Jim Nabors Saved $4.8 Million in Taxes By Marrying His Husband

How Jim Nabors saved $4.8 Million in taxes by marrying his husband. Courtesy of PayTaxesLater.com

 

Jim Nabors: Actor, Singer, and Comedian

On November 30, 2017, Jim Nabors, perhaps most famous for his role as Gomer Pyle, died at the age of 87.  Jim is survived by his husband Stan Cadwallader, whom he married in 2013. Their marriage came one month after same-sex marriages became legal in Washington State.

It is quite eye-opening to look at the tax consequences of their decision to get married; Mr. Nabors died with a $13M estate.  The terms of his will are not public, but for the sake of argument let’s assume he left his estate to his husband. Because of the marriage, no Federal or Hawaiian estate or inheritance taxes are due at death because of the unlimited marital deduction.

Smart Estate Planning

If Jim and Stan had remained unmarried partners the payout to the Government would have been astronomical. A $3,000,000 payment in federal estate taxes alone is bad enough. A payment of over $1,800,000 in Hawaiian inheritance taxes would add a total of $4,800,000 in total taxes. These numbers don’t include the income taxes that will be saved because of the longer “stretch” a spouse receives on an inherited IRA or retirement plan.

The moral of the story is that for many life-long partners, gay or straight: Get Married for the Money.  Obviously the decision to marry hinges on more than whether marriage is a financially strategic move. But if you are simply avoiding the formalities, it might make sense to think about the long-term tax consequences on your financial security—for both you and your partner. Marriage is usually a big plus for purposes of Social Security, especially if one partner has a much stronger earnings record than the other partner.

More Information Is Always Available

For more information visit www.paytaxeslater.com.To schedule an appointment with Jim Lange, please call his office at 412-521-2732. You can always contact Jim at jim@paytaxeslater.com.

James Lange, CPA/Attorney of Lange Financial Group, LLC, is the author of several books on retirement and estate planning, including Live Gay, Retire Rich.  His books on retirement strategies have been endorsed by Charles Schwab, Larry King, Jane Bryant Quinn, Ed Slott, and many more.  He hosts a weekly financial show on KQV News Radio in Pittsburgh. PA.

 

The Essence of Lange’s Cascading Beneficiary Plan

The Essence of Lange's Cascading Beneficiary Plan

Learn how Lange’s Cascading Beneficiary Plan can help ease your worries for your family’s financial future.

Somewhat tongue-in-cheek, I refer to “Leave it to Beaver” families as the perfect candidates for the Lange Cascading Beneficiary Plan (LCPB). Just to be clear about what I mean by that, I am showing you a basic version of the family tree for that type of family. Blended families with children from different unions sometimes need to have estate planning with more complicated beneficiary designations. It is not that the LCBP cannot work, but it is not as straightforward. With that in mind, let’s look at the essence of Lange’s Cascading Beneficiary Plan.

Lange Cascading Beneficiary Plan example photo

It is important to think long-term with financial planning using the Lange Cascading Beneficiary Plan.

In previous content of the Lange Cascading Beneficiary Plan series, I have discussed the tax and long-term estate planning benefits of leaving your IRA and retirement accounts, when possible, to the youngest members of your extended family to get the longest stretch possible. Remember, keeping money in the tax-deferred environment (traditional IRAs and retirement plans) or the tax-free environment (Roth IRA etc.) for as long as possible works to your heirs’ advantage.

But, let’s be realistic. Even if you understand that the tax benefits are greater when you leave your IRA to your grandchildren, most couples want to ensure that their surviving spouse will be financially sound with enough discretionary money to lead a happy and fulfilling life. So, if we take that attitude, it might seem that the simplest and safest route is to simply leave all your money to your surviving spouse.

Or, you make some calculations and decide your surviving spouse will probably be fine with most of your IRA but some of it could go to the kids upon the first death. Maybe your plan works out perfectly, but maybe it doesn’t.  Let’s look at an example. You have a two-million-dollar IRA, and you think, based on future calculations that your spouse will only need about $1,500,000.

You could make your children the beneficiaries of $500,000 at your death. Conducting your estate planning in this manner could provide your children with some inheritance after the death of the first parent. It might be very useful to them, especially if they have children of their own that will be needing money for school or facing other monetary challenges associated with raising a family.

The financial market is in constant flux, keep that in mind when making plans.

That sounds like a great plan but what happens if the market takes a big dive? The two million you thought was going to be there has dropped to 1.5 million, and you have designated $500,000 of that to go to the children. Now, your surviving spouse has less money to live on, and you fail to meet your objective of providing for your spouse. That would be horrible. Divvying up an estate appropriately is one of the biggest hurdles of estate planning.

So, you go back to square one, and leave everything to your surviving spouse outright.  Down the road, your family will likely have to give up more in taxes. Furthermore, if changes in the tax code modify the advantages of the stretch IRA, you could potentially forfeit the tax advantages that might be offered to compensate a bit for the loss. There was talk, for instance, of allowing $450,000 of an Inherited IRA to be stretched over a lifetime, and this exemption allowance would be available to both spouses.

If your estate planning leaves everything to your spouse, you forfeit one $450,000 exemption. Whereas, if the first spouse to die leaves $450,000 to the kids (giving them the advantage of the stretch), then when the second spouse dies, the children can take advantage of the second exclusion and stretch another $450,000. That is a big difference.

This is why the Lange Cascading Beneficiary Plan is right for you.

What we come back to time and again, is that we don’t have a crystal ball that allows us to plan for the future with any confidence that we are making decisions that will be appropriate for the circumstances at that time. That is precisely why the LCBP is so effective. You can draft the documents in such a way that your surviving spouse (with the help of an advisor and perhaps the grown children) can make good decisions about allocating the estate that are both tax-savvy and in the best interest of the family.

Picking up on our previous example where the stock market took a dive and there is less money overall for the surviving spouse. Under the terms of the LCBP, he or she could say, “Hey, I’d love to help the kids out, but I need all the money.” End of story, surviving spouse just keeps everything and we get a good result.

The essence of the LCBP will put you at ease.

Alternatively the surviving spouse has more than enough money for long-term security and a comfortable lifestyle, so he or she decides that money should go to the kids. So, with the cascade in place, divided among the children equally, and with disclaimers available, the surviving parent can look at each child’s situation and help them in the way that makes the most sense. Perhaps one child has a bright financial future, and it would make more sense to pass money onto their children (the grandchildren). In that instance, the first child could disclaim their portion directly to their children via well-drafted trusts.

Second child would love to do the same, but actually, he or she could use the money.  So, he or she accepts the inheritance, and does not disclaim to his or her children. Flexibility works. And, a further advantage is that none of these decisions must be made quickly. The family has nine months after the first death to finalize all decisions. A little breathing room after a crisis can be very welcome.

With documents that offer flexibility, you don’t have to predict the future to provide for your family in a way that makes sense for the time. Lange’s Cascading Beneficiary Plan allows for terrific post-mortem planning that can make an enormous difference for the family.

Next week, we will examine estate planning with the potential $450,000 exclusion in more detail.

See you soon!

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

Tax Cuts and Jobs Act of 2017: Ten Huge Take-Aways

Ten Huge Take-Aways from the Tax Cuts and Jobs Act by Jim Lange

 

Ten Huge Take-Aways from the Tax Cuts and Jobs Act of 2017

by James Lange, CPA/Attorney

 

The first thing to consider about the proposed Tax Cuts and Jobs Act is that it is just a proposed tax bill.  It is possible it will face stiff resistance in the Senate and possibly get no votes from the Republicans.  Jeff Flake, John McCain, Bob Corker, and Lisa Murkowski might be on that list of Republican “no” votes. So, like health care it is possible, and even likely, that nothing will happen this year and maybe not in the foreseeable future.

Depending on your personal circumstances, the Tax Cuts and Jobs Act of 2017 could be good or bad for your family.  Critical factors like how many children you have, whether you live in a high-tax state and itemize your deductions or take the standard deduction, whether you own a home or are looking to buy one could sway you from benefiting from these changes or suffering from them.

In fact, there are so many variables to consider that it is difficult to make a blanket statement that the proposal will offer you tax relief.  Corporate America is a clear winner. Reducing the corporate tax rate from 35 to 20 percent, Speaker Paul Ryan argues, will create more jobs and drive up wages.  But critics, even Republican critics, say it is not a given that companies will pass their savings on to workers vs. shareholders through higher dividends.

However, the bill as it stands now is far from becoming law.  Ultimately, the Senate will introduce more changes and what we will end up with and whether it will pass are still great unknowns.  But, going forward it will still be helpful to understand some of the main provisions the bill advances so you can begin to assess the impact on you and your family.

Champions and underdogs in the Tax Cuts & Jobs Act of 2017:

  1. This doesn’t appear to be an overall tax-cut for the middle class, as promised. What we see in this bill is a tax cut for some, and a tax hike for others.  As usual, it all depends on how much you make, how you earn your living, where you live, the mortgage on your home, your property taxes, student loans, etc.  The Tax Policy Center commented that the bill wasn’t really tax reform but rather it was more of a complicated tax cut.  We have compared differences for different hypothetical clients and the results were less dramatic than we thought.  In one case, the elimination of the alternative minimum tax was helpful, but the dis-allowance of state and local income taxes netted out to a tax increase for one client.
  2. The bill reduces the number of tax brackets from seven to four. Currently the brackets are 10-15-20-28-33-35-39.6%.  Under the new provisions there will be a zero bracket (in the form of an enhanced standard deduction according to the bill), and from there the brackets will be 12-25-35-36.9%.  Here is how they break down:
2017 Single Filer 2017 Married Filing Jointly 2017 Head of Household
$0- $9,325 – 10% $0-18,650 – 10% $0- $13,350 – 10%
$9,326- $37,950 – 15% $18,651- $75,900 – 15% $13,351- $50,800 – 15%
$37,951- $91,900 – 25% $75,901- $153,100 – 25% $50,801- $131,200 – 25%
$91,901- $191,650 – 28% $153,101- $233,350 – 28% $131,201- $212,500 – 28%
$191,651- $416,700 – 33% $233,351- $416,700 – 33% $212,501- $416,700 – 33%
$416,701-$418,400 – 35% $416,701- $470,700 – 35% $416,701- $444,550 – 35%
$418,401 + – 39.6% $470,701+ – 39.6% $444,551 + – 39.6%

 

Proposed Single Filer Proposed Married Filing Jointly Proposed Head of Household
$0-$44,999 – 12% $0-$89,999 – 12% $0-$67,499 – 12%
$45,000-$199,999 – 25% $90,000-$259,999 – 25% $67,500-$229,999 – 25%
$200,000-$499,999 – 35% $260,000-$999,999 – 35% $230,000-$499,999 – 35%
$500,000+ – 39.6% $1,000,000+ – 39.6% $500,000+ – 39.6%

Additionally, the bill would eliminate the alternative minimum tax (AMT), a second tax calculation for people earning about $130,000 which reduces the impact of many tax breaks.

  1. The bill doubles the current standard deduction, giving $12,000 to single filers, $24,000 for married filing jointly, and $18,000 for heads of household.
  1. But before you get too excited about a larger deduction, they’ve decided to repeal the personal exemption—currently $4,050 per person—and the deductions for state and local taxes. So, it isn’t as much of a break as you think it is.
  1. They are taking away one of our favorite, and edgiest strategies. No more recharacterization of Roth IRAs. If you’ve heard me talk about Roth IRAs, you’ve probably heard me mention recharacterization.  The ability to recharacterize, basically undo the Roth conversion, adds enormous flexibility in our Roth IRA conversion planning.  This will mean that the days of do-it-yourself Roth IRA conversion calculations will be highly risky.  Having a professional you can trust, who knows the system in and out, and who has the experience to get it right will become incredibly important.
  1. Taxpayers with a net worth of $10 million or more (and their children) have a reason to cheer as the plan almost doubles the current federal estate tax exemption from $5,490,000 to $10,000,000 per individual, with spouses exempt from any limits. The Joint Committee on Taxation has commented that this provision, while being a boon for business owners and wealthier Americans will reduce the federal revenue by around $172 billion over 2018-2027.  Oh, yeah…and after 2023, the estate tax will be repealed all together.  Compensating for that loss of revenue is a huge stumbling block for the proposed tax reform.  Though hard to confirm, rumor has it that originally they were going to eliminate the estate tax entirely but put this provision in to secure the support of Alaska.
  1. While the bill does simplify many areas, it also complicates many areas. It is not a major tax simplification.  I do not fear that our CPA firm will lose business because clients will find it so easy to complete their tax returns.
  1. While corporations and businesses will see a reduced corporate tax rate—from 35% to 20% – it will come with a price¾a much more involved and complicated filing process. New anti-abuse rules, complicated multi-national corporation rules, new tax treatments on interest, and changes in international income rules will make navigating your business tax return much more difficult.  Shareholders of pass through entities, like Subchapter S corporations will get a big break, but the complications for claiming that break are considerable.
  1. The Act is silent on the Death of the Stretch IRA. We still aren’t sure if and when this will happen.  It is very possible that they are holding it in reserve to for future negotiations pertaining to reducing the deficit.  The tax cuts in this bill will massively reduce federal revenue.  We’re talking in the trillions of dollars here.  To get any version of this to pass, it is very likely that the GOP will have to come up with ways to offset some of the deficit.  Killing the ability to stretch IRAs and retirement plans for generations is one way to do that.
  1. Even the Republican’s admit that this bill will increase the deficit by $1.5 trillion dollars over the next ten years, and that is a huge issue. Critics on both sides see increasing the deficit as unacceptable.  Further, the Tax Policy Center and other tax policy commentators on both sides of the aisle think that this estimate is too low or too high, and many do not believe that this bill will provide the economic growth or tax-relief promised to the middle class.

If you want to read an excellent 82-page summary of the bill, check out The Fiscal Times online:

http://www.thefiscaltimes.com/2017/11/02/Read-House-GOPs-Tax-Bill-or-Summary-Key-Points

If you are looking for more of a brief overview summary, these are excellent resources:

https://taxfoundation.org/details-tax-cuts-jobs-act/

http://www.taxpolicycenter.org/taxvox/house-gop-tax-bill-mostly-business-tax-cut-will-create-new-winners-and-losers

As I mentioned above, this bill is simply the first iteration of what the final bill might look like, and it isn’t clear that anything in it is going to become law.  But it bears some scrutiny since some of the main points are likely to provoke debates.  We will continue to watch as the process evolves.  We might even have to interrupt our series on Lange’s Cascading Beneficiary Plan once again!  If that happens, I hope you will bear with us.  But unless there is major news, we will see you next week as we continue exploring the advantages of the LCBP

The Incredible Tax Advantage of Young Beneficiaries

Let’s Talk About Your Kids:
The Advantage of Estate Planning with Young Beneficiaries

The Incredible Tax Advantage of Young Beneficiaries

Let’s talk about your beneficiaries, your kids and grand kids.

In the second video in this series, we learned that estate planning that leaves retirement assets directly to children and grandchildren offers extraordinary tax advantages to your family.  The basic premise being that a young beneficiary has a long life-expectancy, and sustaining money in the tax deferred environment for an extended period allows for the most growth. At least this is how things work under the current law.

I think we can agree that, in drafting estate planning documents, the primary concern for most couples is to provide for the surviving spouse. As we have discussed, transferring assets to a spouse is a fairly straightforward process and does have some tax advantages. Then, they hope that when they are both gone, there will be something left for their kids, and then for their grandchildren.  But, I am suggesting that, depending on family circumstances, it might be smart to leave money to kids or grandkids at the first death.

Let’s say that after you die, your spouse is in good health and has more money than he or she will ever need.  Under those circumstances, you have met our first criteria for an estate plan:  providing for the surviving spouse.  In this case, leaving at least a portion of your IRA to your children is perhaps a viable and tax-savvy option.  With their longer life expectancy, they will have lower required minimum distributions which means more of your money will continue to grow tax-deferred.  Flexible estate planning at its finest! It’s a winning scenario, especially if you look at the family as a whole with the idea of establishing a legacy.

If we take it one step further with your beneficiaries.

It’s even better, tax-wise, to name your grandchildren.  Imagine the advantages of minimizing tax-free distributions from an inherited Roth account over a long lifetime! If you scroll up to video two in the series, you can watch me run the numbers for just that scenario.  It’s a game-changing strategy.

We cannot over-stress, however, that naming minor children or grandchildren as beneficiaries will also require some additional estate planning to protect them from themselves—no Ferrari at 21 for you my grandson—and, potentially, creditors.  We recommend that all minors’ shares are held in well-drafted trusts.  Additionally, it is critical that the trust meets five specific conditions to qualify as a designated beneficiary of an IRA or a Roth IRA (you can find reference to the five conditions in my book, Retire Secure! on Page 307, and you can download a copy of the book at www.paytaxeslater.com/books. Under current law, a well-drafted trust will allow them to stretch an inherited IRA or Roth IRA over their lifetime. If the trust doesn’t meet all five of the conditions, then the trust will not qualify as a beneficiary and income taxes will be accelerated. Without attention to the details, it could go from an estate planning dream to a nightmare.

So, let’s pull it all together.

Even if you have specific bequests that you want to see honored—a gift to a charity or a cause or a family friend—I suspect that it is still safe to say that your primary beneficiaries will be your surviving spouse, your children, and your grandchildren.  That being the case, stay tuned to learn why Lange’s Cascading Beneficiary Plan is probably the best estate planning solution for you.

Until next time!

-Jim

 

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

Beyond “I Love You” Wills: Tax Advantaged Estate Planning With Lange’s Cascading Beneficiary Plan

Estate Planning Goals:
What Do Most Families Want?

What do most couples want from estate planning and their Wills?

Welcome back for the fourth video blog post in my series on Lange’s Cascading Beneficiary Plan: the best estate plan for married couples.

So, let’s talk a minute about estate planning goals in general and forget about taxes.  What do most couples want from estate planning?  They want to be sure that, no matter what, the surviving spouse will be safe and secure.  If they have kids and grandkids, they want to take care of them too.  This typically leads to what I call an I Love You will.  And truly, it’s a great place to start.  Most I Love You wills are simple and to the point:  Husband leaves everything to his wife.  Wife leaves everything to her husband.  Once they both die, the remainder goes to their children in equal shares.  And if, for some reason one or more of the children predecease the parents, that child’s share would go to his or her own children—hopefully in well-drafted trusts.  As I said, I am a huge fan of I Love You wills.  But, returning to the topic of taxes…we can optimize estate planning when we start thinking of the tax consequences for individual family members, and how that affects the family as a whole.

What’s great about the I Love You Wills

Okay, so what is great about the I Love You wills that name the spouse as the primary beneficiary and then the children equally?

  1. It provides for the surviving spouse. As such, it meets our primary objective.
  2. When you direct your assets to your spouse at death, there is no income tax on the transfer of your IRA or other retirement plans. With a tax-deferred plan, your spouse will continue taking required minimum distributions (RMD).  If a Roth IRA passes to the surviving spouse, there are no RMDs, and it can continue growing tax-free for the rest of his or her life.
  3. With the death of the second spouse, what’s left goes to the children.

That covers the basics.

What can be improved from with I Love You Wills?

Now, let’s look at what we might improve from the basic I Love You estate planning.  If you remember in the second video of this series, we looked at the nitty-gritty of what happens to your IRA after death.  Assuming the IRA distribution rules currently in place, you learned that a child’s required minimum distribution of an inherited IRA would be much lower than the required minimum distribution of the IRA for the spouse.  So, if financial circumstances permit, passing the IRA to a child defers taxes for a much longer period.  And, if we are looking the big tax-picture estate planning for the whole family, that is an advantageous tax strategy.  The tax advantage only improves if a grandchild is the beneficiary.  We can implement this tax-advantaged strategy if the disclaimers associated with Lange’s Cascading Beneficiary Plan are in place.

The critical component with this type of estate planning is flexibility.  Having options that can maximize the tax benefits to the family based on the financial/life circumstances at the time of the first death is both comforting and smart.   Lange’s Cascading Beneficiary Plan takes all the benefits of the I Love You will and adds flexibility and potentially enormous tax advantages.

In our next video blog, we will look at some of the best ways to plan in the face of uncertainty.

See you soon!

Jim

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

When Is Flexible Estate Planning with Lange’s Cascading Beneficiary Plan the Best Solution?

Lange’s Cascading Beneficiary Plan:
When is Flexible Estate Planning the Best Solution?

Hi all!  As we edge closer to Halloween, I want to talk a bit more about something that TRULY TERRIFIES me: bad estate planning.  In our scary tale, the villain: Concrete Contract, is trying to trap your beneficiaries into decisions made today—decades prior to your death—based on information and circumstances that will likely be completely different when the time comes to put the estate plan into motion. The devil is in the details, and you don’t want the devil involved!

Luckily, our flexible friend, Lange’s Cascading Beneficiary Plan comes to the rescue! He provides the peace of mind that your beneficiaries will be able to make the best decisions with the facts at hand when the time comes.  Once again, flexible estate planning protects the innocent and saves the day!

Ok… Ok… I know that was a little silly.  But it is still true. Since the mid-1990s, Lange’s Cascading Beneficiary Plan has been saving beneficiaries from being trapped by decisions made decades in the past when an estate plan was drafted. In my opinion, there is no better option for your estate planning, particularly if your family is not a blended family—more traditional, so to speak.  In the accompanying video, I am going to explain my reasons for using this flexible estate plan and describe how it can provide optimal solutions under many circumstances.

As I have touched on before, the biggest problem in estate planning is that we don’t know what is going to happen in the future.  We don’t know when we are going to die.  We don’t know how much money we’re going to have.  We can’t anticipate the future needs of our surviving spouse.  We can’t know the needs of the children and grandchildren—or even whether there will be grandchildren.  We don’t know what the tax laws are going to be.  In point-of-fact, we don’t know what the tax laws are going to be next year much less a couple of decades from now!

A previous blog and video series addressed possible changes in the tax laws regarding retirement plans… and I said then, what I will say now.  The best thing that you can do to protect your family from those changes—not knowing what the future holds—is to make sure you have a flexible estate plan.  If we lose the ability to stretch an IRA, if inherited IRAs are taxed at an accelerated rate, if tax rates become more unfavorable for your family, then they will need flexibility to make financially sound decisions. Managing the tax impact on your legacy is critical.

What do you need to have Lange’s Cascading Beneficiary Plan work for your family?  Trust.  For this plan to work well, you absolutely must trust your spouse. This is really important, because after you die, your spouse will have the power to make a lot of critical decisions—hopefully in conjunction with other trusted family members and a trusted advisor, and armed with your wishes too.

Estate planning with cascading beneficiaries is not a new concept, but I put my twist on it making it work particularly well for IRA and retirement plan owners with traditional families. Then, I started calling it Lange’s Cascading Beneficiary Plan.  After decades of use, I’ve seen this plan serve my clients very well.

The video goes over the details of how this plan should be set up and how to name beneficiaries. I think it is really critical to get this right, and I want to make sure all my readers do get it right. Flexible estate planning has never been more critical as we stand in the shadow of the Death of the Stretch IRA. Good planning could save your family a lot of worry and a lot of money.

Stop back soon for more on Lange’s Cascading Beneficiary Plan.

Jim

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

Why Flexible Estate Planning Matters, Especially for IRA and Retirement Plan Owners

Why Do We Need Flexible Estate Planning?

Welcome back, Friends! This is the second post in my new video series on Lange’s Cascading Beneficiary Plan—the best estate plan for traditionally married couples, or what I like to call “leave it to beaver couples,” in contrast to blended families where more variables come into play for estate planning.

Why do we need flexible estate planning? Why is it so valuable for IRA and retirement plan owners?  Well, to get there we must think about the unique tax features of IRAs and what happens to an IRA when you die…

Most contributions to IRAs and retirement plans are tax deferred. We will ignore Roths for now. Their status as tax-deferred investments is valuable to you and to your heirs. Under the current law, you can take advantage of a great estate planning tool referred to as “the stretch IRA.” Stretching the IRA means keeping as much money as possible in the tax-deferred environment for as long as possible. We want to    allow as much of the principal in an inherited IRA to grow tax-deferred for as long as possible—currently a child or even a grandchild can stretch distributions from an inherited IRA over his or her lifetime. But, we are looking at a possible change in the laws regulating retirement plans that could really ruin that opportunity.  Having flexibility in your estate planning allows you to roll with the changes, and make good decisions under the new rules. But let’s take a little closer look at how the stretch works.

Bob Smith is a married 69-year-old retiree with a million dollars in his IRA.  On April 1 of the year after he turns 70 ½, Bob must begin taking annual required minimum distributions (RMDs) from his retirement plan.  You see, the government has been letting Bob defer income taxes on his IRA contributions for many years.  But eventually, they want their share! RMDs are calculated using numbers found in IRS Publication 590. Publication 590 gives us a divisor that is based on the joint life expectancy of Bob and someone who is 10 years younger than Bob.  We see that at age 69, Publication 590 says that Bob’s divisor is 27.4 (very nearly 4%).  So, when you do the math, this first year Bob must take out close to $38,000.  So, for the rest of his life Publication 590 is used to determine how much of a distribution Bob is required to take annually.

Now, when Bob dies, the ownership of that IRA is transferred to his wife, Jane Smith. Conveniently in this example, she is the same age as Bob so she begins taking her required minimum distributions exactly as Bob did.  As time goes on, her life expectancy decreases, and the distributions get larger. When Jane dies, however, what’s left in the IRA will go to their children as an Inherited IRA. This is when things can get interesting.

Let’s assume for discussions sake that their child, Sally, is now in her sixties.  Sally will be required to take minimum distributions as well. The difference is that her distributions will be calculated based on her life expectancy. Which, obviously, is much longer than her mother’s was at the end.  So, the dollar value of the distributions drops, and the bulk of the account continues to grow tax deferred for a long time—and Sally benefits from the power of compounding.

You all know that I am a big fan of paying taxes later.  So, if you have done flexible estate planning, like Lange’s Cascading Beneficiary Plan, and if you can afford it, here is an even more dramatic possibility. Since the flexible estate plan allows Sally to disclaim the Inherited IRA (she doesn’t need the money), she can pass it directly to her son, Phillip (her parents’ grandchild). Now, Phillip is in his thirties and his required minimum distribution is even lower.  Think of how long that deferral can run!

And, if you REALLY want to think of something incredible, imagine that this retirement plan is a Roth rather than a traditional IRA.  Now, all those distributions are tax free and we are really talking about building generational wealth.  The video with this post goes into detail about how IRAs are treated after death, and provides examples using specialized software that show how family wealth can grow using inherited IRAs and Roth IRAs—with the caveat is that this is how things work under the current law.

Unfortunately, we still believe that the death of the stretch IRA will pass in 2017 or 2018.  What is going to happen, subject to exception, is that the non-spouse beneficiary will no longer be permitted to stretch distributions of an Inherited IRAs over his or her lifetime. Any amount over $450,000 will be required to be disbursed within 5 years of the IRA owners’ death. Potentially devastating! There are some work-arounds that we have devised in anticipation of the law changing but this is precisely why flexible estate planning is so critical. Enjoy the video.

See you next week!

-Jim

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

The Best & Most Flexible Solution for Your Estate Planning Concerns: Lange’s Cascading Beneficiary Plan

The Ultimate in Flexible Estate Planning:
Lange’s Cascading Beneficiary Plan

The Ultimate in Flexible Estate Planning: Lange's Cascading Beneficiary Plan

This post is the first of series on Lange’s Cascading Beneficiary Plan, the gold standard in estate planning for traditional married couples.

What is Lange’s Cascading Beneficiary Plan?

Estate planning would be so much easier if we just had a crystal ball. We simply cannot predict the future with much confidence. And the unknowns stretch beyond the plan rules, tax laws, and the investment environment. Family and financial circumstances can change dramatically over time as well. So we are faced with questions like: How much money will you have? How much money will you need? How many grandchildren will you have? Who will live the longest?  An estate plan that is intricately thought through and seems in-line with your testamentary intent today could be completely inappropriate once you die.

In the early nineties, I began thinking creatively about this problem. My objective was to revolutionize my firm’s estate planning practice by drafting documents that could accommodate changing circumstances—the key, as I saw it, would be flexibility within a reasonable set of assumptions. Lange’s Cascading Beneficiary Plan, as it came to be called, uses specific language and disclaimers to provide the most flexibility when it is needed the most—at the time of the death of the first spouse when the surviving spouse and the family have the most current picture of their finances and family dynamics.  We were aiming for less guess work decades in advance!

I thought it was the best thing since sliced bread!  And it turns out, I wasn’t alone.  Not only did my estate planning clients love the idea of giving the surviving spouse the option to make important financial decisions at the time of the first death, Jane Bryant Quinn did too.  She picked up on it through an article I wrote and sent out to my email list.  She first published a description of Lange’s Cascading Beneficiary Plan in Newsweek and from there, it has been featured in dozens of major publications like The Wall Street Journal and Kiplinger’s.  The plan is also featured in my flagship book, Retire Secure!, along with other nuggets of my best retirement and estate planning recommendations.  (By the way, you can download a free copy of the book from www.paytaxeslater.com/books or buy it on Amazon if you’d like a hard copy)!

We have been drafting this type of plan now for more than 25 years.  It works beautifully with our other cutting-edge strategies including stretch IRAs, Roth IRA conversions, and inventive gifting plans. Clients are happy knowing they have flexibility built into their plans, and sadly, but realistically, we have had to execute many plans over the years.  Fortunately, we have also been there to witness the peace of mind that the surviving spouse and heirs get from knowing they are making the best decisions possible given the circumstances.

What to expect in this series:

Over the next few weeks, I am going to spell out the details of Lange’s Cascading Beneficiary Plan.  Sure, I might slip in a current event post or two, but I am going to focus on providing you with a full understanding of what I truly believe to be the best in estate planning for traditional married couples.  I’ll explain which situations LCBP is best suited for, walk you step-by-step though the decision making, discuss how it can be adjusted to fit almost any situation to provide the greatest flexibility and tax savings, and tell you why flexibility will be more important than ever.

Let’s face it, tax changes are coming in our near future, but they will also inevitably change again in the more distant future. That is the nature of the beast. So, having a plan that can adjust to changes, that doesn’t fix things in stone, can give you a measure of comfort that you won’t end up with estate planning documents that have to be redrafted with every single change!  In my opinion, one of the best things you can do for your family is to develop a smart and flexible estate plan that saves them from additional stress and anxiety when you are gone.

Thanks for reading, as always, and stop back soon!

-Jim

P.S. If you want to do a little advanced study on this topic before the next post and video, go to http://paytaxeslater.com/estate-planning/.

 

Special Alert About the Equifax Data Breach

The Equifax Data Breach:
All You Need To Know

The Equifax Data Breach – What Should You Do

The recent data breach at Equifax has sparked a lot of discussion about how vulnerable the personal information of all Americans may be to theft.  Is there anything you can do to protect yourself in our computer-driven society?  While the Equifax hack was by far the largest in history, it’s not the first and will not be the last.  In 2017 alone, Verizon, Blue Cross Blue Shield/Anthem, Dun and Bradstreet, Chipotle, Washington State University, and even the IRS have discovered that they’ve been hacked – exposing the personal information of millions of Americans to thieves.  The breach at Equifax was so far-reaching that several corporate officers have retired, and many on Capitol Hill are calling for a complete investigation.  With over 143 million Americans at risk of being involved in this massive breach, you could very easily be affected.

What You Can Do If Your Information Has Been Compromised

So what can you do to protect yourself?  You probably know that Equifax has set up a website where you can check to see if your number has been exposed.  If your information was exposed in the breach, you can get free credit monitoring for one year.   In my opinion, that’s like closing the barn door after the horse has gotten out.  They’re happy to let you know that someone has opened up a fraudulent account in your name, but it’s still up to you to clean up the mess if they do!  And what happens when your year of free credit monitoring is over?  If you don’t pay for credit monitoring every year for the rest of your life, you may never know if someone is using your identity at some point down the road.

What Does Freezing Your Credit Report Do?

Some experts are recommending that you place a freeze on your credit files.  A freeze prevents lenders from even accessing your credit report.  The advantage to freezing your file is that, if they do not know your credit history, lenders will not offer credit to a thief who is trying to use your identity.   What are the disadvantages of freezing your credit files?  First, it’s not an easy process.  There are three major credit reporting bureaus, and you will have to place three separate freezes.  You can do so by using these links:

Equifax freeze

Transunion freeze

Experian freeze

If you are a Pennsylvania resident, the law permits the credit bureau to charge you $10 to freeze your file.  Equifax has agreed to waive their fee, but only after public pressure.

Unfortunately, the data breach at Equifax has caused all three credit reporting agencies to be overwhelmed with requests to freeze accounts.  Many consumers are complaining that they can’t even get into the websites or if they do get in, that the site crashes after they fill out the application form.  If you have not already frozen your account, you may have a better chance of getting through if you try before 7:00 a.m., or after 11:00 p.m.  Another disadvantage of freezing your credit files is that if you need to apply for credit yourself – for a car loan, a home equity loan or even a medical credit card – you must first remove the freeze from your files.  You will need a PIN number to remove the freeze and, if you lose your PIN number, you will be facing a time-consuming and difficult process to get another one.

The Equifax Data Breach and Your Tax Return

Opening phony credit accounts in your name, unfortunately, could be just the tip of the iceberg.  The Internal Revenue Service (IRS), which has issued more than $20 billion in fraudulent tax refunds over the past few years, could be plundered unless there is intervention by Congress.  By law, the IRS must process your tax return within a specified period – generally 45 days – or they have to pay you interest on your refund.  To meet those guidelines, they’ve adopted a “pay first, ask questions later” philosophy.  In our practice, it’s not uncommon to see a client get a tax refund check and then an audit notice a year later! The IRS’s system requires little more than a name, date of birth and Social Security number to process tax returns – information which was exposed in the Equifax data breach – and they accept returns as soon as January 1st.   On the other hand, employers aren’t required to submit updated employment information to the IRS until March.  By that time, about half of all of the refund checks have already been issued!

Protecting Yourself After the Equifax Hack

So what can you do to protect yourself?  If you don’t want to freeze your credit files, then you should be checking your credit reports regularly for fraudulent activity.  Most of the major credit card companies allow you to request that you be notified if a charge is processed on your account that exceeds a certain dollar amount.  You should consider placing an alert for an amount that exceeds your normal spending threshold.   If you are traditionally a procrastinator when it comes to filing your tax return, don’t wait – get it filed as soon as possible.  Even if you owe, you don’t have to pay the IRS until April 15th.  If you have any credit card debt, get it paid off.  Financial institutions that fall victim to fraudsters because of the Equifax data breach will have to pass the cost of their losses on to their customers – and you don’t want to be one of the unlucky ones footing the bill.

Last but not least – whatever you do to protect yourself, make sure that you do the same for those who might not, including children and elderly parents!

Stay safe out there!

Jim

 

The Sneaky Tax – Not Your Mother’s Income Tax

Don’t Let Congress Catch You Sleeping!

Our office is pretty busy right now because of the approaching income tax extension deadline of October 15th.  I was talking to some clients who had come in to pick up their return, and who had received an email from me last week about stopping the Sneaky Tax.  I guess it was just bad timing since their federal tax return was on their mind, but they thought that the term “Sneaky Tax” was somehow related to the tax code simplification that President Trump had promised in his campaign.  And since they both work in the medical field and are in the highest income tax bracket anyway, they assumed that their personal tax situation couldn’t get any worse and didn’t bother to read my email!  For this particular couple, it could have been a very costly mistake.

Who Will Pay The Sneaky Tax?

Most of the information I have written about the Death of the Stretch IRA has been for the benefit of parents who will be leaving their IRAs and retirement plans to their children.  These clients had no children, so they didn’t need to worry about how much their own beneficiaries would pay in taxes after their deaths, right?  Wrong!  These clients were the children – meaning that both had elderly parents who owned IRAs and retirement plans that they would eventually inherit.  So think about this situation for a minute.  This couple is not planning to retire for at least ten years, and the statistical odds are that their parents will pass away before then.  If that happens, the proposed legislation that I call the Death of the Stretch IRA will make them pay tax on their inherited IRAs within five years of their parent’s deaths.  They’re already in the highest tax bracket, so they stand to lose a whopping 39.6% of their inheritance because of the Sneaky Tax!   That’s almost as high as the maximum federal estate tax rate – which most people aren’t subject to anyway because each individual can exclude $5.49 million in assets before it applies.  That’s why I call it the Sneaky Tax – people (erroneously) think they don’t have to worry about it because they don’t have more than $5.49 million.  The Sneaky Tax is not the same as the estate tax – they’re as different as federal income tax and the sales tax you pay when you buy a new car!  And if you don’t watch out, this tax could very well sneak up on you and cost you a lot of money.

Baby Boomers and the Sneaky Tax

If you have elderly parents and are the beneficiary of their IRAs and retirement plans, then the Sneaky Tax will affect you – even if you have no children of your own.  The Death of the Stretch IRA legislation would force you to distribute and pay tax on any IRAs that you inherit (subject to exceptions), within five years of the owner’s death.  If you are required to take distributions from your inherited IRAs and retirement plans at the same time you are receiving income from working, it is quite possible that you’ll be bumped into a higher tax bracket – maybe even the highest possible bracket.  The excessively high tax consequence could affect your standard of living during retirement, or even your ability to retire at all.

Stopping the Sneaky Tax

Unfortunately, if this legislation passes and you subsequently inherit an IRA from someone other than your spouse, there will be little you can do to minimize the astounding consequences of the Sneaky Tax – and I say astounding because it is estimated that this tax will cost IRA beneficiaries trillions of dollars.  If the original owner (presumably your parent) is still alive, he or she might benefit from reading some of the preceding posts that discuss options the owner can use to minimize the tax burden.  If that’s not an option, you might want to take some advice from our first president, George Washington.  He said, ”…make them believe, that offensive operations often times, is the surest, if not the only (in some cases) means of defense.”

Most of you who will inherit your parent’s IRAs can’t afford the Sneaky Tax.  I hope you will join us in sending a shot across the bow to our representatives in Washington.  We have started a petition that we will forward to every legislator in the United States, and hope to collect as many signatures from across the country as we can.  Please forward this to everyone you know who might be affected by the Sneaky Tax, and ask them to sign our petition, and join our Facebook Group.

Thanks for reading, and stop back soon!

-Jim

Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.