Tax - Trust and Estate Planning Law Office

When it comes to planning and saving for your retirement, one of the first decisions you need to make is choosing which type of retirement account to open. There are numerous types of retirement accounts, each with their own unique advantages and disadvantages. Though it is beneficial to have so many options, it is important to learn about each of them to know which suits you best. However, it can get complicated, especially knowing that one day your children or grandchildren will inherit what you leave behind. This is where understanding the different tax rules in each account becomes significantly important. A good place to begin is looking at the two most popular retirement accounts: Traditional Vs Roth IRA.

What is a Traditional and Roth IRA?

A traditional and Roth IRA are both individual retirement accounts, with tax advantages. However, they differ in many ways and have their own types of advantages. This leaves it up to you to choose based on your preference. Below is a list of their main advantages and disadvantages to consider

Taxes

Traditional - The way a traditional IRA is set up is money that is invested in this account is tax-deducted. Meaning, the portion of your income that you contribute to this account, will not be taxed in your yearly income which gives you an immediate tax break. Thus, only withdrawals made from the account in the future will be taxed as income.

Roth - The way a Roth IRA is set up is money invested into the account are after-tax contributions. Meaning, money put into the account has already been taxed and can grow tax free. Thus, withdrawals made in the future will NOT be taxed. However, this will not give you immediate tax breaks on your current income.

Contributions

Traditional - With a traditional IRA you can contribute pre or post tax dollars. For 2022, the limit is $6,000, and for those 50 years and older, $7,000. In addition, there are no income limitations, anyone with earned income can contribute.

Roth - With a Roth IRA, there are some rules for contribution. Contribution limits are $6,000, and for those older than 50 years and older, $7,000. However, there are limitations based on your Modified Adjusted Gross Income, which in 2022 has changed to $129,000.

Withdrawals

Traditional - When it comes to the time of withdrawing money from your Traditional IRA, there are some restrictions. For one, all withdrawals you make after the age of 59 ½ are taxed as income. Additionally, you cannot keep your money in this account forever, by the age of 72 you are required to start making withdrawals.

Roth - When it comes to the time to withdraw money from your Roth IRA, that is when you see its advantages. For one, you will not have to pay tax on any withdrawals since contributions were already taxed before. Secondly, you can keep money in this account for as long as you want. However, if you do choose to withdraw, you can do it penalty and tax free after 5 years of opening the account and age 59 ½.

How These Differences Impacts Inheritance:

When deciding which account you want to pass on for your future family to inherit, most of the decision comes down to taxes and which would give the most benefit.

Roth - According to many financial advisors, a Roth IRA might be the most advantageous account to pass down for inheritances. This is mainly because all money in the account can be withdrawn with no additional fees or taxes. However, it is also important to consider your current tax rate versus your children's potential future tax bracket. If you believe they will have an equal or higher tax, then it would be most beneficial to set up a Roth IRA.

Traditional - Though there are some cons when inheriting a Traditional IRA such as having to pay taxes on withdrawals, there are some pros as well. For example, if at the time you are making contributions you have a high income and net-worth, you may be better off setting up a Traditional IRA since you may have a high tax rate. Therefore, when your children make withdrawals in the future they can liquidate and pay taxes at their own rate. This would essentially help you lose less money.

Reasonably, it could be difficult to predict the future as well as the tax bracket your children will be in. Therefore, it's important to remember if you choose to receive immediate tax advantages with a Traditional IRA, you can always convert it in the future to a Roth IRA. To help choose which retirement account is right for you and include it in your estate plan, contact the Law Office of Inna Fershteyn at (718) 333-2394.

There are many different ways a person can set up an estate plan to protect and prepare for the future of their assets after their death. One way that this is done is through the creation of a trust. A trust is a legal arrangement that allows a third party, a trustee, to hold and manage assets on behalf of the beneficiaries until they are able to inherit them. Its purpose is to ensure that a person's assets are protected and utilized in a way they deem fit. There are various types of trusts that serve for different purposes. Therefore, it's important to understand the different types of trusts in order to know which will suit you best.

What are the different types of trusts?

1.) Irrevocable Trust

An Irrevocable Trust is a type of trust that, once executed, cannot be changed or revoked without consent of all beneficiaries or a court approval. Essentially, this means once your assets are in the trust, you no longer have full control over them as well as the freedom to make any revisions you want. However, a benefit of this type of trust is that assets in the trust will not be subject to state or federal estate taxes. In addition, assets are also protected from creditors and legal judgment which avoids lawsuits and false claims.

2.) Revocable Trust

A Revocable Trust, also known as a living trust, is a type of trust that allows you to modify or change anything at any time you see fit, without needing the consent of any beneficiaries. With a revocable trust you have full and complete control over your assets, how you want them distributed and if you want to add or revoke any. It is also commonly used for those who want to avoid the probate process, which can take months to years. However, assets in this trust are subject to state and federal estate taxes. In addition, assets are not protected from lawsuits and creditors.

3.) Special Needs Trust

A Special Needs Trust, also known as a supplemental needs trust, can be established as a living trust and is generally designed for a loved one with a disability. It is commonly used for a dependent such as a child, sibling or parents that are unable to provide for their own financial needs. It is also made to continue caring for a person with special needs without disrupting government entitlement benefits such as SSI or medicaid.

4.) Charitable Trust

A Charity Trust is an irrevocable trust that is made to simultaneously benefit you, your beneficiaries and a Charity of your choosing that is qualified under IRS rules. There are 2 types of charitable trusts:

Charitable Lead Trust - The way a charitable lead trust works is, individuals are allowed to choose charities that will receive interest from the financial gift they have assigned to them for a specified period of time. Once the period has ended, the remaining assets may either go to their family or beneficiaries.

Charitable Remainder Trust - The way a charitable remainder trust works is that you, your family or your beneficiaries can receive interest from a financial gift assigned for a determined period of time. Then, once that period has ended, the remainder of the assets go to the charity of your choosing.

5.) Irrevocable Life Insurance Trust

An Irrevocable life insurance trust is designed to help those who have estates that might exceed federal or New York estate tax exemptions. With this, trustors are allowed to exclude life insurance proceeds from the taxable estate. This then allows beneficiaries to be free from any taxes that may be placed on the trustor's life insurance policy in the estate and to transfer death benefits immediately.

A trust is a very valuable tool when it comes to estate planning. With so many different types available, it can be tricky choosing which one is best for you. If you need an attorney to help determine which trust is best for you, contact the Law Office of Inna Fershteyn at (718) 333-2395.

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