OT: "happy" ending for sad situation & good lessons

[Coytee]

This is long so get a bag of popcorn...

I have just GOT to run to the top of a hill and scream out “YESSSSSSSS”! I’ve got to get this out of my system so read it just for fun...there is actually a possible lesson here should someone else be in a similar situation.

Setup: Husband 60, wife 58 years old

This guy has had a small IRA with me for a number of years. I ‘inherited’ his account when another broker left so I never personally met or knew the guy although for the couple times we spoke on the phone, we got along very well.

Got to be I didn’t hear from him for a year. He never returned my phone calls. Maybe another six months went by...still no returned phone calls. I do not know what to make of it. Finally one day, the wife calls... says he’s got a very rare disease of the kidney. Something like only 100 (or maybe 1000) people get it. Ironically, there is a specialist for that very ailment here in Knoxville so that’s good for him.

A couple months later I call again and he’s there. We talk for a bit but it was clear that he was weak (this was a terminal illness).

I didn’t really know what to make of his situation but found out that he’d spent most of the prior year in a hospital and nursing home.

Wanting to cover several topics with him but not wanting to “waste” his healthy time talking to me on the phone, I decided to write him a letter. This would allow him to read the letter at his leisure, or maybe have it read to him if he was too weak. The letter ended up being three pages long, single spaced. Among other topics, I suggested to him that if he had a 401K, that he should roll it over. Also, that if he hadn’t yet, that he might want to talk to our estate attorney to see if maybe a trust or updated will would make sense for his situation.

A year went by and I never heard back. One day the wife called me and said he had died. Seems he got my letter and just as he received it, he fell ill again and went to a hospital, then nursing home then passed away.

The wife had read my (very compassionate I might add) letter and decided she wanted to deal with me. He indeed had a 401K at a prior employer, he had two other IRA’s, SHE had two IRA’s and they had yet another stock account, all at other firms.

Here’s a couple kickers... first... he did NOT have any beneficiary designation on his 401K plan. Fortunately, the wife was named on his death certificate as surviving spouse so because of that, it defaulted to her. A second twist... she at 58 years old, had an advanced stage of cancer and was not expected to live another year.

So, the challenge to me was take this ill lady (who herself had spent a good part of the year in a hospital) and get their stuff organized.

I had a meeting set up with her “next Monday” and on the Sunday prior, the daughter who lives in Virginia called me at home to cancel. Seems they had to get mom to the hospital again.

That following Thursday, the daughter came to my office. They let her mother out of the hospital on Wednesday to go home and die. There was nothing more they could do with Mom and she wanted to die at home.

Out of simple ignorance, the daughter, who was going to be the executrix, had NO idea of what was looming.

1. Fathers three IRA accounts with mother only as beneficiary.

2. Mothers two IRA accounts with father only as beneficiary.

3. $400,000 401K with NO named beneficiary but automatically goes to mother who has no beneficiaries declared.\

4. Regular stock account that would need to go through probate

The daughter came to my office and I went over these things and told her that unless we put out a Herculean effort, all this 401K and IRA money was going to be coming OUT of the qualified accounts and was going to be taxable.

What was working against me was all of these assets, but for a single account were held by OTHER broker/dealers. I called up each broker/dealer, knowing they can’t talk to me about any specific account information so I had to fight to tell them that I’m asking about ADMINSITRATIVE questions and what forms did we need to move all of Dad’s accounts over to Mom’s name.

Then I needed to open equal accounts here for mom and include appropriate transfer forms.

The most important piece of paper I had though, was the beneficiary designation form for the 401K and told the daughter that if Mom can’t sign but ONE piece of paper that this one had to be the first thing (if it was the last thing she did)

This stack of forms was literally about a solid inch thick and I probably had 30 places for Mom to sign as either beneficiary or executor.

The daughter pulled it off and got ALL the forms signed. Her mother passed away about a week later.

I got all the forms processed & mailed to the various places on their behalf. I knew I wasn’t supposed to do it but truth be told, the family had other issues to deal with since both parents had died within about six months of each other.

As accounts got consolidated from father to mother, then from mothers away accounts to mothers local accounts, we then started moving assets from mothers local accounts to the kids accounts. By the way, we set up “TOD” accounts for Mom. TOD is “Transfer on death” so it means the non-IRA accounts, had a beneficiary designation and as such, did NOT need to pass through probate and gave the kids near immediate access to the assets.

As this was happening, the 401K plan got VERY delayed in their processing of the check which was going to roll over into the IRA’s.

That is when the crap hit the fan.

My back office said since Mother had died, that they could not take a check written to her account and deposit it. Even though the check was written from a third party, they could not do it.

They said “you need to send it back, have the 401K plan write the check to the kids and let THEM roll it over into their BDA accounts (Beneficiary Distribution Accounts...used for inherited IRA’s)

So, we did that.... months pass... finally we get the accounts setup at 401 for kids and we go to roll them over... except, the 401K plan does NOT to direct transfers. That is not an option. The ONLY option is to cut a distribution check to each child, withhold the mandated 20% for the IRA.

Ok, we do that since each child has enough cash to cover the 20% withholding tax. The son gets it, deposits it and then sends it to his account here just like my people told us to do.

Oh wait they say... we can not take a 60 day rollover check, we can ONLY take a trustee to trustee transfer check (the very type transfer that the 401 Plan said they would NOT do)

Well crap??? Now what do we do? His 60 day clock is ticking...

I had a fit at my people and they finally didn’t want to deal with me, suggesting that I might want to contact a securities attorney so HE could set me straight. Well, we use to be our OWN broker/dealer and happened to have one on retainer back then. I decided to call him & see what’s up and explain situation.

He about choked... he felt I was exactly right and the documents they showed me (I told them I wanted to see it in writing) did in fact expressly prohibit depositing SECURITES into a decedent account however, we were depositing CASH and there is a distinct difference between the two and the NASD is very cautious to use the word ‘securities’ when they mean securities and use the word ‘cash’ when they mean cash and to use “securities/cash” when they mean BOTH.

Well, it only referred to securities yet we were stuck.

Ok, wellllllllllllllllllllllll, to finally cut to the chase, I called the 401K back, I called the plan administrators back, I called the COMPANY themselves back....

We finally got some positive news. Seems the company has recently (Jan 1?) decided that they need to change their policy of not allowing direct transfers. The change in policy is NOT in place yet but since they have already discussed the plans to allow it to happen, they will allow these two kids to send their money back to the 401 and the 401 will now do a direct transfer. Fortunately we’ve not already invested into anything.

What does this mean?

This means, instead of them taking about $200,000 out today and paying taxes on all of it, they can KEEP the full $200K inside a tax sheltered account and allow it to grow tax deferred however, they are now REQUIRED to take annual “RMD’s” (required minimum distributions) out of the account, based on their current age (low 30’s) instead of waiting until they turn 70 ½ like anyone else that owns a regular IRA

It allows them to convert their parents combined IRA’s and 401 into ‘stretch IRA’s’ for themselves and then each year, when they DO take an RMD out, they can simply pay the taxes on that amount and spend or reinvest the balance.

It has been a freaking nightmare what these two have gone through, from losing both parents in the same year to different tragic diseases, but also the nightmare they went through with this IRA money bouncing around. I have never ever, in 22 years, seen this kind of trouble with a transfer.

That said... in 22 years, I’ve never seen anyone else DODGE as many issues as they would have had.

I keep reminding the daughter that had she not informed me of her mothers pending demise, we might not have gotten all their assets organized like we did. Since I knew of the pending death, I was able to look ahead and open the TOD account and get all the forms organized that would be needed to consolidate from various places to Mom and then on her passing, to allow that to easily move to the kids (except for the dang 401 which was STILL saved because we were able to get a beneficiary designation submitted prior to her passing)

Had we not gotten her mothers stuff organized, the daughter would have had to deal with her mothers 2 IRA accounts, fathers 3 IRA accounts, his 401 and their join account. She would have needed to provide SEVEN sets of legal paperwork, death certificates, letters of testamentary... or...by having her mother do all the paperwork while alive, we only needed HER stroke of pen!! MUCH easier for the daughter.

So, if you’ve read this far there are several lessons in here

Keep ALL your retirement accounts updated with beneficiary designations and if appropriate, include contingent beneficiaries.

If you are retired, or when you retire, MOVE YOUR 401 to your IRA. It’s MUCH EASIER for your beneficiaries to deal with and unlike some 401’s, will allow your kids the CHOICE of making them ‘stretch IRA’s’ or cashing them in (spouse can simply roll over to their own account)

If you have an individual brokerage/mutual fund account or even a joint one, look into changing it into a “TOD” (transfer on death) account. You don’t lose anything and yet, if something happens to you, it will go to your beneficiaries much faster and will bypass the probate process

Find out if a trust makes sense to your finances (I am a fan of trusts) and if so, get it done.

I just now had good news from the 401 and they are going to allow the kids to now ‘refund’ the money back to the 401 and the 401 plan will reissue checks to their BDA (beneficiary distribution account) accounts so this story, after seven months, finally has a happy ending.

Oh, I might add something... both kids live out of state and both already have an investment advisor. Both of them have stated that they want to deal with ME on all of this.

I get along with both of them very well, so I finally asked the daughter “since you already have a broker and he’s local to you, why do you want to use me?”

Her answer?

“I read your letter” (to her father)

[oldbuckster]

Good Deeds do get rewarded !!!!!! Good Job, you used your knowledge to help some people out. So it's safe to say, Your mind, and your heart are fine, it's your hearing that's shot ................. Way to go !!!!!!!!!! .....................(You didn't try to get them to buy Jubilees, did you ?)

[Coytee]

You actually read all of that????

[]

(You didn't try to get them to buy Jubilees, did you ?)

My lips are sealed [:#]

[dtel]

Good work Coytee, feels good to help someone out, it always comes back on way or another.

[jacksonbart]

Very nice job you did. You built up some good Karma, no doubt it will lead to more referrals and a general feeling of satisfaction and well being. If that does not happen fire up the Crowns and let the Jubs roar.

[billybob]

Congrats on caring what happens! Even with a will things can get complicated, especially when assets like those described are thrown in. And then there is probate. Instead of a better, more modern approach in this day and time, antiquated laws, and red tape can really screw up, what the decedents wishes might have been. Good Advice! Thanks!

[Islander]

Good job, coytee! After reading that, I really think I ought to finally get around to getting a will organized. I don't know about anybody else, but I don't really like thinking about this stuff. Even so, sometimes you just have take care of business.

[fini]

Two words: Living Trust.

We are in the process of setting up ours. The same attorney did my Mom's, and it was a blessing.

Good work, Richard!

[Coytee]

Congrats on caring what happens

Thanks. Kind of funny you say that, cause I do care a lot... I really went to the mat for them. I was calling my compliance department (usually people we try to avoid) and then called my compliance people AGAIN reiterating how they were wrong and we needed to help these kids. I got the 401 administrators on the phone, I got the company itself on the phone...went to the mat with all of them trying to break through what I (and still do) perceived as some ignorance (evidenced when they show me in writing how "this" can't be done yet 'this' wasn't what we were trying to do). No one seemed to have the ability to sit back and say "what CAN we do to accomplish this goal"

Anyways, I have called my complaince guy three times now to apologize if I was rude. Told him that I didn't mean to be rude to him AND I hoped that now that he saw what a chainsaw I can be when I am fighting for what I believe is 'right' for someone I'm working with, regardless of who I might need to go up against. I think he is now very comfortable knowing that as he supervises various branches, us included, he can rest assured that we will always be trying to do what's in the clients best interest. (compliance guys always seem to be suspicous)

He at one point was actually yelling at me to drop this and I continued to fight.....ironic too in that had I simply given in to his commands, both kids would have NOT accomplished this rollover.

I've used the story of these kids at my seminars... many people just don't realize how screwed up they have things and what it will really take to clean it up.

[Coytee]

Two words: Living Trust.

We are in the process of setting up ours

1. Good for you

2. Two more words: FUND IT!

By fund it, that means you have to go to each of your titled assets and retitle them into the trust. It means you have to (maybe) go to your stock account and make it the owner of the trust... do NOT make the trust the beneficiary of your IRA's, you want real, breathing people as beneficiaries of your qualifed funds.

Many people seem to "get" a trust and think they're done when in fact, they're only halfway there. The trust is useless with regard to the items it does not own/control. So, the second half of the equation is visiting all your assets (banks, brokerages, real estate, cars?, yada yada...) and putting them into the trust.

Hat's off to ya Finz

Did I just say Finz?

[Shodrewken]

Simpling amazing, good job Coytee! My family when through something like that when my grandfather passed away. I'm sure those guys can sleep a bit easier now with somebody as diligent as yourself taking cares of thouse matters.

[billybob]

There are lawyers...and then there are lawyers....for example! My GF went to work for a lady lawyer of whom, she has found out in a short time cares for the client vs others she has worked with, Walls are paper thin so she hears things, like the lady going to bat just because it is right, against prevailing odds.

Needless to say this lawyer is very busy all of the time, so busy that she shares the cases amongst her fellow attorney's that get it!

It' not always about the money, or winning or losing, but trying and not accepting an unacceptable outcome.

Kudos for your "Proffessionalism!

[Daddy Dee]

Coytee,

Congrats bro! That was one heck of a mess to untangle. I don't think know many folks who would work like this on behalf of others. You're doing the Lord's work there, my friend.

[fini]

do NOT make the trust the beneficiary of your IRA's, you want real, breathing people as beneficiaries of your qualifed funds.

My wife (then my kids) will be the beneficiaries of the IRAs. Could you explain why IRAs are different from other assets? Thanks, Ritz!

BTW, Roth IRAs are great. I got my 19-year old daughter to max one out last year. Just my little plug...

[Coytee]

Could you explain why IRAs are different from other assets?

I won't talk publically about that so just between you & me...[]

It's simple... Your (traditional) IRA's are tax deferred. If you make a trust beneficiary, then upon your demise 100% of the assets come OUT of the IRA and are going to be immediately taxable. If on the other hand, a spouse is beneficiary, then the spouse can roll your IRA into theirs and it would be as though it was theirs from the beginning. It would be completely in their name as though it never belonged to you and a spouse is the only person that can do this, it's called a spousal rollover.

If on the other hand, the beneficiary is a non-spouse person... let's presume you split your 15,000,000 IRA and give 5,000,000 to wife, 5,000,000 to daughter and 5,000,000 to your grandchild.

Wife can make 5,000,000 totally her own.

Daughter who is say, 25 takes hers and puts it into a BDA account (Beneficiary distribution account) as does your 1 year old granddaughter.

Well, the wife, regardless of age, can leave her money in the account growing tax deferred until she's 70 1/2 when she MUST begin to take money out as a "RMD" or required minimum distribution. Basically, taking the December 31 value of the PRECEEDING year, dividing it by her life expectancy and taking that number out. The wife has other options too so I'm limiting it only to this scenario.

The daughter can leave the money in the BDA account, HOWEVER, she, unlike the wife, MUST take RMD's starting at her age of 25. Since she's so young, her life expectancy is a lot longer than the wife would be (at age 70 1/2) so her required amount to take out each year is very small. As long as the RMD's are taken, the balance can be left to grow, tax deferred.

Your Granddaughter, at 1 year old is in same boat as your daughter but being younger would have to take even LESS out and she can otherwise allow the balance to grow tax deferred again, as long as HER RMD's are taken out.

Each person can always take MORE than the RMD out... it only defines the minimum they must take.

Let's say your daughter makes HER daughter beneficiary of her (your) IRA. Now the question is... if the granddaughter inherets your daughters (your previous) IRA, can the granddaughter "stretch" it out again?

Answer is no.

If your IRA went to your daughter (any non-spouse beneficiary) and they in turn, gave it (through inheritance) to their child... then the second person inheriting the account must still continue to take RMD's out, based on the first persons (daughter in this case, not yours) life expectancy. (first person defined as the first person to inherit the IRA, not original owner)

Upshot... If someone has no spouse and one child, one grand child. If you have a ton of money in a IRA... you might consider splitting the proceeds to your child and some to the grand child because the limits of the "stretching" are applied ONLY to the FIRST person who inherits the IRA. If it pases down to another generation, they must still adhere to the first persons life tables. The grand child would garner much more benefit if the grand child could use their life expectancy instead of your daughters.

That make sense? Again, they can always take more out and a second point... if they ever take money out (including "more") even though they are not yet 59 1/2, they have access to any of the money without the IRS 10% penalty. The penalty is waived as part of the death benefit in these accounts. That won't keep them from owing taxes though.

Essentially, you can not do the above with a trust. Actually (I'm not an attorney but I do play cards with the wife of one []) I think you MIGHT be able to work something out in a trust to accomplish the above but for all the extra words, work and effort... taking the money out of the IRA, into the trust, BACK into an IRA... why not just name the person on the original IRA and keep it REAL simple so no one can screw it up!!???

[Coytee]

Essentially, you can not do the above with a trust. Actually (I'm not an attorney but I do play cards with the wife of one ) I think you MIGHT be able to work something out in a trust to accomplish the above but for all the extra words, work and effort... taking the money out of the IRA, into the trust, BACK into an IRA... why not just name the person on the original IRA and keep it REAL simple so no one can screw it up!!???

I just wanted to add that I've never seen this successfully done (money out of IRA, into trust, then back somehow, into another IRA) so I'm not saying it can be done...I've been told it can be done but I'm still left to wonder... why jump through 14 hoops to give the money to someone when you can simply put their name on a beneficiary form and bypass all that hassel?.

Side note on a beneficiary form... if you have one on file and decide to change it, you can sign a new one and be done. If you sign a new one and upon leaving office (or post office if mailing it) and WHAM, you are in a car accident and gone... then the NEW signed one is the updated one.

The moment you sign an updated beneficiary form, even though it's not 'processed' to your account yet... it becomes effective. That is what saved our hiney when the mother in the story above, put her kids as her beneficiary on her (her husbands) 401K.

The moment she signed the beneficiary form, her kids were immediatly declared her beneficiarys. She passed away a week later but we were still able to save the process of giving the money to the kids (instead of her estate) because it was signed. Actually, the daughter had her sign TWO beneficiary forms in case the first one somehow got lost in the mail (my idea of course )

[colterphoto1]

That's what we in the photography business call 'psychic income'. That 'feel good' feeling that you just did something irreplaceable for someone that they will remember you for a long time over.

[Coytee]

That's what we in the photography business call 'psychic income'. That 'feel good' feeling that you just did something irreplaceable for someone that they will remember you for a long time over.

'psychic income'!!! never heard of that but I'll remember that at the checkout line when I'm buying my 'psychic groceries' with it eh??!!!

[:|]

[fini]

Thanks, Richard! You've given me lots to talk about with my attorney...at how much per hour?[{][}]

[Coytee]

In the chance he disagrees with my logic (that presumes you present it to him clearly, right?), then I'd urge you to give me a call before you wrap it all up so you could hear more details.

If he's an estate attorney, I'd say you're in for smooth sailing but with that said... we DO have a client (oral surgon) who had his attorney set up a trust and demand ALL this guys retirement assets go to the trust upon his demise.

I've tried to talk to the guy (he's my partners client so I'm walking a thin line there by butting in, but as shown in beginning of thread, if I feel it's the right thing to do... I'll do it)

Anyways, I've tried to bring it up with him and he is blindly assured that everything is ok. Perhaps it is... it's just in my 22 years, I've never seen it work out like this so if he keeps it as is and passes away, I'll have my first closeup audience of this happening (IRA to trust to IRA)

What I really don't get is what does it matter? Why does this attorney insist that the assets LEAVE his retirement accounts, pay out to this trust and then (somehow) re-establish some kind of retirement account for the surviving spouse... why not simply put the spouse's name on the account as beneficiary and it can all be done with stroke of pen & death certificate... something still smells there to me.

I don't see any reason to even flirt with putting ones assets at risk by playing that kind of dance when a direct beneficiary would suffice.

Anyway... I'd be more than happy to explain. It's a lot easier to verbalize it than to type it out and try to be accurate on all the nuances.