Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

How to Use Gifting and Life Insurance as possible solutions to the Death of the Stretch IRA

Using Gifting as a Soltion for Death of the Stretch IRA James Lange

This post is the ninth in a series about the Death of the Stretch IRA.  If you’re a new visitor to my blog, this post might not make much sense unless you read the preceding posts, which spell out the specifics of the proposed legislation that might cost your family a lot of money.  This post discusses some ways that you can use gifting and life insurance as a possible solution to the Death of the Stretch IRA.

If you’ve been following my previous posts, you know that the Death of the Stretch IRA legislation could spell devastating tax consequences for your beneficiaries (other than your spouse, who is considered exempt).  Strategic planning to minimize those taxes will become very important once this legislation is finalized.  And while the techniques that follow are not for everyone, they can be beneficial for people who are in a position to take advantage of them.

What is a Gift?

When estate planners talk about gifts, they’re not talking about the presents you exchange on birthdays and holidays.  Generally, they’re referring to gifts of assets – cash, investments, etc. – that, when transferred to someone else, can reduce your current tax bill and, ultimately, the tax that your beneficiaries will pay after you die.  Current IRS rules allow you to gift a maximum $14,000 every year, tax-free, to each of your children.  Your spouse can also gift $14,000 to each child and, if you wanted to, both of you could also gift $14,000 to your child’s spouse.  Let’s say that you have three children, and they’re all married.  This means that you and your spouse could gift $56,000 to each of their families, tax free.  It also means that you’ve just reduced the size of your own taxable estate by $168,000.  Gifting can help reduce the amount of income tax that you owe now, and can be an effective solution to help manage the taxes that will be due at your death.

Maximizing the Tax Benefits of your Gift

But why not maximize the value of your gift by making it tax-efficient for the beneficiary too?  One idea would be to fund a Roth IRA for each child.  Roth IRAs are not tax-deductible, but the future earnings on the account are, under current law, completely tax-free.  A gift of a $5,500 Roth IRA to a 25-year old could make a significant difference in his standard of living when he retires.

If you have grandchildren who are of school age, a gift of a college savings plan could be an excellent tax-savings strategy.  While the contributions to a Section 529 plan are not deductible on your own federal tax return, the withdrawals are tax-free as long as the proceeds are used for qualifying expenses incurred by a student who is enrolled at a qualifying institution.

But what happens if your family situation is such that, even if you gift the maximum amount legally possible to all of your beneficiaries, taxes will still be a concern after your death?  In that case, you may want to consider life insurance as a possible solution.

Using Life Insurance as a Solution for Problems After Your Death

I don’t recommend life insurance just so that your heirs will receive even more money when you die.  Rather, I recommend it so that your heirs, and not the government, will get the money you’re leaving behind.  Here’s why.  Monthly payments such as pensions, annuities and Social Security that you rely on for cash flow, will likely change (if your spouse survives you) or stop completely when you die.  Your bills, though, will keep coming until they’re settled by your executor.  Many of these bills will be caused by taxes.  Your executor will have to file an income tax return on April 15th, and estate and inheritance taxes are generally due nine months after you die.  If your assets are not liquid by nature (for example, if you own real estate or a family business), or if you owned investments that happened to have declined in value at the time of your death, life insurance can provide sufficient cash to pay those taxes.  Without it, your heirs may be forced to liquidate your assets for far less than what they are worth.  The proceeds from life insurance, if it’s set up properly, are free of state and federal estate, inheritance and transfer taxes.

Remember, life insurance is a gift – and if you can’t afford to give your children a cash gift, then it isn’t likely that you can afford to give them a gift of life insurance either.  If you can afford to give them a gift, though, then life insurance is an option that you might want to consider.

Gifting and the Death of the Stretch IRA

When the Death of the Stretch IRA legislation is finalized, gifting (and especially life insurance) will likely become even more effective solutions than they have been in the past.  Please stop back soon, because my next post will go into the details!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post?  Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

How Does the Exclusion Amount to the Death of the Stretch IRA Legislation Work?

The Proposed Exclusion Amount to the Death of the Stretch IRA Complicates Planning.

The Exclusions for the Death of the Stretch IRA

This post is the eighth in a series about the Death of the Stretch IRA.  If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the preceding posts related this one.  Those posts spell out the details of the proposed legislation that will cost your family a lot of money.  This post discusses the proposed exclusion amount to the Death of the Stretch IRA legislation and explains how it will be applied to each IRA owner.

When I wrote my book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA, I accurately predicted most of what the Senate Finance Committee is proposing to make law.  The one point that I did not predict, though, was that each IRA owner would be permitted to exclude a portion of their retirement plans from the Death of the Stretch IRA legislation.  I don’t know if it was the Committee’s attempt to make the legislation seem not as bad as it is, but it certainly makes things more complicated for individuals who are trying to design an effective estate plan.  So I want to explain how the exclusion amount works.

The Exclusion Amount Applies to All Retirement Accounts

The whole idea behind the exclusion is that a certain portion of your IRAs and retirement plans would be protected from the Death of the Stretch IRA legislation.  Most people would think, “That’s great!  I’m going to apply my exclusion to my Roth IRA so that my beneficiaries can continue to enjoy the tax-free growth for the rest of their lifetimes.”  Well, that’s not how the exclusion amount works.  It has to be prorated between all of your retirement accounts.  Let’s say that you die with $2 million in retirement plans – $1.5 million in your 401(k), $400,000 in a Roth IRA, and $100,000 in a Traditional IRA.  Here’s how the exclusion amount would work.  Your 401(k) accounts are 75 percent of your retirement plans, so 75 percent of the exclusion amount (or $337,500) of that would apply to that account.  Your Roth IRA accounts are 20 percent, so  20 percent of the exclusion amount (or $90,000) would apply to that account.  Your Traditional IRA accounts are 5 percent of your retirement plans, so 5 percent of the exclusion amount (or $22,500) would apply to it.  The bottom line is that the exclusion amount has to be applied to all of your retirement accounts, both Traditional and Roth.

The Exclusion Amount Applies to All Non-Exempt Beneficiaries

I’m going to emphasize one subtle but very important point about the Death of the Stretch IRA and your beneficiaries.  The legislation did provide that some beneficiaries are completely exempt from the new tax rules.  For most of you, the most important exempt beneficiary is your spouse.  You can leave $10 million in retirement plans to your spouse (although I’d prefer that you’d add disclaimer provisions for your children!), and he/she can still stretch them over the rest of his/her life.  Disabled and chronically ill beneficiaries are exempt, as are minor children.   Charities and charitable trusts are also considered exempt beneficiaries.  Now that you know who is considered an exempt beneficiary, I want to talk about the beneficiaries who aren’t exempt.  For most of you, it’s your adult children.  If you have adult children who aren’t disabled or chronically ill, and you name them as beneficiaries on your retirement plans, the exclusion also has to be prorated between them.  You may have preferred to leave the amount that was excluded from your Roth account – in the above example, $90,000 – to the child who would receive the most tax benefit from it, but that’s not how the exclusion amount works.  If you have two children and they are named as equal beneficiaries, then each will receive (and can continue to stretch) 50 percent of the excluded amount– or $45,000.  Both children would also receive $155,000 from the Roth that can’t be stretched, and the account would have to be withdrawn within five years.  Granted, qualified withdrawals from Roth accounts aren’t taxed, but the greater cost is that the bulk of their Roth inheritance will no longer be permitted to grow tax-free.

Planning Opportunities Created by the Exclusion Amount

Oddly enough, there are certain planning opportunities created by the exclusion amount that is proposed in the Death of the Stretch IRA legislation.  If you have a beneficiary who is exempt, then you should remember how the exclusion works.  Suppose that you die with retirement plans that are worth $500,000 and you left 10 percent (or $50,000) to charity and the remainder to your child.  In that case, none of your retirement plans would be subject to the Death of the Stretch IRA rules.  That’s because the charity is an exempt beneficiary, so the $50,000 it received is exempt from the rules.  And the remaining $450,000 that went to your child is within the permitted exclusion amount, so her inheritance can be stretched over her lifetime.

I predict that the proposed exclusion amount will create headaches for financial advisors across the country.  Just imagine the chaos!  Where your beneficiary might have inherited one IRA, now they’ll inherit two – and each will be subject to a different set of rules.  How can they call this “simplified”?

Please stop back soon for my next post on this important legislation!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

 

P.S. Did you miss a video blog post?  Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

Why is the Death of the Stretch IRA legislation likely to pass?

What is the likelihood that the Death of the Stretch IRA legislation will pass?

Why is The Death of the Stretch IRA Legislation Likely to Pass by James Lange

This post is the seventh in a series about the Death of the Stretch IRA. If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the preceding posts related this one. Those posts spell out the details of the proposed legislation that will cost your family a lot of money. This post discusses the reasons I believe it is very likely that this legislation will pass.

To be fair, my critics point out that this idea has been brought up many times before, but hasn’t yet passed. I can’t argue with them on that point. Senate Finance Committee Chairman Max Baucus was the first major proponent of the idea, proposing the elimination of the Stretch IRA as part of the Highway Investment Job Creation and Economic Growth Act of 2012. The American Bar Association followed suit in 2013, recommending their elimination as part of a tax simplification proposal to the Senate and House tax-writing committees. And President Obama was very much behind the idea, including it in every one of his budget proposals since 2013. Even though it’s been proposed over and over again, it’s never passed. So why am I saying it is likely to pass, and soon?

The Politics of the Death of the Stretch IRA

When the idea was first proposed to the Senate by Max Baucus in 2012, it was defeated by an uncomfortably close margin of only 51-49. That vote, interestingly, was mostly along political party lines. President Obama presented the idea in every one of his budget proposals since 2013, but couldn’t get it past a House of Representatives that was controlled by the Republican Party. But on September 21, 2016, the Senate Committee on Finance voted 26-0 to effectively kill the Stretch IRA. And what was especially interesting about that vote was that it had unanimous bipartisan support.

So why isn’t it the law now? Well, think back to what it was going on in the fall of 2016. The nation was locked in a tumultuous political battle over who would be our next President, and Congress was busy dealing with allegations of malfeasance by both candidates. And before we knew it, the election came and went, and then the 114th United States Congress quietly adjourned without ever having time to consider the Finance Committee’s recommendation.

Is the Stretch IRA safe?

Does this mean, then, that the possibility of the Death of the Stretch IRA is overblown? I don’t think so, and here’s why. With the exception of Senators Schumer and Coats, all of the veteran members Finance Committee of the 114th Congress received the same Committee assignment after the election last fall. That means that 24 out of the 26 individuals who voted to recommend this legislation to the 114th session of Congress are in a position to make the same recommendation to the new Congress. And do you really believe that, considering the current political climate, it’s likely that they’re going to change their minds?

Trump and the Death of the Stretch IRA

What about the fact that we’ve got a new (and very rich) President? Won’t he protect his own ass(ets) by fighting the Death of the Stretch IRA? With the exception of an Executive Order, the President doesn’t create laws. He signs (or vetoes) legislation that has been voted on by Congress. However, President Trump has made several campaign promises that, if he has any hope of making good on them, will require a lot of money. The nation is already dangerously in debt, so borrowing to finance them could mean political suicide for him. However, the President has also promised to simplify the nation’s overly complicated tax code. It seems quite possible to me that, in exchange for getting Congress’ support on a major tax reform issue, he might have to compromise and allow the Death of the Stretch IRA legislation to be a part of the overhaul. It’s all in the art of the deal!

Please stop back soon for my next post on this important legislation!

Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

What Are the Exceptions to the Death of the Stretch IRA Legislation?

Death of the Stretch IRA Who is Excluded From the Five Year Rule James Lange IRA Expert

If you’ve been following my blog, you know that the Senate Finance committee has voted 26 0 to eliminate the Stretch IRA. The idea makes sense – the billions of dollars they’d make in tax revenue would help the new administration pay for promises made on the campaign trail. I believe that it will pass, and so I wanted to spend a little bit of time today and discuss the exceptions to the proposed new Inherited IRA rules.

If there is any good news in this mess that Congress has dumped on us, it is the fact that they have protected your spouse from the new rules affecting Inherited IRAs. So everything that you read in Retire Secure! about taking minimum distributions from your spouse’s retirement plans still holds true. If you die and leave all of your IRA money to your spouse, she can still stretch it over the course of her lifetime. But don’t get too comfortable, because the new rules have a catch. Even though she can still stretch your IRA, it might not be the best idea to leave your spouse all of your money – a concept that is so complicated that I’ll have to devote an entire future post to it.

Some beneficiaries can still benefit from Stretch IRAs

Disabled and chronically ill individuals are excluded from the new rules, as are beneficiaries who are not more than ten years younger than you – such as siblings or an unmarried partner. The privilege isn’t extended to their beneficiaries. Once they die, their own beneficiaries will have to pay taxes according to the new rules. Minors are also excluded from the five year rule, but only while they are minors. Once they reach the age of majority – which varies depending on which state they live in – they have to pay accelerated taxes according to the new rules. This could open up a Pandora’s Box of problems during their college years, because the distributions they’d have to take from the inherited IRA could make them ineligible for any type of financial aid!

Charities and Charitable Remainder Unitrusts (CRUTS) are also excluded from the five year rule. This exception can provide some planning opportunities for the right individuals, but it’s also a topic so complicated that I’m going to devote an entire future blog post to it as well.

Current proposal about Stretch IRAs offers some protection with an exclusion

The other interesting news is that the proposed new rules give each IRA owner a $450,000 exclusion – meaning that their beneficiaries can exclude (and therefore, continue to stretch) a certain portion of the account. Granted, they may change this amount, but as it stands now, you have nothing to worry about if the total IRA balance in your family is less than $450,000. If you have a $1 million IRA, your beneficiaries will be able to stretch $450,000 but will have to pay accelerated taxes on $550,000. The exclusion has to be prorated between all of your retirement accounts – including Roths. And while distributions from Roth accounts aren’t taxable, the greater damage is that your beneficiaries will lose the benefit of the future tax free growth. You can’t even choose which of your beneficiaries gets to use the exclusion – it’s prorated between your beneficiaries!

These new rules for Inherited IRAs will be an administrative headache for all of your beneficiaries. The exceptions to the rules, however, provide planning opportunities that if possible, you should take advantage of while both you and your spouse are alive. I encourage you to watch the short video attached to this post, and stop back soon to learn more about the things you can do now to minimize the effects of this devastating legislation.

Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

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Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

New Rules for Inherited IRAs and the Death of the Stretch IRA

Death of the Stretch IRA

Now that the dust has settled from the election and President Trump has taken over the reins of the White House, voters are asking the question, “Just how does he plan to pay for his tax cuts?” At the risk of sounding like a broken record, I’m going to ask readers to refer to my latest book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA. In that book, I warned readers about the legislation that proposed the Death of the Stretch IRA and offered solutions that you can implement to minimize its devastating effects.

Shortly after the book went to press, the Senate Finance Committee proved to me that I am on the right track. In September of 2016, in a stunning bipartisan show of support, they voted 26-0 to eliminate the stretch IRA. The Senate, however, adjourned for the year before they could vote on the Finance Committee’s proposal, so the legislation will have to be reintroduced on their 2017 legislative calendar.

What is a stretch IRA?

What is a stretch IRA, and why should you care if it goes by the wayside? The stretch IRA refers to the ability of your heirs to continue the tax-deferred status of your retirement plans long after your death. The current inherited IRA rules permit your beneficiaries to take very small minimum distributions over the course of their lifetimes, allowing more of their inheritance to remain in the protected tax-deferred account for a longer period. The new rules for inherited IRAs, on the other hand, will require that your children and grandchildren remove the money from the account within five years and pay income taxes on the withdrawals. Depending on the size of your IRA and other factors, these harsh new rules could throw your beneficiary into a higher tax bracket. Ultimately, they may even make the difference between your child being financially secure for the rest of their lives, and going broke.

I think that the election of President Trump will spell the end of the stretch IRA as we know it. The idea was introduced every year since as part of Obama’s budget but never had quite enough support to become law. Our new president wants to cut taxes for the majority of Americans and needs to find a way to pay for his plan. Since most people don’t think about taxes unless they’re associated with money they’ve earned themselves, eliminating the stretch IRA could be an easy way for the government to force billions in previously untaxed retirement accounts into their coffers. I believe that the Finance Committee’s proposal will reappear in 2017, but as part of a much larger tax reform bill – which is precisely what our new president has promised. In previous years, a bipartisan and unanimous recommendation by a Senate Committee would almost guarantee passage by Congress, but whether that still holds true after one of the most bitter and contentious elections in history remains to be seen. In any event, I will be offering a series of short video clips over the upcoming months that keep you up to date on the status of the legislation and provide insights as to what a change to the inherited IRA rules will mean to your beneficiaries. Remember, the key to smart planning is not trying to avoid estate tax, but income tax.

Please stop back soon! Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

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4 Reasons Why We’re Excited that Retire Secure! is Interactive on the Web!

If you haven’t made your way to www.langeretirementbook.com yet, now is the time!

Here at the Lange Financial Group, LLC, we are very excited to bring you an interactive version of Retire Secure! A Guide to Getting the Most Out of What You’ve Got.

Reason #1 – The entire book is on this website. Yes, all 420 pages of the book, including the front and back covers, all about the best strategies for retirement and estate planning.

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Reason #2 – The book is divided into chapters for ease of reading. Meaning, you don’t have to flip through 400-some pages to get to Chapter 11 – The Best Ways to Transfer Wealth and Cut Taxes for the Next Generation.

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Reason #3 – We honestly haven’t seen anything like this before. Granted, I’ve read magazines on viewers where you can flip the pages as you read. But not a website for a book that includes a viewer, as well as a forum where readers can engage with each other.

The comments are moderated by the Lange Financial Group, LLC staff and myself. One of us will reply to your comment as soon as we can. To leave a comment, all you need to do is connect with your Amazon, Facebook, or LinkedIn account. This measure is for your protection, as well as ours. We don’t want spammers posting comments or incorrect information about such an important topic.

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Reason #4 – We are hoping this interactive website encourages you to purchase the book! Retire Secure! is available from Amazon and JamesLange.com. Once you’ve read the book, feel free to return to LangeRetirementBook.com to ask questions, as well as Amazon and Goodreads to review the book for the benefit of others.

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How Advisors Should Handle the IRA and Retirement Plan Beneficiary Form

retirement-plan-beneficiary-form-trusts-the-roth-revolution-james-langeThe ability to know what to do with an IRA or retirement plan beneficiary form can often be detrimental.

First, know we are on shaky ground. The conservative and proper legal advice is to request the client have their estate attorney fill out the beneficiary designation forms.

There are several advantages of having an estate attorney fill out the forms

  • Eliminates or drastically reduces your exposure for not filling out the form correctly and consistent with the clients’ wishes
  • Presumably, the estate attorney has a “big picture” of how the estate will be distributed and the IRA and retirement plan beneficiary designation is an important piece to that entire puzzle

For most traditional clients, I prefer the plan described in chapter 12 of Retire Secure! (Wiley, 2006). The chapter, “The Ideal Beneficiary Designation of Your Retirement Plan” describes what I consider the “master plan”.

Assume that you have a traditional family with children and grandchildren or even the potential to have grandchildren in the future. Let’s also assume that your client and their spouses trust each other completely and the client’s children are by now responsible adults (if not, see the discussion about trusts below).

Primary Beneficiary:

My spouse __________________

Contingent beneficiary

My children______________, ___________, and __________equally, per stirpes

Per stirpes is Latin for by representation. Adding per stirpes is critical. Let’s assume one of your client’s children either predeceases your client or your client’s child wants to disclaim a portion of the inherited IRA to their children, i.e. your client’s grandchildren. Without the words per stirpes, (assuming that the form does not have a box to check to indicate a per stirpes designation), the share of the predeceased or disclaiming child would not go to their children, but rather to their siblings, because the majority of beneficiary forms do not assume a per stirpes distribution unless you specifically state per stirpes in the designation. Presumably, most of your clients do not want to disinherit their grandchildren. Without per stirpes, you could have a grandchild that not only lost their parent, but also lost any inheritance they may have used for support, education, etc.

I also recommend putting current addresses and social security numbers on the IRA or retirement plan beneficiary designation.

Please note, however, that even this solution is only a partial and temporary solution. This solution still allows the possibility of having your client’s grandchild (or child if they are young) drinking $1,000 per bottle champagne to celebrate their purchase of a new Hummer on their 21st birthday.

So, to do the job right, you should name a well drafted trust, either a dedicated trust or a trust that is currently part of the client’s will or living trust, for the benefit of grandchildren (or children if client’s children are young and/or not sufficiently mature to handle an inheritance). In addition, you need at least one trust for each set of your client’s children’s children. There are lots of variations on these trusts, but for the IRA beneficiary purposes, they must meet 6 specific conditions in order to preserve the “stretch IRA” for the grandchildren.

Therefore, what will be a combination of practical, yet also proper advice is to fill out the forms the way I have suggested and recommend both orally and in writing that your client see a qualified estate planning attorney to properly fill out the IRA and retirement plan beneficiary forms.

-Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

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Trusts as Beneficiaries of Retirement Plans: A Possible Alternative to the Stretch IRA?

trusts james langeIf you’ve read my earlier posts, you know that much of the new edition of Retire Secure! addresses the ramifications of the legislation that, if passed, will kill the Stretch IRA. If this potential change is a concern for your family, then Chapter 17 is a “must-read” for you because it offers a possible alternative that will allow them to continue the tax deferral of your retirement plan for many years.

Trusts may be appropriate in many situations. We use them for young beneficiaries who, by law, cannot inherit money, and for older beneficiaries who can’t be trusted with money. Trusts can also be used to help minimize taxes at death (although this is not as common as in previous years). With more frequency, though, our office is using trusts to replace the benefits of the Stretch IRA. This application started when all of these campaigns to kill the Stretch IRA began, and we began to seek alternatives for our clients. Chapter 17 compares the value of an IRA assuming that the non-spouse beneficiary must withdraw the proceeds within 5 years, to the value of an IRA when it is protected by a specific type of trust. I think you will find the results very surprising.

The rules governing trusts are very complex, and, if you are interested in incorporating them in to your own estate plan, you will need the assistance of a competent professional.

Do you donate to charity? If so, my next post will cover the changes in the laws that affect charitable contributions.

All the best,

Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

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The Ideal Beneficiary for your IRA or Retirement Plan

beneficiary-designation-retirement-plan-james-langeGive Your Heirs as Much Flexibility as Possible

I gave serious thought to changing the title of Chapter 15, which discusses the ideal beneficiary for your retirement plan, to “My Pet Peeve”. This is because of how annoying I find it to see people spend thousands of dollars to create elaborate wills and trusts, only to render them useless because they carelessly listed the wrong beneficiary on their retirement plan. Unfortunately, it’s an all too common mistake.

What follows here is one of the most, if not THE most, important concepts in the book. Your will and trust documents do not control the distribution of your IRA or retirement plans. Any account that has a specific beneficiary designation will be distributed to the individuals listed on that beneficiary form, regardless of what your will or trust says. Why is this important? Well, I’ll tell you about a situation I became aware of recently. A gentleman who had been married and divorced twice prepared a will that left all of his assets to his children from his first marriage. Most of his wealth was in his retirement plan, though.   He died unexpectedly, before he could get around to changing the beneficiary designation of that plan from his second ex-wife to his children. After his death, the second ex-wife (who had since remarried) received the very large retirement plan, and his children received the non-retirement assets, which were worth far less than the retirement plan. To add insult to injury, the second ex-wife made sure that his children knew that she had used her inheritance to buy herself and her new spouse very expensive cars – even going so far as to post photos on social media websites as proof! So your beneficiary designations are very, very important – so important that, in fact, if you’re my client I won’t even let you fill them out by yourself!

I like to give my clients as many options as I can. The beneficiary designation that I usually recommend gives your heirs as much flexibility as possible. It allows both your surviving spouse and your adult child, assuming that the child is the contingent beneficiary, to disclaim or refuse the inheritance to his or her own children (your children and/or grandchildren). Under current laws, this allows the children and grandchildren to take minimum distributions based on their own life expectancy. Will I still do this if the law changes? More than likely, yes, but the financial benefits will not be as significant as they were in previous years. If this topic interests you, then you’ll probably want to read Chapter 15 to learn about all the changes.

My next post will continue on the topic of beneficiary designations, and why they are important if your estate plan includes trusts. Stop back soon!

Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

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Disclaimers: Who on Earth Would Refuse to Accept an Inheritance?

inheritance stretch ira james lange the roth revolution blogWho on Earth Would Refuse to Accept an Inheritance?

Plenty of people!

The concept of disclaiming, which means that you refuse to accept an inheritance, is often surprisingly difficult for clients to accept. Who on earth would refuse to accept an inheritance? When I get this question, I have to laugh because the obvious assumption is that the beneficiary is turning away a rare opportunity to increase his or her wealth with little or no effort. So let’s look at a hypothetical situation. Suppose your rich uncle wrote his will twenty years before he died, and the will provided that, at his death, you would inherit a small apartment building that he owned. In the twenty years since his will was written, though, your uncle’s health declined and he did no maintenance at all on the building. The angry tenants moved out long ago, and the building has been vacant for ten years. Vandals broke the windows and stripped the building of its plumbing and wiring. The city has condemned it because it is a nuisance, and the owner is going to have to pay to have it demolished. Do you still want your inheritance now?

Beneficiaries always have the right to disclaim (or refuse) all or part of an inheritance. This idea has traditionally been a cornerstone when planning for the multi-generational benefits of a Stretch IRA. Under the current law, if the named beneficiary chooses to disclaim an IRA or retirement plan, the contingent beneficiary is able to use his or her own life expectancy to determine the Required Minimum Distribution from that account. In a case where a surviving spouse disclaims to children, this allows the IRA to be “stretched”, allowing maximum growth as well as income tax savings.

If the Stretch IRA is eventually eliminated, disclaimers will likely play less of a role in estate settlements. There is, however, a rapidly growing group of attorneys (including me) who use and will continue to use at least some form of disclaimer in the estate plans of most clients. I have used them in my practice for years, and have found that they can give families a lot of flexibility during what is usually a very stressful time.

One final note about disclaimers: beneficiaries who are on Medicaid may be disqualified from their benefits if they receive an inheritance. They may be able to refuse the inheritance and keep those benefits, but this depends on the laws of the state that they live in and the terms of the grantors will.

These ideas are presented in Chapter 14.

My next post will continue to expand on the concept of the Stretch IRA, but will specifically address the ramifications of choosing one beneficiary over another. Stop back soon!

Jim

Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

If you’d like to be reminded as to when the book is coming out please fill out the form below.

Thank you.

Save

Save

Save

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