3. Multiple Estates — Two probate courts may be involved if someone lived in one state but left solely owned real estate in another. If that’s the case, there may need to be a probate case filed in each state (ancillary probate). Some states allow for a TODD (transfer on death deed) that can make this easier.

4. Time — Probate can take a long time — anywhere from a few months to more than a year. If there is a will, and one or more of the heirs chooses to contest the document, the process can take a lot longer. Since annuity benefits are not subject to probate when an individual is the beneficiary of the contract, they may have access to the proceeds sooner.

5. Probate at second death — Probate is often less complex when assets pass from the owner to a surviving spouse. Without pre-planning, however, probate may be a potentially complex undertaking at the second death. If annuity ownership changes due to spousal continuation at the first owners death, that surviving owner needs to make new beneficiary designations on the contract to achieve a probate-free transfer at death.

Income Taxes

Managing the amount and timing of your client’s income taxes could have a significant effect on both the original asset owner(s) and the beneficiary.

With temporary lower marginal income tax rates after the TCJA, retirement plan owners may benefit by paying taxes now and taking excess withdrawals from qualified accounts. For purposes of this article, excess income through withdrawals is basically taking income through withdrawals from tax deferred accounts balanced with tax deferral. Issues to consider within this category include prolonged tax deferral for large retirement plans inflating RMDs and increased income tax exposure for a surviving spouse due to the change in filing status from married filing jointly to single.  A surviving spouse’s income could be reduced, yet due to the change in filing status, the tax exposure could increase.

Prolonged income-tax deferral of large ($1 million+) retirement plans can trigger higher income taxes and other costs, such as Medicare Part B & D premiums, after age 70½, when required minimum distributions (RMDs) generally start.

It may be that accelerating IRA distributions before 70 ½ could benefit the current IRA owner as well as the beneficiary in some situations:

• By reducing income taxes on ordinary income by managing the withdrawals to “fill” a current lower tax bracket after retirement and before RMDs begin. Large forced distributions could trigger the 3.8 percent Medicare surtax on net investment income if the distributions exceed the income threshold and there is net investment income. Reducing those distribution amounts may eliminate exposure to the surtax.

• Medicare premium costs are based on two years prior modified adjusted gross income so large RMDs could increase premiums on some parts of Medicare.