South Carolina Trust
and Estate Law Blog

Installment I of A to Z is the INHERITED IRA. Sounds pretty self explanatory doesn’t it? An inherited IRA must simply be an IRA account that you have inherited right? Well, sort’ve. An Inherited IRA is an IRA that contains either qualified retirement plan assets or IRA assets that you have inherited. The most important thing to remember is that if you are named as the beneficiary of a qualified retirement plan or IRA of a non-spouse, the use of the Inherited IRA concept can allow for continued deferral of income taxes on the assets held inside the account.

The Inherited IRA, as applied to qualified retirement plans, is a creation of the federal Pension Protection Act of 2006. Prior to that Act, non-spouse beneficiaries of a qualified retirement plan often found that when they inherited a qualified retirement account, they could not defer the income taxes on the assets. This was mostly because the plan administrator would require that the account be liquidated much more quickly than federal tax law required, causing early recognition of income taxes on the pre-tax dollars contained in the account.

Nowadays, qualified plan administrators are required to allow designated beneficiaries to transfer the qualified account assets to Inherited IRAs. The benefit of transferring the assets to an Inherited IRA is that distributions from the account can occur over the beneficiary’s lifetime, spreading the income tax bite over many many years, and retaining the ability to invest pre-tax dollars. IRA accounts can also be transferred to an Inherited IRA.

There are some requirements to be followed when setting up an Inherited IRA. The Inherited IRA account must be titled in the name of the original account owner and the beneficiary, typically written as “IRA f/b/o John Doe, as beneficiary of John Public, Deceased.” The transfer to an Inherited IRA is not a true rollover of the account, it is a trustee to trustee transfer, meaning that the account cannot be paid directly to the beneficiary to then transfer into the inherited IRA. There is no sixty day rollover rule here. The transfer must be made directly to the Inherited IRA or you will have to immediately pay the income taxes. A further requirement is that Inherited IRA assets cannot be commingled with your own assets. Lastly, be sure to name your own beneficiaries for your Inherited IRA. If you pass away prior to withdrawing all of the assets, your named beneficiaries will be able to continue withdrawing the assets on the basis of your life expectancy.

If you are named as a beneficiary of a qualified retirement account or IRA, the decisions you make can have major financial repercussions, and can generate a significant and unnecessary income tax liability. The advice you may be receiving from the qualified plan administrator or IRA custodian may well be incorrect or out of date. In addition, the plan administrator or custodian may be a company that is not friendly to IRA beneficiaries and needlessly advises that plan or IRA accounts must be cashed in right away, without advising of the possibility of transferring the account to another IRA custodian as an Inherited IRA. If you are in this situation, you are strongly advised to consult with your lawyer or accountant as soon as possible. The income tax bite can be many tens of thousands of dollars, depending on the value of the account.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm. The rules regarding retirement accounts do change, are highly fact specific, and errors can be extremely costly. Before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Installment H of Estate Lawyer A to Z is HEIRS. What is an heir? Most people think that an heir is somebody that will inherit your property after your lifetime. This is sometimes true, but sometimes it is not true. The term HEIR is defined by South Carolina Code Section 62-1-201(17) as being “those persons, including the surviving spouse, who are entitled under the statute of intestate succession to the property of the decedent.” The SC Code drafters were not being very original inasmuch as Blacks Law Dictionary, Seventh Edition, defines an heir as “[a] person who, under the laws of intestacy, is entitled to receive an intestate decedent’s property.”

So it seems that in order to know what an heir is we need to know what intestacy and an intestate decedent is. Intestacy is simply the default inheritance scheme that takes effect when a person dies without a Last Will and Testament. An intestate decedent is a person who dies without leaving a Last Will.

So what is an HEIR? An heir is a person who is entitled, by default, to a decedent’s property when the decedent leaves no Last Will. So which of our family members are our heirs? I will discuss this in my next post where I will discuss INTESTACY in more detail.

There are actually different types of heirs depending on the circumstances. One type is the forced heir … a person who you are forced to leave an inheirtance to, such as your surviving spouse. Another type is the after born heir … a person who is entitled to receive an inheritance despite having been born after the death of the decedent. Another type is referred to as the laughing heir … a person who is distant enough on the family tree from the decedent to feel no grief when the decedent passes away leaving a windfall to the heir.

So, in what situation does an heir not inherit a decedent’s property? This occurs of course when the decedent leaves behind a Last Will that directs that a person other than an heir is to receive the inheritance.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Every now and again I like to post a warning re: scams targeting lawyers and financial managers. This scam was one that I had not heard about before.

I was recently contacted by a financial adviser/trust manager acquaintance of mine located in another state. He relayed to me that he had recently been contacted by a person who stated that he was a resident of South Carolina, but currently had construction work located in another country. The person said that he anticipated that when the work was finished he would be moving to the state where the financial adviser was located. The person wanted to transfer his mutual funds of several million dollars to my acquaintance’s bank for investment management services.

I was contacted for help in possibly drafting a revocable grantor trust-type document to transfer the funds to, with the bank as the investment manager. When I heard the story it just didn’t seem right to me, why would this person be initiating a transfer of assets while he was out of the country? I think whenever I find out that a potential client is located in another country my suspicion increases. Anyway, a few weeks later my acquaintance informed me that the person who had contacted him was not the person he said he was, but was in actuality an imposter/identity thief who was attempting to have the bank transfer the assets out of the control of the real owner, a real person who actually resides in South Carolina. Luckily, the fraud was discovered before any transfers were initiated.

I’ve said it before and I’ll say it again, it’s a jungle out there. From financial fraudsters and schemers, to marketers trying to sell you useless junk or unethical services, you need to be careful in this business. More and more we see fraudsters and identifty thieves targeting those considered to be sophisticated enough to know better. And sometimes it works. Luckily in this instance it did not.

Good question reader. The person who has the right to be the Personal Representative is said to have the highest right of priority. The right of priority to be personal representative is laid out by statute, SC Code 62-3-203. The statute lists the following persons in order of highest priority to lowest priority:

(1) the person with priority as determined by a probated will including a person nominated by a power conferred in a will;

(2) the surviving spouse of the decedent who is a devisee of the decedent; (a devisee is a person who receives a gift under a Last Will)

(3) other devisees of the decedent;

(4) the surviving spouse of the decedent;

(5) other heirs of the decedent regardless of whether the decedent died intestate and determined as if the decedent died intestate (for the purposes of determining priority under this item, any heirs who could have qualified under items (1), (2), (3), and (4) of subsection (a) are treated as having predeceased the decedent);

(6) forty-five days after the death of the decedent, any creditor;

(7) four months after the death of the decedent, upon application by the South Carolina Department of Revenue, a person suitable to the court.

(8) Unless a contrary intent is expressed in the decedent’s will, a person with priority under subsection (a) (1 through 7 above) may nominate another, who shall have the same priority as the person making the nomination, except that a person nominated by the testator to serve as personal representative or successor personal representative shall have a higher priority than a person nominated pursuant to this item.

If there are multiple people who have the same level of priority to be Personal Representative, the Probate Court will require the Petitioner seeking appointment as Personal Representative to file a Renunication of Right to Appointment by those not seeking appointment. If the other people will not sign such a renunciation, the Court will require a formal appointment proceeding to be conducted.

If you are having trouble obtaining appointment as a Personal Representative, you should consider obtaining the advice of an estate attorney who can guide you through the process.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Installment G of A to Z is Gift Tax Exemption and Exclusion. The federal government imposes a gift tax on gifts. (Most states, including South Carolina, do not impose a gift tax.) The maker of the gift is generally liable for the tax on the gift. However, all of us are permitted to make a certain amount of gifts without incurring any tax.

The gift tax exemption is the amount of gifts that people can make during their lifetime without having to pay gift tax upon their deaths. This is the lifetime gift tax exemption amount and it currently stands at five million dollars. (The gift tax exemption is unified with the estate tax exemption, so any amount of gifts that reduces your gift tax exemption reduces your estate tax exemption dollar for dollar.)

For example, if you were to make taxable gifts totalling four million dollars during your lifetime, and upon your death you leave a taxable estate worth three million dollars, the four million dollars in gifts will reduce your five million dollar gift tax/estate tax exemption to one million dollars. The one million dollars left of the gift tax/estate tax exemption will reduce the taxable estate by one million dollars, leaving a taxable estate of two million dollars. This is what is meant by the unified gift tax/estate tax: Taxable gifts made during your lifetime can decrease the amount of estate tax exemption available to your estate after your death.

The other gift tax concept is the gift tax annual exclusion. The gift tax annual exclusion amount currently stands at $13,000.00 per year per person receiving a gift. This means that you may gift up to $13,000.00 per person per year without reducing your gift tax lifetime exemption amount. Spouses have the option to elect to double the amount of gift they can make to any one person during the year without reducing their lifetime exemption amount, this is called “gift splitting.” Spouses can do this even if the source of the gifts is with one spouse only. This election is made on the gift tax return.

Speaking of gift tax returns, when is one required to be filed? A gift tax return must be filed with the IRS when any person makes a gift to any other one person in a given year in an amount greater than $13,000.00 (or $26,000.00 if spouses elect gift splitting.) Also, a gift tax return must be filed whenever spouses elect gift splitting for a gift made. The gift tax return is generally due by April 15 of the year following the year of the gift. If the gift maker has died before the return is filed, his or her Personal Representative must file the return, and a Personal Representative is permitted to elect gift splitting for gifts made prior to the gift maker’s death.

Unless you give away an amount greater than your gift tax lifetime exemption amount, no gift tax must be paid when the gift tax return is filed. The tax is instead determined after death through the concept of the unified gift tax/estate tax exemption, as described above, ie, the gift made during lifetime reduces the gift tax/estate tax exemption after death.

So there you have a brief primer on the gift tax exclusion and exemption amounts and their interplay with the estate tax regime.

Like any decent lawyer, I need to add a disclaimer here: unfortunately, it is impossible to offer comprehensive legal advice over the internet, no matter how well researched or written. And remember, reviewing this website and my blogs doesn’t make you a client of my Firm: before relying on any information given on this site, please contact a legal professional to discuss your particular situation.

Oh, and the IRS would like me to let you know that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.