© 2016 Joan E. Emery
1. In mid-2014, it was estimated that 31.1 million U. S. households owned traditional Individual Retirement Accounts ("IRAs") and 19.2 million U. S. households owned Roth IRAs. Since some households own both traditional IRAs and Roth IRAs, the totals overlap to some degree.
2. The general rules regarding Roth IRAs are as follows:
a. Contributions are not tax deductible.
b. Earnings on contributions are not subject to federal income tax if the earnings are distributed as part of a qualified distribution. See 2.g., below.
c. Income Limits – A person’s ability to contribute to a Roth IRA is affected by the amount of that person’s modified adjusted gross income (“MAGI”). Below specified levels of MAGI, a person can make a contribution to a Roth IRA up to the contribution limit. In certain MAGI mid-ranges, the amount of the contribution is reduced. Above certain specified MAGI amounts, the ability to contribute to a Roth IRA is eliminated. Special rules apply to traditional IRAs which are converted to Roth IRAs and to rollovers from a qualified retirement plan to a Roth IRA.
d. Contribution Limits
1. If the income limits are not exceeded, the following rules apply:
a) Contributions are permitted if the person has earned income and contributions are permitted at any age. A spouse is permitted to make a contribution if a joint income tax return is filed and contributions are permitted at any age.
b) The contribution limits are as follows:
i) Through age 49: lesser of 100% of earned income or $5,500 per person;
ii) Age 50 or Over: lesser of 100% of earned income or $6,500 per person; and
iii) The Kay Bailey Hutchison Spousal IRA Limit, which applies to both traditional IRAs and Roth IRAs, may affect the amount that may be contributed to the IRA of the spouse who earns less.
c) Traditional and Roth IRA contributions are added together to determine if the person’s contribution limit has been reached. Employer contributions to a SEP or SIMPLE IRA are excluded from this calculation.
2. The general contribution limits do not apply to a conversion of a traditional IRA into a Roth IRA or the rollover from a qualified retirement plan to a Roth IRA. However, special rules apply to these conversions and rollovers. The general rule is that the amount in a traditional IRA or qualified retirement plan, which will be rolled into a Roth IRA and which is not a return of basis, must be included in gross income for the year in which the conversion or rollover occurs.
e. Due Date of Contributions – Contributions may be made until the due date of the person’s return. An extension of time to file the return does not extend the contribution due date.
f. Mandatory distributions are not required during the lifetime of the person who establishes the Roth IRA.
g. Taxation of Distributions
1. Qualified distributions are not subject to federal income tax. The general definition of a qualified distribution is a distribution received (a) by the person who established the Roth IRA if at least 5 years
have elapsed since the Roth IRA was established and the person who established the Roth IRA (i) is at least 59.5 years of age, or (ii) is disabled, or (iii) satisfies the qualified first-time home buyer exception, or (b) if the person who established the Roth IRA is deceased.
2. In addition to federal income tax, a 10 percent additional federal tax applies to distributions which are not qualified distributions unless one of the specifically listed exceptions applies. The 10 percent additional tax may not apply if :
a) The recipient is at least age 59.5; or
b) The recipient is totally and permanently disabled; or
c) The recipient is the beneficiary of a deceased IRA owner; or
d) The distributions are part of a series of substantially equal payments; or
e) The distribution is used to pay:
i) Eligible medical expenses which exceed certain limits; or
ii) Eligible unemployed worker’s medical insurance premiums; or
iii) Qualified first-time home buyer expenses; or
iv) Qualified higher education expenses; or
f) Certain other specified exception requirements are met.
© 2016 Joan E. Emery
1. As of September 30, 2014, the total U. S. assets in Individual Retirement Accounts (“IRAs”) was estimated to be 7.3 trillion dollars. This total includes Traditional IRAs and Roth IRAs.
2. In September of 2014, it was estimated that IRAs comprised 11% of the financial assets of the average American family.
3. The general rules regarding Traditional IRAs are as follows:
a. If income limits and all other applicable rules are complied with, contributions are tax deductible, but only up to the contribution limits.
b. Earnings on contributions are tax-deferred.
c. Income Limits
1. Individuals and Heads of Household – full deduction up to contribution limit if person is not a participant in an employer sponsored plan/deduction is phased out if the person is covered by an employer sponsored plan and modified adjusted gross income exceeds certain levels.
2. Married Filing Jointly
a) Full deduction, without regard to income, up to contribution limits if both spouses are not covered by an employer sponsored plan.
b) If either spouse is covered by an employer sponsored plan, the deduction may be reduced if a calculation, which considers the spouses’ modified adjusted gross income, applies. Different income levels trigger the phase out of the deduction based on which spouse is covered by an employer sponsored plan.
3. Married Filing Separately – special rules apply
d. Deductible Contribution Limits
1. Contributions are permitted if the person is under age 70.5 and have earned income. A spouse is permitted to make a contribution if he or she is under age 70.5 and a joint income tax return is filed.
2. Through age 49: lesser of 100% of earned income or $5,500 per person.
3. Age 50 or Over: lesser of 100% of earned income or $6,500 per person.
e. Nondeductible Contribution Limits – A person may make a nondeductible contribution, but that nondeductible contribution is limited to the maximum allowable contribution minus the amount allowed as a deduction for that year.
f. Due Date of Contributions – Contributions may be made until the due date of the person’s return. An extension of time to file the return does not extend the
contribution due date.
g. Mandatory Distributions, referred to as Required Minimum Distributions,
must begin no later than April 1 following the calendar year when the person attains age 70.5.
h. Taxation of Distributions – This assumes no qualified rollover to another IRA or qualified retirement plan. However, Required Minimum Distributions cannot be rolled over.
1. Deductible contributions and any earnings are taxed at ordinary income tax rates.
2. Non-deductible contributions are not subject to income taxes.
3. The taxable and nontaxable portions of a distribution are calculated using specific rules.
4. A 10 percent additional tax applies unless one of the following exceptions applies:
a) the recipient is at least age 59.5;
b) certain disability requirements are met;
c) the distribution is used to pay:
1) eligible medical expenses;
2) eligible unemployed worker’s medical insurance premiums;
3) up to $10,000 of qualified first-time home buyer expenses;
4) qualified higher education expenses;
d) certain other specified exception requirements are met.
i. Allowable Asset Contributions – Contributions to IRAs are made by cash, check, or money order. Contributions of securities, real property, etc. are not permitted. However, different rules apply to rollover contributions.
j. IRA Investments
1. IRAs may be invested in most kinds of investments.
2. IRAs cannot be invested in collectibles, such as antiques and stamps. Some types of coins are permissible investments.
© 2016 Joan E. Emery
A family meeting may take place only once or the meetings may happen several times each year for decades. Family meetings are often used for the following reasons:
1. Estate Plan - disclosure of some or all aspects of a family member’s estate plan – may be a single meeting;
2. Family Business – meetings are often annual or bi-annual, possibly for as long as the business exists;
3. Family Crisis - dealing with an immediate dilemma, such as physical or mental crisis of a family member – frequency depends on the nature of the situation; and
4. Ongoing Family Situation - dealing with a current family issue (such as the physical or mental deterioration of a family member, use of family vacation home, or administration of a family foundation) – frequency of meetings depends on the issues being addressed.
If you have a successful family meeting and your family wants to have another family meeting, what can you do to increase the likelihood that the subsequent meeting(s) will be successful? Subsequent meetings will involve most of the same preparation steps used for the first family meeting (which were discussed last week) and will also include:
1. Resolve who will prepare a summary of the notes taken at the original meeting and circulate that summary to all meeting participants.
2. Decide who will be the facilitator(s) of the next family meeting.
3. The facilitator(s) will then take the following actions:
a. Work with family members to decide on a date for the next meeting;
b. Prepare a draft agenda for the next meeting, circulate that draft to all family members who may attend the next meeting, and seek feedback, as appropriate, from family members regarding topics to be included in the next agenda; and
c. Decide whether to get input regarding modifications, if necessary, to the meeting behavioral guidelines. Sample guidelines might be no interrupting, approach a disagreement as an opportunity to resolve a conflict, stick to the agenda items, be respectful of other participants' opinions and ideas, deal with others fairly, take turns speaking and listening, and everyone will have an opportunity to speak.
4. Plan to include some relaxation or fun. If the meeting takes the form of a family retreat or trip, there can be many opportunities for shared fun. If the meeting has a more urgent and stressful purpose, e.g. a health crisis of a family member, it is still appropriate to include some time at the beginning or end of the meeting to share some favorite family stories or to catch up on family news from each family member.
Family meetings, which are structured around a family business, involve a relatively large number of people, or are expected to take place over a period of years, often include two additional aspects. These aspects are:
1. Family Mission Statement – The purpose of a family mission statement is usually to describe the family’s values (identity, ideals, and traditions). Goals of the family or the purposes of the family meetings are also often included.
a. The family mission statement of a family which has a family business might be to provide business opportunities for family members, to grow the business, and to continue the business for as long as reasonably possible.
b. The family mission statement of a family involved in the long term care of a family member might be to provide that family member with the highest quality of life reasonably possible.
c. The family mission statement of a family guiding a family foundation might be to find innovative ways to give back to the community, in the area of health care, education, protecting the environment, or any other charitable purpose which the family has chosen to focus on.
2. Family Council – The family council can serve a function similar to the board of directors of a corporation. Family councils often create governing rules. These rules are used to organize and operate the family council and the family meetings. The governing rules usually specify the purpose of the family council and how it is to be organized (including who can be a member, the election or selection process for becoming a member, duration of membership, and the relationship of the family council to family meetings). For example, members of the family council might be elected by a majority of the family members and serve a three year term. The family council might be responsible for planning the annual family meeting and providing family members with a quarterly family newsletter.
Sharing information, engaging in discussions, and brainstorming solutions at family meetings can keep family members close, bring family members closer, reinforce family values, and create a platform to deal with family issues which may arise.
© 2016 Joan E. Emery
If Mom and Dad decide to have a family meeting to discuss their estate plan, what are some key aspects of a successful meeting? Mom and Dad should consider adopting the following guidelines:
1. Define, in advance, the purpose and scope of the meeting. Defining the scope requires that Mom and Dad decide in advance how much information they want to share. All participants should be aware that calling a family meeting does not mean that Mom and Dad have given up control of decisions regarding their estate plan. The roles of Mom and Dad as the ultimate decision makers regarding their estate plan should be made clear.
2. Prepare and send an agenda, in advance, to all participants. Effective use of an agenda creates the expectation that the meeting will be focused on the agenda and will have clear, specified goals.
3. Decide in advance who is invited to attend. The answer to this question depends on the dynamics of the family. When making this decision, it’s important to remember that not including all members of the same group, e.g. children, grandchildren, or spouses of children or grandchildren, can lead to conflict.
4. Decide in advance who will be the facilitator of the meeting. Will it be Mom and Dad, Mom or Dad, a trusted advisor, or a trained facilitator? Any trusted advisor who acts as facilitator should decide how he or she will deal with confidentiality issues, potential conflict of interest issues, and the possible perception by some attendees that the trusted advisor is not impartial.
5. Consider providing a brief set of behavior rules before the meeting or at the beginning of the meeting. Everyone should understand that conflict may occur, but that conflict is a part of life. One of the purposes of these guidelines is to provide a framework for managing conflict.
6. Anticipate problems that may occur at the meeting. Decide what can be done prior to the meeting to prevent potential problems. If prevention of the problem is not possible, then, prior to the meeting, decide on steps to minimize or fix the problem if it occurs. Common problems are hostility or attempts to dominate the meeting. Common solutions are using the agenda to limit discussion, using the behavior rules to keep unacceptable behavior in check, guiding a participant back to the meeting agenda, and temporarily suspending or permanently ending the meeting.
7. Document what happened at the meeting. This can be done by taking notes or by taping the meeting, but any relevant state law regarding audio or video tapes should be complied with. It’s usually helpful to prepare a summary of the meeting and to send the summary to all meeting participants.
8. Plan a positive way to end the meeting and then conclude the meeting using the planned closing.
9. Consider whether a follow-up family meeting would be beneficial.
I am an attorney practicing in the Chicago area.