Lange’s Cascading Beneficiary Plan may be a good option to protect your family against the Death of the Stretch IRA
When I meet with new clients for the first time, one of the most aggravating things that I often find is that their existing estate planning documents are “set in stone”, and can cause the estate to be subject to unnecessary taxes. What do I mean by that?
Let’s say you have Jack and Jill, and their three kids John, James and Judy. Jack is 87, and Jill is 86. Jack and Jill both had wills that said, “I want my spouse to inherit everything, but if he or she is dead then I want my children to get everything.” Sound familiar? After Jack and Jill both die, their assets will be passed on to their kids as they specified, most certainly. The problem is that their kids will more than likely end up with less money than they could have.
Why is that? Jack dies, leaving $3 million to his wife. Is it really likely that Jill is going to need $3 million to live on for the rest of her life? Probably not. The vast majority of wealthy individuals that I’ve worked with are in that position because they have never led an extravagant lifestyle, and in my experience, leopards don’t change their spots all that easily. More than likely, what will happen is that, a few years down the road, Jill will die with even more money in the bank. Their hard-earned savings will eventually go to their children as they wanted, but Jack and Jill may have missed the chance to use Lange’s Cascading Beneficiary Plan and possibly save them a significant amount of taxes due on their inheritance.
Using Disclaimers in Your Estate Plan
A disclaimer simply means that your beneficiary says “I don’t want this money that I’ve been given”. So let’s assume that Jack names Jill as his primary beneficiary, and their three children as contingent beneficiaries. After Jack’s death, Jill has nine months to think about it and, if she says “I want that money”, she gets it. But what happens if Jill is terminally ill and doesn’t expect to live much longer? She can disclaim the money say “I will never live long enough to spend $3 million, but I would like to have $300,000 for my own use. The remaining $2.7 million can go directly to our kids.” Jill can’t change what Jack has instructed – meaning that she can’t cause one child to receive more money than what he specified, or ask that some of the money be given to their grandchildren if Jack didn’t include them as beneficiaries. But she can step aside and say “I don’t need all of this money; give it to the next one in line”. By disclaiming, Jill allows Jack’s money to be passed directly to their children if she doesn’t need it. In many cases, disclaiming can be far more tax-efficient than having Jill inherit all of the money, never using it, and then passing on to their children.
Lange’s Cascading Beneficiary Plan (LCBP)
Many years ago, I designed a groundbreaking concept that I call Lange’s Cascading Beneficiary Plan. It incorporates the use of disclaimers into the estate plan, which allows your surviving spouse to have maximum flexibility after your death. This type of flexible estate planning can make a huge difference for your beneficiaries after your death. Assuming that your wills contain the appropriate language that meets both federal and state requirements for a valid disclaimer, your beneficiary can make decisions that are based on your family’s situation and tax laws that are in effect long after your will was prepared. And the best part is that they have up to nine months after your death to disclaim – so their decision can be based on your family circumstances and the tax laws that are in effect at the time.
Lange’s Cascading Beneficiary Plan may become an even more valuable estate planning tool after the legislation that I call the Death of the Stretch IRA is passed. Please stop back soon for an update.
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.