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Trusts to Protect your Family with Guest Bruce Steiner
James Lange, CPA/Attorney
Guest: Bruce Steiner, JD
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- Introduction to Guest – Bruce Steiner, JD
- When Should You Leave Trusts as Beneficiaries of IRAs
- Leaving IRAs to Minor Beneficiaries
- A Well-Drafted Trust Has Flexibility
- Leaving Assets to A Child With Special Needs
- Avoiding Probate With Revocable Trusts
- Much Lower Estate Exemption in 2013
Hana: Hello, and welcome to The Lange Money Hour, Where Smart Money Talks. I’m your host, Hana Haatainen Caye, and of course, I’m here with James Lange, CPA/Attorney and best-selling author of the first and second edition of “Retire Secure!” and “The Roth Revolution: Pay Taxes Once and Never Again.” Jim’s guest tonight is Bruce Steiner. Bruce is a frequent lecturer at continuing education programs for bar associations, CPAs and other professionals. He is a commentator for Leimberg Information Services, Inc. He’s a member of the Editorial Advisory Board of Trusts and Estates. He’s a technical advisor for Ed Slott’s IRA Advisor, and has written numerous articles for professional journals. Bruce has been quoted in various publications, including Forbes, the New York Times, Wall Street Journal, Kiplinger’s Retirement Report and many others, and has served on the professional advisory boards of several major charitable organizations. Bruce was named a New York Super Lawyer in 2010 and 2011. Tonight’s show will be all about trust, when it is smart to establish trust, and when it is not, and when you should make a trust the beneficiary of your IRA and/or retirement plan. Also, Jim and Bruce will touch on trusts for minors, trusts for special needs children, trusts for spendthrift adult children and tax-motivated trusts, including the cruelest trap of them all. But before I turn it over to Jim, I want to remind our listeners that the show is live, so please feel free to call in with your questions for Bruce. The number is (412) 333-9385. Good evening, Jim, and welcome to the show, Bruce.
Jim: Welcome, Bruce.
Bruce: Thank you.
Jim: One thing that I can add to that introduction is Bruce is one of the very few estate attorneys that really gets the numbers between IRAs and retirement plans, and most estate attorneys, even if they do draft the documents and the wills, etc., correctly, they don’t necessarily really understand the numbers, the math, the strategies behind IRAs, and I would say as much as any attorney that I can think of, Bruce really gets it. It’s an honor to have you on the show, Bruce.
Bruce: Thank you.
Jim: Bruce, I thought we would just start with your, you know, what I would consider one of your strengths, which is talking about trusts as beneficiaries of IRAs, and there was recently a column in the Wall Street Journal, and I don’t even want to mention the author of it because I just disagreed with the article so strongly, that seemed to indicate that since there were some complications in having trusts as beneficiaries of IRAs, that unless the situation was absolutely desperate, that people should not have trusts as beneficiaries of IRAs. What is your opinion on trusts as beneficiaries of IRAs if a trust is an appropriate beneficiary, whether it’s an IRA or not an IRA?
Bruce: Well, funny you should mention that, Jim. I saw that article and, indeed, I actually e-mailed the author of the article…
Jim: So did I!
Bruce: and told her why it is that I, too, disagreed with her article.
Jim: Yeah, she wrote me back, and she said, “Well, it’s very complicated and I’m happy with what I wrote, ” and I was thinking, “Bad advice!”
Bruce: No, she actually did not respond. If it’s the spouse, there are some benefits that only the spouse gets. When the spouse is the beneficiary, the spouse can roll it over into her own IRA, can name new beneficiaries so that the IRA can be stretched out for a longer period of time, can covert to a Roth if the IRA owner had not converted to a Roth. So, if it’s compelling to leave it to the spouse in trust, then you might leave it to the spouse in trust and give up those income tax benefits. If it’s a close call, if there are only some slight reasons favoring a trust, you’d leave it to the spouse outright. But for anybody else, if it’s a child, let’s say, or a grandchild, unless the amount is too small to bother administering a trust, you’d want to provide for your children in trust because money you leave to your children outright is in their estates when they die for estate tax purposes, and it’s exposed to their creditors and exposed to their spouses if they get married or if they get divorced or if they outlive their spouse and they remarry, and assets that you leave to your child in trust are better protected against all those things. So, for all those same reasons that you would leave your other assets to your children in trust rather than outright, you would likely leave your IRA benefits to your children in trust rather than outright, and yes, there’s some extra complexities that you have to go through, but once you’ve, from a lawyer’s perspective, done it once or twice, by the third time, it’s not all that difficult.
Jim: Well, I would agree with you completely, but let’s break down your answer item by item. First, you started to talk about the surviving spouse as the beneficiary, and can I take it that your general opinion is unless there is a very strong reason to have the money in trust, that you just like to have an outright beneficiary of the surviving spouse? So, let’s even take our, I call it, the ‘Leave it to Beaver’ family, which is the original husband, the original wife, and they have the same kids. It’s not kids from his marriage or kids from her marriage, but kids from our marriage. In the estate plans that you draft, and even specifically as the beneficiary of the IRA, is the surviving spouse almost always going to be the primary beneficiary there?
Bruce: In the vast majority of cases, well certainly in your example where it’s a happy first marriage and they have the same children, almost certainly, the spouse will be the beneficiary, notwithstanding the risk that the spouse remarries and the new spouse has some claims, or that the spouse, for some other reason, has a creditor problem, or something. Assuming you’re not expecting those problems, you’d leave it to the spouse outright and let the spouse roll it over and name the children, or more likely, trusts for the children as beneficiaries, or maybe even trusts for the grandchildren as beneficiaries convert to a Roth. So, yeah, in the overwhelming majority of cases in happy first marriages, people would name the spouse as their primary beneficiary.
Jim: Well, I would agree with that, and it’s surprising how often that doesn’t happen with various estate attorneys that I have seen documents. So, I would agree with you, but I also want to probably emphasize the income tax. You know, I think, right now, particularly, I mean, we don’t know what’s going to happen with the exemption amount in the future. You know, right now, it’s $5,120,000 per individual, and again, we don’t know what’s going to happen, but I think particularly for the people with $500,000, $1,000,000 or even $2,000,000 estates that are IRA-heavy, which we, you know, Pittsburgh’s a working town, so you have a lot of people who didn’t start with a lot of money, but they worked for a lot of years and they built up their retirement plans, and I have a lot of those types of clients myself. For a lot of those people, I think that income taxes are going to be as important or probably more important than estate taxes in their estate planning, and naming the surviving spouse as the beneficiary of the IRA has tremendous income tax advantages. I don’t know if you would agree with that, or if that is one of your underlying reasons why you like the spouse.
Bruce: Yes. Well, yes, and indeed, there was a tradeoff until a couple of years ago, and that was to the extent you didn’t have enough other money to use your estate tax exempt amount. Let’s say that in 2009 when the exempt amount was $3.5 million, and let’s say you had $2,000,000 of other assets and $3,000,000 of an IRA. So, if you left the IRA to the spouse and the other assets in some other way, maybe in trust for the spouse, you wasted $1.5 million of your estate tax exempt amount in order to get these income tax benefits. At the moment, though scheduled to expire at the end of the year, we have something called portability, which says that to the extent you didn’t use your estate tax exempt amount, it’s added to the spouse’s estate tax exempt amount. So, if portability is extended or made permanent, which is probably the better guess, then you’re giving up less in exchange for getting this income tax benefit. And in the smaller estates, the estate tax is not really a significant factor.
Hana: Okay, Jim, I hate to break in here, but we have to take a break. Is this a good place for you to stop?
Hana: Okay. We’re going to take a quick break, and when we come back, we’ll continue this conversation. I want to remind our listeners out there that we are live tonight, so if you have any questions, you can give us a call at (412) 333-9385. We’ll be right back with Bruce Steiner and Jim Lange on The Lange Money Hour.
Hana: Hello there, and welcome back to The Lange Money Hour. This is Hana Haatainen Caye, and I’m here with Jim Lange and Bruce Steiner.
Jim: Okay, Bruce. I think that we established and agreed that in most situations, particularly in happy first marriages with the same children, that it’s going to be appropriate to name the surviving spouse as the primary beneficiary of an IRA. Let’s get to some of the more difficult issues where you and I might have disagreed with the column in the Wall Street Journal. What if we have, let’s even just say, a relatively normal situation where we have minors as likely beneficiaries, either because they are our children, or because we are interested in providing for our grandchildren, or even possibly we’re interested in providing for our children but giving them the option of disclaiming or allowing the amount that could have gone to our children to the grandchildren. But in either case, let’s assume that we have in mind the potential of a minor beneficiary, and the underlying asset is an IRA or retirement plan. What do you like to do in your practice to provide for that minor beneficiary?
Bruce: It doesn’t really matter whether the child or grandchild is a minor or an adult. What we would do, Jim, is if the amount is less than a couple hundred thousand dollars (everyone has a different view as to where the boundary is), but if the amount is too small to warrant running a trust, we would leave it to the person outright, unless we know that the person has a disability, and if the person is a minor, name a custodian under the Uniform Transfers to Minors act, some adult person who has management powers until the person is twenty-one, if it’s a minor. And if it’s an adult, they would get it outright. If the amount is enough that it’s worth the effort to administer a trust, I would probably put it at around a couple of hundred thousand dollars, a few hundred thousand dollars, give or take, then we would leave it to the person in a trust and give that person control over the trust at some appropriate age.
Jim: All right. So, let’s take a fairly normal situation, maybe a family with children or grandchildren and minors. Now, what you’re saying goes against what the advice of the Wall Street columnist said, who said that the complications of having money in an IRA going to a trust were so severe that we shouldn’t do it unless in the extreme case. And earlier in the radio show, you said “Hey, if you’re an estate attorney who has dealt with these matters before, that you have gone through the trouble of finding the appropriate language to use as the beneficiary of a trust for an IRA or a retirement plan.” Is that what you do in your practice, that the fact that you have done many of these?
Bruce: Yes, that’s right. About ten years ago, in fact it was ten years ago, the IRS came out with a ruling that explained that when you have a trust, if you leave an IRA to an individual, they can take it our over their life expectancy. You know, it’s fairly easy to tell, you know, at their ages and go look it up on a table. So, if the person has a sixty-year life expectancy, they take out 1/60th in the first year and 1/59th in the second year, and so on.
Jim: By the way, for our audience, that’s called the stretch IRA, and the table that Bruce is talking about is Publication 590. I’m sorry, I didn’t mean to interrupt. Go ahead.
Bruce: That’s right, and if a trust is the beneficiary, you look at the life expectancy of the oldest beneficiary of the trust because that person might get some of the money. So, you can’t use a trust to be able to stretch the distributions out over a longer period of time than you could’ve had you left it to that oldest person outright. And there was a ruling about ten years ago where there was a trust for two grandchildren, and if they both died before they were thirty, the money went to some older person, or if they died without having children and before they were thirty. The money went to somebody who was 67 years old at the time the IRA owner died, and the IRS said well, no matter how unlikely it is that that person will ever get anything, you put them in there as a beneficiary. So that’s the measuring line. You’ve got to take it out over that person’s life expectancy. And then, a few weeks later, they came out with another ruling which really gives you the roadmap. It basically was a situation where there were trusts for the children. Each child had a separate trust, and when the child died, the balance of that child’s trust went to that child’s children, and if he didn’t have any children, it got added to the other children’s trusts, and then the child had a power of appointment. At his death, he could, in his will, leave the balance of his trust to anybody he wanted as long as it was nobody older than the oldest of the children. So, there was no way that any of the money in the trust could ever get to anybody older than the oldest of the children, and the IRS blessed it and they said okay, you can stretch the distributions out over the life expectancy of the oldest child. So, what you have to do is just make sure that in the trust, there’s no way any of the IRA money can ever go to anybody older than the person whose life expectancy you’re using to measure the stretch out. Well, if it’s a trust for a child, it’s usually going to be the oldest child. If it’s a trust for a grandchild, it’s going to be usually the oldest grandchild. It isn’t really all that hard to do it. You just go look at that ruling, and there was another similar ruling fairly recently, and you sort of follow it.
Jim: So, basically, what you’re saying is rather than getting away from a trust, when we need a trust, when a trust is clearly appropriate, whether because the beneficiary is a minor, or perhaps because there’s a special need, or perhaps there is a spendthrift issue, or perhaps there’s some creditors, for whatever reason, if we assume that it is appropriate as an estate planner, forgetting what type of asset it is, that some type of trust is the beneficiary of the IRA. What you’re basically saying is rather than naming the beneficiary outright, it’s better to name the trust. But the attorney just has to make sure that the language of the trust meets all the appropriate conditions to preserve all the income tax benefits that we want to preserve. Is that a fair characterization?
Bruce: That’s exactly right.
Jim: Okay. I think that that’s really important for listeners to understand because I think that the trust as the beneficiary of the IRA is probably one of the most common mistakes, either as the case of the Wall Street Journal columnist the advice to avoid a trust, which I disagreed with, or sometimes the attorneys aren’t familiar with all the appropriate language that needs to be included, and then if we have a mistake in the drafting of the trust, then we get into some other problems. I don’t know if you have seen that in your practice, Bruce? And certainly not with documents that you did. It’s documents that others have done, or you have heard of.
Bruce: What we’ve seen is a lack of flexibility in the trusts that the choice does not have to be between leaving money to somebody outright, or leaving money to somebody in a trust that’s very tightly drawn so that it hamstrings the ability to distribute money or not distribute money based upon what’s best from time to time. It can be a middle ground. It can be a trust that keeps the money out of the beneficiary’s estate, protects against the beneficiary’s creditors, including spouses, and yet provides the appropriate flexibility that money can be paid out, if needed, and left in the trust if not needed.
Jim: Well, I prefer that approach. I think that it preserves all the income tax benefits and does what clients want, which is to preserve the money for their children and, potentially, grandchildren without having a huge income tax hit. So, I actually think that that is the best way to handle beneficiaries of IRAs, is to have, when a trust is appropriate, a well-drafted trust that takes these factors into consideration.
Bruce: That’s right.
Jim: So, I think that you and I are on agreement in that one, if that’s a fair characterization.
Hana: Jim, before you go on to another question, we’re going to have to take another quick break.
Hana: When we come back, we’ll continue this conversation, and again, we’ll be right back with Bruce Steiner and Jim Lange on The Lange Money Hour.
Hana: Welcome back to The Lange Money Hour. This is Hana Haatainen Caye, and I’m here with Jim Lange and Bruce Steiner. And let’s get back to our discussion.
Jim: Bruce, you mentioned that you like to use trusts for children, but you kind of hinted that you sometimes use them even if the child isn’t a minor. Is that correct?
Bruce: That’s correct, as long as the amount is at least a couple hundred thousand dollars because to administer a trust smaller than that may not be practical unless there is a disability. But let’s say you have an adult and competent child who’s receiving at least a couple hundred thousand dollars, we would still leave it to that child in trust because it keeps it out of the child’s estate for estate tax purposes and it protects it against the child’s creditors. It better protects it if the child goes into a nursing home and wants Medicaid. It protects it against the child’s spouse if the child gets divorced, and if the child outlives his or her spouse and remarries, it protects against claims of the second spouse. So, yes, we would provide for children in trust rather than outright in almost every case.
Jim: Yeah, and by the way, I think that that is legitimate. It’s actually a little bit different than what we usually do. We usually give people the choice, but we have often not used a trust in that situation, particularly if we think the child might not need it. The other thing that we sometimes do, and I don’t know if you do this at all or not, is that we often give the child…so, let’s assume that we have grandma and grandpa who are the IRA owners, and then we have, let’s say, a couple…and let’s assume again, your ‘Leave it to Beaver,’ and we have a couple kids and then we have some grandkids. I sometimes will give each…and let’s keep it simple, let’s say there’s two kids and it’s going to be equal 50-50. I often give each child the choice of either keeping their 50%, and the advantage of that is the child gets the money, and they can use the money during their lifetime, or I give the child the right, and the legal word is disclaim, but the concept of it is is the child is not accepting the IRA, or isn’t accepting a portion of the IRA, and then what happens is there is a language in the IRA beneficiary that that money goes into a well-drafted trust for the benefit of the grandchild, and the advantage there is an income tax advantage to the family because the grandchild, like Bruce had mentioned earlier, has a much smaller minimum required distribution of the inherited IRA. That is, the grandchild can leave most of the money in the IRA and not have to pay income tax on it until later. I don’t know if that’s an approach that you use, Bruce, or do you prefer a more certain path for your IRA after death?
Bruce: Well, the child can always disclaim, whether you say so or not. Obviously, you have to say what happens if the child disclaims, and logically, it would then drop down to the next generation. So, sure, and that’s a very common thing because, as you pointed out, if the grandchild or a trust for the grandchild gets it, the income tax stretch out is tremendously longer.
Jim: Yeah. By the way, Bruce, you’re just kind of saying oh, of course you’re going to have that provision in there, but I will tell you that in many cases, you know, you see things like beneficiaries of, you know, to my children equally, which would not allow the…
Bruce: That creates a tontine. If one child waives, it would go to the other children. I can’t imagine very many people wanting that because what if one child dies first? Do you really want to cut out that line and have the money go to the other, just to the surviving children? And occasionally, somebody does, but more often, people want the predeceased child’s share to go to the grandchildren on that side. And similarly, if a child would like to waive his share so that it can go to his children, you wouldn’t want it to have to go to his siblings. I can’t imagine anyone would do that. I can’t imagine very many people would do that intentionally.
Jim: Well, I would agree with you that I don’t think it’s intentional, but I will tell you I see it a lot, and not to make any disparaging remarks about any attorney or anybody else who fills out these beneficiary forms, but sometimes that possibility is overlooked, and what I have found is that sometimes we have children of different financial strengths. So, let’s say one child, you know, maybe is a physician or is a New York estate attorney, and that makes him tons of money because their great advice brings in so much business, and if any money was left to them, that they might say, “Hey, you know, it really makes more sense, rather than me keeping it myself, to have that go down to my children, and have that money stretched over the life of my children.” But certainly in that situation, you would want that money in a trust because the children are young and you would want all the provisions, health maintenance and support, education, etc., for the benefit of that grandchild. So, for you, you just say, “Oh, well, of course I’m going to include that in the language.”
Bruce: That’s for an IRA. If it’s not IRA assets, I don’t want to be put to the choice of having to take the asset and have it be in my name, or disclaim it so it goes to my kids. I’d rather it came to me in a trust that I controlled. So, it’s only with the IRA that I have to either take it or take it in a trust for my benefit, but that has to take distributions out over my life expectancy, or disclaim it and let the grandchildren stretch it out over their life expectancy. With other assets, it can come to the child in a trust that the child controls. If you leave it to the child outright, the child has to either take it or disclaim it. But if you leave it to the child in a trust, you can still keep it out of the child’s estate and let the child control it.
Jim: Well, I certainly understand the benefits of that. We often, by the way, actually don’t do that. We sometimes, in fact, I would say often do give the child the option of keeping it or disclaiming it, and one of the reasons we sometimes do this…by the way, for our listeners, this is, let’s call it, a friendly disagreement between two people who really see the world pretty much the same in a lot of ways. So, we’re really talking about, let’s say, not huge differences, but one of the things I sometimes like to do is to figure out after somebody dies what assets are best placed where. So, I sometimes do like to add flexibility, but I certainly understand the benefits of having a trust for the child where the child, in effect, is controlling the assets. Could we go on to talk about some special situations? I don’t know if, you know, why, in our practice, but it seems that we have had more clients come in with either children or grandchildren with either some type of special need. Maybe the person is receiving a government benefit. Maybe the person has a physical deformity or a mental deformity, or some reason why we would not feel comfortable leaving money outright to that child or grandchild. Could you talk a little bit about some of the provisions and what you do when you do have a child or a grandchild with some type of special need?
Bruce: Well, depending on the nature of the special need, you might not be able to let that person control their share. So, that person’s share might have to be in a trust that that person does not control. Somebody else controls it.
Jim: Well, yeah. That’s right, and that’s what we do also.
Bruce: And, of course, if there’s a means-tested government benefit, it has to be in a trust where that person has no entitlement to anything. But that we would normally do generally. The thing that we would do differently for the child with a disability than we would for the child who shares in trust merely to protect it against estate taxes and creditors and spouses, is that the child with a disability, it’s not appropriate in most cases for that child to control his trust, or her trust.
Jim: Right. So, the idea is to be able to provide for that child, but still to preserve the government benefit?
Bruce: Either to preserve the government benefit, or even if government benefits are not involved, depending upon the nature of that child’s situation, you know, some children, it’s appropriate perhaps for Wally Cleaver, the older child, to control his share. The Beaver’s share, perhaps he should gain control at some future time, and perhaps Wally’s friend Eddie Haskell should not ever control his share. Perhaps, you know, he’s probably not going to be on any government benefits. Eddie should not, perhaps, control his share, and maybe either, I don’t remember if he had a sibling, or maybe his friend Wally, or maybe a bank, or whoever’s appropriate should control Eddie’s share.
Jim: Yeah, well, I think that that’s really an important issue, and I think the point for our listeners is that you still can provide for somebody who has a special need, whether they’re getting a government benefit or not, in a vehicle, whether it’s an IRA or non-IRA, in a way that can preserve a government benefit, but still have certain benefits to that beneficiary, and you don’t have to disinherit somebody. In fact, there’s an argument that you don’t want to disinherit somebody who has a special need. Could we talk about, let’s say, a more basic issue, which is the issue of avoiding probate? Now, I know that you’re a New York City guy, and practicing in New York state, and the probate rules are a little different, but I would think that there’s a lot more similarities than differences. Do you routinely avoid probate with Revocable Trusts, or for most of your clients, do you encourage people to get Revocable Trusts and to avoid probate?
Bruce: That varies to some degree from state to state. From states like New Jersey, where probating a will takes about ten minutes and doesn’t require a lawyer, you just walk into the courthouse with the will and a death certificate, and they’ll even fill out the forms for you. I’m told that in California, it’s incredibly difficult. I don’t really know whether that’s true or not, but it’s what everyone says. New York is somewhere in between. In most cases, it’s a minor nuisance, and it just isn’t something that we worry about. The effort to do a Revocable Trust or the effort to probate the will is, in each case, a minor nuisance and not the main event. There are exceptions. One exception in New York is you have to find the people who would’ve taken, if there were no will, and usually, that’s easy. It’s the spouse and the children. But if someone has nobody closer than a cousin, and maybe the cousins are in other countries, and maybe you don’t know who they are or where they are. In a case like that, you very well might do a Revocable Trust. But as a routine matter, they’re not commonly used in New York. It’s kind of a middle level of effort, but probably no more effort than creating the Revocable Trust, and for most people in New York, it’s just a distraction. If, however, you’re in a state where the process is particularly difficult or burdensome, you might do it if you’re in that state, and I can’t say that I’m familiar with all fifty.
Jim: Well, okay. Well, we obviously practice predominantly in Pennsylvania, and Pennsylvania probably has some additional advantages of avoiding probate in not just the probating of the will, but actually court supervision that sometimes people opt to get away from and to preserve privacy.
Bruce: Yeah. In some states, court supervision means sort of that the executor can’t do very much without a court saying it’s okay, and in New York, we don’t have that, and in some states, you do have that.
Jim: Yeah, and again, I would say Pennsylvania is probably, the courts are fairly easy to deal with. On the other hand, some people prefer the privacy in not having to deal with the courts at all.
Bruce: Although most people’s wills are not newsworthy. Rarely is there anyone whose will is the story in the New York Times. Maybe Jackie Onassis’ was, or somebody like that, but for the most part, most people’s wills provide first for their spouse and then for their children and have pages and pages of legalese that would not be of interest to anybody. But occasionally, there could be somebody who’s…what the person is doing is something that would be controversial or embarrassing or would provide information to a business competitor. Maybe it has provisions for a succession of the business that they just don’t want the competitors to know about.
Jim: I’m not really in the habit of reading other people’s wills that I have nothing to do with, but I do have to admit I was a little bit curious when Michael Jackson died. And probably, the most curious thing that I found with Michael Jackson’s will, which by the way, was online and was accessible to anybody that knew how to get to it and had an internet connection, was that in the event of his death, and in the event of the mother of his children and his own mother’s death, that the backup guardian for his children was Dionne Warwick, which I thought was pretty interesting. But I would agree. A lot of times privacy is probably not all that important.
Bruce: I doubt that anyone…now, my children are over eighteen, but before they were eighteen, I don’t think anyone would have cared who I would’ve picked as the backup guardian. Nobody would be looking on the internet for that!
Hana: Okay gentlemen, we’re going to have to take our final break, and we will be right back with Bruce Steiner and Jim Lange on The Lange Money Hour.
Hana: Welcome back to the final segment of The Lange Money Hour. This is Hana Haatainen Caye, and I’m here with Jim Lange and Bruce Steiner.
Jim: Bruce, earlier in the show, we just briefly went over the fact that the estate exemption, which is now $5,120,000, and there is also, what you mentioned is portability, meaning that between a husband and wife, there could be over a $10,000,000 exemption, but we have a change in the law, or if nothing happens, we have a big change in the law in 2013 where the exemption goes down to $1,000,000. How are you handling that potential change and uncertainty in your own practice?
Bruce: It’s very frustrating that no one knows what the law will be next year. We’re guessing portability remains because the U.K. has had it for several years and we usually copy what they do, and no one seems to be particularly bothered by it. As to what the exempt amount will be, the administration has proposed making it permanent at $3.5 million. So, our best guess is that it’s likely to settle at either $3.5 million or something above that, but there really is no way to know, and it makes it real hard, particularly in states like New York and Pennsylvania and about, oh, half the states that have their own estate tax that doesn’t tie into the federal. So, it makes it real, real hard to plan for the smaller estates, and for this purpose, small is anything up to about $5,000,000.
Jim: Yeah, and by the way, for our listener’s benefit, Pennsylvania does not have anything that is connected to the federal government. So, you have, in Pennsylvania, for example, there is an unlimited marital deduction, which is the same as the federal, meaning you can leave as much money as you want to your spouse without any kind of Pennsylvania inheritance tax, but then there is, for children and grandchildren, a 4 ½%, and there’s no exemption amount. So, really, the first dollar going to children and grandchildren is taxed. So, what we have done, Bruce, is we have provided a flexible-type plan where we sometimes will give the choices of having money going to a spouse, money going to the traditional B trust, and even extending choices to children and grandchildren.
Bruce: Sure, you let the spouse decide whether to do what’s best from a federal tax standpoint or do what’s best from a Pennsylvania tax standpoint because there’s a tradeoff between, you know, one way is better for one and one way is better for the other. So, yeah, you might let the spouse decide and give her the option. And we’ve done that sometimes, as well.
Jim: Yeah. What we sometimes do is we will have…but preferably, in that ‘Leave it to Beaver’ situation with the original husband and the original wife, we will sometimes give the surviving spouse a lot of options in terms of where the money goes. So, well we don’t throw out the B trust, or the unified credit shelter trust, we don’t usually force it on spouses.
Bruce: That’s right.
Jim: I don’t know if you’re doing that kind of thing in your practice, or whether you’re using the more traditional documents?
Bruce: Sometimes one way and sometimes the other way, depending on the particular case and the client’s preference.
Jim: I think that that’s probably…that makes a lot of sense, but we do find that there are situations where the building the flexibility, particularly for families that trust each other, the ‘Leave it to Beaver’ family, we don’t always get that luxury, but we sometimes do. Is there anything else? We’re just about to wrap up in a few minutes, and I know that you…and by the way, I should mention to our listeners, having Bruce Steiner on your show and talking about IRA beneficiary designations and some of the things that we’ve talked about is a little bit like having Jose Canseco come up and bunt, because Bruce is so talented in so many very sophisticated areas that we have not talked about today. Bruce, with just the few minutes remaining…
Hana: Jim, we actually only have one minute left. So, we’re going to have to wrap it up quick.
Jim: All right. With one minute left, Bruce, do you have any other final thoughts for our listeners? And while you’re thinking, I’ll also just mention that in the commercials, no one said that if you’re interested in the workshops, you could also get that information at www.retiresecure.com.
Bruce: And you have a lot of other wonderful information on your website, as well.
Jim: I appreciate that.
Bruce: Just that you want to keep the plan flexible. You don’t want to put too many constraints on it, so that after you’re not around, whoever’s around from time to time can’t do what’s best from time to time.
Hana: Okay. I want to especially thank Bruce for taking the time to chat with us tonight, and of course, I want to thank you, our listeners, for joining us for another The Lange Money Hour, Where Smart Money Talks. You can access our vast library of past shows on our website at www.paytaxeslater.com, and as always, you can catch a rebroadcast of this show at 9:05 am on Sunday morning, right here on KQV. Join us at 7:05 pm on May 16th when once again, our special guest will be P.J. DiNuzzo.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.