a benefit after retiring.  Employees usually have not contributed to this benefit.  If the employee terminates employment prior to retirement, the benefit will likely cease and the employee will have no further entitlement.  These payments are usually fully taxable for income tax purposes.

401 (with a letter) – This is a retirement account that is employer sponsored and to which employers and/or employees contribute.  The contributions made by employees are pre-tax and go into an individual account within the plan of the employer.  Upon termination of employment or retirement, the employee will roll the assets in the account into an IRA – Individual Retirement Account.  Since this is an asset to which the employee has a vested interest, there will be a beneficiary designation with this account.  Some or all of the distributions will most likely be income taxable.

Individual Retirement Account – Traditional IRA – This is an account for retirement purposes that you establish and some or all of your contributions to the same may be deductible for income tax purposes.  You will need to complete a beneficiary designation for the account in the event of your passing.  Funds withdrawn from this type of an account are usually fully taxable for income tax purposes.

Roth IRA – This retirement account has had income taxes paid on the contributions as they are made, thereby any distributions from the account are income tax free.  The taxes are paid at the contributor’s income tax rate at the time of contribution.  Here again, there will be a beneficiary designation. 

Annuity Contracts – Annuities are purchased and there is a contract that sets forth the distribution of the benefits as well as many other details related to the contract.  Annuities are very diversified and can have very specific clauses as to their administration.  As part of the application for an annuity, there will be a beneficiary designation if the type of annuity provides for payment post death of the owner. 

Retirement-type accounts can be confusing and are sometimes not fully understood.  Distribution from 401 accounts and IRAs have age requirements for distributions and the income taxability of them. 

It is always wise to review your beneficiary designations for any of these assets that you own or are entitled to.  Life happens and circumstances change.  Make certain that your assets will benefit those that you wish to benefit.

Have You Taken Your Required Minimum Distribution For The Year?

As we are quickly approaching the end of the year, it is important to determine if you have taken your required minimum distribution from retirement-type assets.  For a financial institution to do the calculation,  process the request for the distribution and send out the distribution, bear in mind that you are not the only person for whom they are processing a distribution.  So, please do yourself (and the financial institution) a favor and DON’T wait until December to initiate the distribution. 

If an RMD (required minimum distribution) is not made by the end of the year, you can be surcharged for the failure to take the RMD. 

For example – let’s say that your RMD for the year is $10,000. Not only do you have to pay applicable income taxes on the distribution; the surcharge calculation would be $5,000 or 50 percent.  That’s a BIG chunk of your hard-earned money. 

While many people think it best to wait until the end of the year, I always recommend that people think of taking their RMD during tax season.  That way, it is done and doesn’t have to be thought about. Also, there is much less chance of missing the distribution that you have to take in any event and it will eliminate the possibility of a surcharge.

DON’T DELAY.  Contact your financial institution to initiate your RMD for 2022 NOW if you aren’t already one step ahead of the game.

Required Minimum Distributions from Retirement Accounts

Based upon your age, you may be required to take minimum distributions from your retirement assets.  If you don’t, then unlike in 2020 when the requirement was waived, failure to take your RMD may cause you to be surcharged.  And, the surcharge could be 50 percent of the amount you should have taken. 

With less than three months to go in the year, NOW is the time to be thinking about your RMD and to consult your financial advisor.  It is never a good idea to wait until December because the financial institutions are frantically trying to get all of the paperwork in order to meet the RMD deadline of December 31.  And, I have seen things fall through the cracks and the distributions don’t get processed in time.  This then creates more work for everyone and possibly a surcharge for the retiree. 

I suggest that RMDs be taken in the first quarter of the year.  That way, if something unforeseen should occur, your estate is not faced with having to worry about whether the RMD was taken for the year.  Processing paperwork for estates requesting the RMD is more cumbersome than for a living individual. 

Make it easier on yourself and don’t wait until December.  Start the process for 2021 if you haven’t already and speak with your financial advisor about receiving the RMD earlier in the year to avoid possible complexities later in the year. 

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