Estate Planning for the Modern, Blended Family
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|The Lange Money Hour: Where Smart Money Talks
|Click to hear MP3 of this show|
- Guest Introduction: Paul Hood, JD, LLm
- What is a “Modern” or “Blended” Family?
- Providing for your Spouse while Protecting Children from a Previous Relationship
- Advice for Unmarried Couples
- Bequeathing Real Estate in a Blended Family
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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at paytaxeslater.com. Now get ready to talk smart money.
David Bear: Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks. I’m your host, David Bear, here in the KQV studio with James Lange, CPA/Attorney and author of two bestselling books, Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again. Every family is different, and blended families, defined as those with children from previous marriages or couplings included, can be even more complicated. If estate planning can be tricky for traditional families, it’s much more so for blended families. When dealing with complex family situations, cookie cutter plans just don’t work. To help define and sort through some of these issues, we welcome Paul Hood to this edition of The Lange Money Hour. Presently director of Planned Giving for the University of Toledo Foundation, Paul is a self-styled recovering tax lawyer and author of four books on estate planning and business, written for both professionals and the general public. The Tools & Techniques of Estate Planning for Modern Families is a prestigious 800-page resource, used by top estate attorneys around the country, while his book Estate Planning for the Blended Family is written for a broader audience. Among other topics Paul and Jim Lange will discuss today are the significant tax and non-tax traps that unmarried couples can face and how to navigate them. And listeners, since the show is live, you can join the conversation with your questions and comments. Call KQV studios at (412) 333-9385, and with that, I’ll say hello, Jim and welcome, Paul.
Jim Lange: Welcome, Paul!
Paul Hood: Thank you! I’m glad to be here.
Jim Lange: Well, first of all, congratulations. I have the two most recent books and, for our purposes, the most relevant books, including The Tools & Techniques of Estate Planning for Modern Families, which, by the way, is the reason I called you originally. We have two types of listeners. The majority are probably consumers, but we also have a lot of financial advisors and attorneys and financial professionals, probably throughout the country. For those of you who are…if you even have one or two clients, and we all do, I would highly recommend The Tools & Techniques of Estate Planning for Modern Families. That’s a Leimberg book. I like all the Leimberg books, the estate planning one, the trust one, the life insurance one, and that, by itself, is a mark of a really fine book. But I went through some of the things in the book, and I’ll tell you, Paul, you did an excellent job. So, congratulations on that…I can’t even imagine how tough that is to write 800 pages of fine, fairly technical material.
Paul Hood: Well, thank you so much, Jim. It took a fairly long amount of time to write that book, and it was my job to write the first draft, and it was Steve’s job to edit. So, that’s how we worked it.
Jim Lange: Well, I’m not going to guess at what percentage of the time that you spent and what time Steve did because I don’t want any repercussions. But anyway, congratulations on that. And then (and this is probably more relevant for most listeners), you have a book called Estate Planning for the Blended Family. All right, so, this is a book for consumers. It’s clear, it is concise, and here’s the other thing, I mean, not only is the book right on point, but you also have a CD at the back of it that has all kinds of useful information. Probably, the CD itself is worth well more than the price of the book. But anyway, for any families…and I actually just talked to a financial advisor who actually has your book, and is a big fan actually as of today…but for the consumer, Estate Planning for the Blended Family by Paul Hood. So, Paul, why don’t we do one or two introductory issues, and then get to the meat of an issue that you and I had corresponded back and forth. What do you mean by a ‘blended’ family, or a ‘modern’ family?
Paul Hood: Well, the modern family is really a broader category than just blended families. Blended families are one category of the modern family. The other categories that we cover in the book are unmarried couples. This is one of the fastest growing segments of the community, and the other is the same-sex married partners, and from that standpoint, those three groups principally make up the modern family, together with the traditional family.
Jim Lange: Yeah. It’s interesting that you’re writing about same-sex couples because, as you know, we are just about done writing a book specifically for same-sex couples, and even though some of the strategies that we talk about would apply to unmarried opposite-sex couples, I specifically am directing and targeting same-sex couples, and I think I’ve shared with you one of those chapters, which I think is going to be a huge growing market in the future that is certainly underserved, and there isn’t great information. So, I applaud you for writing about some of these issues and talking about them. All right.
Well, I’ll tell you what I want to talk about, and I kind of want to get right into the meat, and I will tell the listeners that Paul and I have a little bit of a, let’s call it, friendly professional disagreement on an issue, and usually, I like to be agreeable and like to agree with my guests, but I think that his view (which is probably the majority view, and probably the sounder one) is different than mine, at least in certain circumstances. Maybe if all the details were laid on the table, we would get a little closer. But I want to bring up the issue of, let’s say that you are this blended family. And let’s keep it simple for the moment. Let’s say that you had children ten, twenty, thirty years ago with a different spouse than somebody that you are currently married to. And let’s even, for discussion’s sake, let’s say that your spouse had one or two children of their own, but not with you, that you had one or two children of your own, but not with your current spouse, and you’re doing your estate plan, and since we’re in Pittsburgh now, and Pittsburgh’s a working town, we don’t inherit a lot of money, although some of us do. Most of us get our money by working hard and putting money in our retirement plan and doing that for thirty or forty years, and the majority of our money is in an IRA or a 401(k) or a 403(b). So, there are different approaches to how do you protect your spouse, and let’s say that you’ve been married for twenty or thirty years to your second spouse, but also want to protect your children…
David Bear: From your first marriage.
Jim Lange: …from your first marriage. So, Paul, why don’t we start with you saying what your general approach to something like that is, with the caveat of course (and I would say the same thing) that it’s obviously going to be on a case-by-case basis. But how would you kind of approach that, in general?
Paul Hood: Well, it would depend a lot upon what the client wanted to accomplish. If the client’s goal was to provide for the spouse primarily, I might recommend leaving the retirement plan asset to the spouse, and leaving other property to the children. If it’s a matter of wanting to divide between the two, I would more than likely utilize either the credit shelter trust, or a QTIP-able trust, and that’s probably how I would recommend going about it.
Jim Lange: All right. Well, your first answer, which, by the way, I like, which is name the spouse to the IRA and the retirement plan because there’s lots of income tax benefits to doing that, and leaving, what I’ll call, the after-tax dollars to the kids of the first marriage, that might work out very well if you happen to have the appropriate right amount of money in the IRA and retirement plan and after-tax dollars. But in my example, let’s assume that really, the main assets are the family house, and to be sexist about it for a moment, the husband’s IRA. So, let’s assume that your first possibility, that is, name the IRA to the spouse and after-tax dollars to the children doesn’t work because that just basically doesn’t leave anything to the children. So, in that situation, do I understand you right that you would do either a QTIP-able or a…well, I’ll call it a B trust or a unified credit shelter trust situation, and that is a good approach. Is that right?
Paul Hood: Yes. That is what I would probably recommend. I don’t like to use either the QTIP-able trust or the B trust for retirement plan benefits because they do have associated income tax consequences. However, if that is all we have to deal with, that is what we have to address.
Jim Lange: All right. And by the way, I think that your view is probably the majority view. I know that you don’t specifically practice in estate planning, but you write so much and so well in this area that you have to be deemed an expert, and I think that you are representing the majority view. And for what you mean by…and without getting into all the technical details, but what Paul means by QTIP-able or B trust is…and let’s say, for discussion’s sake, it’s a million dollar IRA, that he’s going to name a trust as the beneficiary of the IRA, and the terms of the trust, to oversimplify, is his spouse is going to get income, or some defined amount of money, per year, every year for the rest of the spouse’s life, and then, at the spouse’s death, it’s going to go to the children of the prior marriage. And I think, from a gut instinct, that’s what a lot of people want to do. They want to make sure their spouse is okay while their spouse is alive, but then, for money afterwards, they want it to go to the children of the first marriage. Is that a fair summary?
Paul Hood: Yes, it is.
Jim Lange: All right. Let me tell you what my approach is, that is different than Paul’s, but only for limited people. So, I had some people, and I’ve had this over the years many times, people come in, and usually, it’s the husband and the second wife who come into the office, and they say, “Hey, look. We’ve been married thirty years, and I have a very close relationship with the children from the first marriage.” Not always, but let’s say sometimes, or let’s even assume that that’s not necessarily the issue. But here’s what your client might say (and this is what I’ve heard): “I completely trust my second spouse, all right? We’ve been together thirty years. I really believe that they would do the appropriate thing.” And I’m going to throw out what I have done in practice, which Paul, at least in an e-mail, says he doesn’t like. I would say…now, by the way, there’s also a simple solution too: X percent to spouse, X percent to kids at first marriage, and you’re done. But if the goal is to make sure that the spouse is provided for during their lifetime, and that’s the primary goal, here’s what I might do: I might leave the money to the spouse with the proviso, either on an oral or, preferably, a written contract, that any money that the IRA owner leaves the spouse (this is, again, the second marriage) will go into a separate account, and that separate account will not be co-blended with the spouse’s other assets, and they’re allowed to go into that account for their own purposes, but the beneficiary of that account is going to be the kids of the first marriage. All right? So, we have, let’s say, dad leaving his money to step mom on the proviso that step mom keeps that money separate and names children of dad as her beneficiary, even though she might have a biological urge to provide for her kids, in which case, legally, even without this contract or without an oral deal, she could change the beneficiary. Now, Paul, you’re going to probably tell me a couple stories how somebody did something like that and it didn’t work out very well for them at all. Is that right?
Paul Hood: Well, there’s a significant risk, and I will tell you that relationships often change after the parent’s death. What appeared to have been a copacetic, and even a good, relationship can quickly break down.
Jim Lange: All right. You’re talking about the relationship between mom and children of first marriage, right?
Paul Hood: Yes.
Jim Lange: Okay.
Paul Hood: That’s who I’m speaking about.
Jim Lange: Okay. Go ahead.
Paul Hood: And the risk there…I mean, if the client really wants to make sure that their children actually inherit something, the only way to guarantee that is to leave it in a way that the spouse can’t alter the distributions.
Jim Lange: Yeah, and by the way, for our listeners, Paul is giving us the sound advice that probably most people should take. I, for some reason, have been very lucky, and that the type of clients that I tend to attract often have a high degree of trust, and for whatever it’s worth, I’ve actually done it the way I have described, where I have kind of counted on the integrity and the trust of the surviving spouse to do what was anticipated, that is, leave money to children of the first marriage, and in all but one situation, that’s actually what happened. My problem with the QTIP-able, or B-type trusts that Paul was referring to, and he said, to be fair, Paul was the first one to say he doesn’t like doing it with IRAs and retirement plans, and without going into all the technical details, Paul, is it fair to say that it is basically an income tax disaster to name that QTIP-able, or B trust, because you have significant income tax acceleration? So, the reason I don’t like to do that is because you are perhaps accurately splitting up the pie the way you want, but you’re making the pie a lot smaller because Uncle Sam gets his taxes a lot faster, where if we do it the way I’m referring to, and it works, that is, the spouse is appropriate, we get a much bigger pie.
Paul Hood: I think that’s accurate.
Jim Lange: Okay. All right, now let me tell you my approach in practice. My approach in practice is to explain both views. Then, I actually go through some of the numbers, and Natalie Choate actually has run some numbers on that, and sometimes, the demonition of the account can almost be by 50%, depending on if there is a significant spending and if there is a significant IRA. So, I like to make the bigger pie, but explain it to the client. Paul might be a little bit more of a, let’s say, a watchdog of the husband’s money and make darn sure, even if it’s a smaller piece, that it ends up going to children of the first marriage. And I think Paul’s view is probably the more popular and sound view. Is that fair?
Paul Hood: I’ve always thought so, yes.
Jim Lange: Okay. By the way, a QTIP or a B trust, I don’t have a problem with if it’s, what I’ll call, after-tax dollars, that is, non-IRA dollars, because then you don’t have all those nasty income tax implications that you do if the underlying asset is an IRA. So, I’ve used QTIPs and B trusts plenty for after-tax dollars, with one exception, and frankly, I disagreed with the client, but I did what the client wanted. I have not done that with the IRAs. Okay, so…all right. So, that was, let’s say, one issue. But there’s other tax traps and non-tax traps that a lot of people face, and I always…you know, in the book that I have for same-sex couples, I am a big advocate of getting married. So, what I’m telling Pennsylvania same-sex couples is to run to New York, or run to Maryland, or run to a state that recognizes same-sex couples, get married over there, and come back over here. But as you said, there is a growing trend of unmarried couples, and if you could tell us some of the traps that unmarried couples face and how to navigate them, I think our listeners would be very interested.
Paul Hood: Certainly. First of all, in my opinion, unmarried couples need estate planning more than anyone else, and the reason for this is because the laws of intestacy and the laws of privacy really, really treat unmarried partners very, very cruelly, in my opinion.
Jim Lange: Could you define ‘intestacy’ just so everybody knows what you’re talking about?
Paul Hood: Yes. The laws of intestacy are the laws where someone dies without a will, and the state has a will for you, and they dictate how your property is to be divided. Unfortunately, in most situations, in fact, the overwhelming majority of situations, unmarried partners don’t factor into that equation.
Jim Lange: All right. So, let’s say that there are two potential heirs. One is your unmarried partner, and two, virtually everybody in your family is dead, and the only person that’s even closely related to you is this, like, third cousin. So, you die without a will, and let’s not assume IRA dollars. Let’s assume after-tax dollars. You die with a million dollars. Who’s going to get this? Your third cousin once removed, or is it going to be your unmarried partner?
Paul Hood: Well, under the law, it would be the third cousin once removed.
Jim Lange: Yeah. So, it’s pretty brutal for unmarried couples to die without a will. I assume that that’s your main point?
Paul Hood: Yes, that is my point.
Jim Lange: Let me ask you this: do you ever counsel…although I know that, I think you call yourself a recovering estate attorney, but would you counsel people to consider getting married?
Paul Hood: As a matter of fact, if it is an appropriate situation where people are definitely treating each other as spouses, I do recommend that. Yes, I do.
Jim Lange: Well, this is an area, by the way, that we are on complete agreement with, and actually, I think I that we really agree with because one of the tenets that I’m kind of pushing, if you will, in Retire Secure for Same-Sex Couples, and truthfully, it would be the same for unmarried opposite-sex couples, is that there are enormous tax advantages for being married, particularly if the person who dies first owns a significant IRA, and there’s also significant Social Security advantages for people to get married.
Paul Hood: Yes.
Jim Lange: So, to me, I would much rather…and if people are worried about their property rights and giving them up if they get married, to me, they could always do a prenuptial agreement that would very closely define the property rights to be whatever they want it to be, but, by being married, we go back to that issue of having a bigger pie.
Paul Hood: Yes.
David Bear: Well, before we get started in this angle, let’s take a quick break, and when we return, we’ll continue the conversation. Meanwhile, if you have a listener question or comment, call the KQV studio at (412) 333-9385.
David Bear: And welcome back to The Lange Money Hour. I’m David Bear, here with Jim Lange and Paul Hood, co-author of The Tools & Techniques of Estate Planning for Modern Families.
Jim Lange: So, we’re here with Paul Hood, and there’s going to be two book recommendations that I’m going to make. If you are a financial professional, and the book, in a way, isn’t really so appropriate for the consumer, a) because of its length (800 pages), b) because of its sophistication, it’s written in a style for financial professionals. But if you’re a financial professional, whether you’re an estate attorney or a financial planner or anything else, I’m going to really recommend Estate Planning for Modern Families. It is part of the Leimberg series. And for consumers, if you have a blended family yourself, that is, you have different children from different marriages, I’m going to highly recommend Paul’s book, which is called Estate Planning for the Blended Family, and there’s a book, and then there’s a very helpful CD afterwards. But I was going to pick up on the issue of getting married, but we have a question on the line, and…
David Bear: Joseph.
Jim Lange: …and I love to take questions, and maybe we’ll both take a shot at this, whatever Joe has to say. So, Joe, you’re on the line.
Joseph: Thank you very much. I’m Social Security age already, but my wife is going to turn 65 this year. But we’re going to wait until she’s 66 because she’s actually piggybacking on my Social Security. She doesn’t have enough quarters in because when our family started to come, she just decided to be a stay-at-home mom. But my question to you is, if something would happen to me, would she be still getting the amount that she would get when she turns 66, or would she be entitled to an amount equal to mine?
Jim Lange: Oh, you’re going to be a happy guy!
Jim Lange: How about if I take this one first, and then I’ll give Paul a crack at it also. All right, so, I’m going to restate the question, if it’s okay with you…
Jim Lange: …and to make sure that I have it right. So, you’re 66, your wife is 65, and the issue is…and you have a much stronger earnings record…
Jim Lange: …and she has a weaker earnings record…
Jim Lange: …and I’m going to rephrase the question to say what is your best strategy? And here’s what I would personally do: I would wait until your wife is 66. For you, do nothing until she becomes 66. Then, when she’s 66, you do something called apply and suspend. That’s where you apply for Social Security, but you tell them, “Don’t pay me.” So, what’s the difference between applying and suspending and doing nothing? If you apply and suspend and your wife would be 66 at that time, that means that she could apply for a spousal benefit. So, here, benefit would be one-half of what you would have received at 66. Then, that pattern continues with her taking money on your record until you’re 70. So, you’re not collecting anything, but she’s collecting half of yours. For every year that you wait between 66 and 70, you are getting an 8% increase in the amount that you’re going to get at age 70. So then, at 70, now you start collecting. Now, your wife, who has enjoyed collecting money on your account, in effect, what’s very interesting is the amount that you receive is not diminished in any way by what your wife took. So, you’d get exactly the same as if you had taken nothing. But your wife got that money. Then, at 70, your wife reassesses, “Gee, am I better off taking half of his as a spousal benefit,” or would her own record for the work that she did do better? So, you take a look at that. But I…
Joseph: I’m sorry. Her record would not apply because she actually never qualified to have enough quarters in.
Jim Lange: All right. So, basically then, we’re getting a spousal benefit that, in effect, is free between when your wife is 66 to 70, and then we’re increasing your benefit as if you had waited to 70. So, that money that your wife got from 66 to 70 is, in effect, free money. Then, she takes a spousal benefit when she’s 70, and here’s another huge advantage of you waiting: if you predecease your wife, she will then get a much higher benefit because you waited. So, let’s say that the difference is, to make a simple example, one way, it’s $2,000 a month if you don’t wait, and the other way, if you do apply and suspend, it’s, let’s say, $3,400 a month, and then you die, if you didn’t wait, your wife would get the $2,000 a month, but if you did wait, she would get $3,400 a month.
Joseph: I see.
Jim Lange: And for whatever it’s worth, you might think that I’m a lone star on this one because everybody wants to collect as much as possible as early as possible, but I’ve actually had four guests on the show, Kathleen Sindell, who wrote a book on Social Security, Jane Bryant Quinn, who is the very…
Jim Lange: …popular national author, and we’ve had Larry Kotlikoff, who’s an economist, on twice, and they all basically said the same thing. Paul, do you have an opinion on that issue?
Paul Hood: I actually agree with you, Jim.
Jim Lange: Okay. All right. So, does that help? It’s called apply and suspend.
Joseph: Yeah, exactly. Well, we had planned on waiting until she was 66 anyway, not, you know, when she was 65.
Jim Lange: Well, that actually works better because if she collects money before her full retirement age, that’s going to diminish the amount that she would get…
Jim Lange: …and it will also diminish her amount that she will get if you predecease her. And see, here’s my big thing, and I would say this for virtually anybody: I’m not necessarily, even in, you know, the money end of management (which is a major portion of our firm using low-cost index funds), I’m not necessarily trying to get the highest return all the time. I want to get a good return, but I want to be safe, and no matter what, I always want there to be food on the table, gas in the car, a roof overhead, a little money for Saturday night, and if you are holding off on your Social Security and something happens to you, there is a much better chance that your wife will enjoy those than if you take it early.
Jim Lange: So, if you’re not that wealthy, then the Social Security becomes very important, and if you are wealthy, then you could look at it as just like a smart investment play. The only time that this doesn’t really apply is when there’s either very short life expectancies or you’re just so dead broke, you literally can’t make it week to week unless you take it early, and for those people, I still want them to wait because I’m more worried about their future if they don’t.
Joseph: Yeah. In our situation, it’s not like we need her Social Security, and so we’ve delayed that until she turns 66, which will be next year. And yeah, I heard about the offset penalty if you do it before full retirement.
Jim Lange: Yeah, so here’s the deal: when she is 66, you apply and suspend. She applies as a spousal benefit. Then, you start collecting benefits when you’re 70…
Jim Lange: …and then she gets the increased amount while you’re both alive…
Jim Lange: …and then she gets what you get at death. And I’ll throw in one other thing because I can’t help myself!
Jim Lange: And I’m sorry, Paul. I know that this wasn’t a blended family question, but I like questions! These years, between when you are 67 and 70, are going to be the lowest income tax bracket years you’ll ever have. You’re retired, so you’re not getting wages, you’re not yet 70, so you don’t have minimum required distributions on your IRAs, and, with the exception of your wife’s spousal benefit, you’re holding off on Social Security.
Jim Lange: That’s the best time ever to make a Roth IRA conversion.
Jim Lange: And Paul, feel free to disagree with me, but why don’t you chime in on that opinion, if you would?
Paul Hood: No, I actually think that converting to Roth in the situation like that at that time is actually a pretty shrewd and good idea.
Jim Lange: Yeah. So, the difference, depending on how much money you have, can really be significant. But I thank you for your question.
Joseph: You’re welcome.
Jim Lange: Okay, so, getting back to where we were before, we were talking about potentially telling unmarried couples, and I’m not talking about a sham marriage, but people who are in committed long-term relationships, about the financial advantages of getting married, and Paul has even gone to the extent of thinking, “Hey, that might be a very good thing to counsel people to get married.”
Paul Hood: Yes. The other point that I wanted to make about the unmarried couple is the absolute need for a healthcare power of attorney, because there are privacy laws in hospitals, it’s called HIPAA, and the HIPAA laws basically could freeze out the unmarried partner who does not have a healthcare power of attorney, or advance care directive. It’s called by a couple of different names. And this is something that I have seen personally, and it is painful to watch because people who would know the most about what this person would have wanted are now frozen out of the situation.
Jim Lange: Yeah. And by the way, the same thing applies for same-sex couples too…
Paul Hood: Yes.
Jim Lange: …because here in Pennsylvania, that marriage is not recognized, and without an appropriate healthcare power of attorney (we sometimes call them living wills)…I haven’t heard the word, you know, frozen out of the decision process, but that is what happens. So, I think that that, as well as financial powers of attorney, are very important.
David Bear: Is there an issue here with the blended families that’s different from what Joe might have been talking about, or another situation, having kids involved?
Paul Hood: Yes, the situation can be different, and one of the things that I used to be very careful about in drafting powers of attorney in the blended family context is to limit the powers of the person to whom you give the authority. Limit the powers of the agent. For example, if you have your regular very broad power of attorney, it might also include the power to change your estate plan, which is certainly something that most people don’t want to have their agent do. So, there are a number of things that I used to recommend changing in the standard durable power of attorney for blended families.
Jim Lange: Yeah. By the way, this is another example of Paul, probably appropriately, not trusting the second spouse. I’ll tell you what my approach is: I ask the client, and if the client says, “No, I trust them completely,” I’m inclined to listen to the parent. But Paul’s is the traditional, classic right answer.
David Bear: All right. Well, let’s take one final break, and when we come back, Jim and Paul Hood will continue the conversation.
BREAK TWODavid Bear: And welcome back to The Lange Money Hour, with Jim Lange and Paul Hood, author of Estate Planning for the Blended Family.
Jim Lange: And again, one more time before we end the program, I do want to recommend to financial professionals that you get the book called The Tools & Techniques of Estate Planning for Modern Families. It is from the Leimberg family, which I just think they’re all excellent. I mean, it’s $150, or something like that, but I have it, and just a financial advisor that came in today to see me, he had it and he thought it was terrific. And that’s by Paul Hood. And the other book that I’m going to recommend for consumers, for people who have blended families, that is families with children who are different than the children of your current spouse, is Estate Planning for the Blended Family by Paul Hood, and not only is it an excellent book, but it also has a CD in the back that has all types of useful information. So, Paul, one of the things that you talk about, that I think is a real problem in practice, is what about the house? What about the family home? What do you do in these situations for a blended family when a home is…let’s assume, for discussion’s sake, a significant part of the estate, a) while both people are alive, b) after one person dies, and c) after two people die? Can you talk a little bit about the home?
Paul Hood: Yes, I can. The home, of course, is the castle, and most people want to leave this large asset usually for the ultimate benefit of their descendants, their children or grandchildren. Now, the problem comes in when the surviving spouse needs a place to live. So, what do you do for the surviving spouse? There are no real good, easy answers here. What I used to recommend more often that not was that the spouse be given the right to live in the home for a finite period of time.
Jim Lange: Something like two years, right?
Paul Hood: A transition period, yes, a transition period, and because one of the problems when you have a different owner of the property than the one who has the right to reside there, they start getting into all sorts of squabbles about who’s responsible for maintenance and the real estate taxes, and you get all these other issues that crop up, and they become a perpetual thorn in the sides of the participants.
Jim Lange: So, basically, you’re saying you’re going to give the spouse maybe a year or two, let’s say two years, and then you’re going to boot her butt out on the street, right?
Paul Hood: Well, it’s not so much booting them out on the street. Hopefully, they have other alternative living conditions. Now, if the situation is that you simply are going to end up turning them out on the street, if you do that, then clearly, the client has a tough decision to make.
Jim Lange: Well, see, my big thing is I like to provide for everybody. So, that’s why I like to provide for the surviving spouse, but at the same time, I don’t want to disinherit children from a prior marriage. So, we had talked about a couple of those techniques earlier with the traditional QTIP or the B trust, then we talked about my idea of having, let’s say, some trusts for somebody. The other thing that I was thinking about is if we are going to use your approach, and we are going to give the spouse, or, let’s say, the second spouse the right to live in the house for a certain transition period, but not years and years and years, and they’re going to need someplace to stay. Depending on money, one of the ways to protect either children or a spouse that we haven’t brought up, that I think that you do in your books, is with life insurance. In other words, it’s sometimes easier to cut up a pie when it’s a bigger piece of pie, and sometimes, the only way to sufficiently satisfy the needs of both the surviving spouse and the kids of the first marriage is life insurance.
Paul Hood: Oh, absolutely. Life insurance can solve all kinds of problems, and we certainly discuss life insurance quite a bit in the book, and frankly, in a blended family, it can really be a saving grace.
Jim Lange: Well, see, that’s the thing. You know, we don’t want to throw the surviving spouse out on the street, but if she has a half million dollar life insurance proceeds, then she could go get her own place, or she could rent, or she would have a lot of options, and particularly if the main underlying asset is IRAs and retirement plans, it’s pretty brutal to ask them to take out large amounts of money from their IRAs to pay for housing, particularly buying a house, just because the tax ramifications are so extreme.
Paul Hood: That’s right.
Jim Lange: All right. So, you like to usually do a transition. And also, out of curiosity, I would say that I have spent an inordinate amount of time on the second home, the cabin out in the woods, the little place in Florida…
David Bear: The husband’s place!
Jim Lange: Yeah, often the husband’s place. People are really concerned with that, and usually much more concerned with their kids, who end up selling it and splitting proceeds. Do you have any advice on second homes?
Paul Hood: Well, second homes often are treated a little differently than the primary residence. Quite often, clients have this sort of rose-colored glasses view of the world that their children will want this property, when in truth and in fact, nothing could be farther from the truth. The kids really don’t have a tie to it and don’t really want that property. So, I usually encourage them to have honest conversations. You have to involve the heirs and beneficiaries of an estate and find out where everyone is at the moment, because you can save a lot of difficulty if you simply have some conversations.
Jim Lange: Well, that brings up an interesting point, and sometimes, you see it in movies: how open do you think you should be with your, let’s say, second spouse and children of your first marriage on what your plans are? I was just seeing Sense and Sensibility the other night and, you know, the old man says, “Okay, here’s what we’re going to do.” And he decided to leave, you know, Blackacre, actually the second home, to his wife, his second wife, and he left his money to the children, and he told everybody, “Hey, this is what’s going to happen, and if anybody has a problem with it, say it now.” And a twenty-second story of confidentiality, I’m from a Jewish home, and we didn’t talk much about money and how much money mom has and how much money dad has, etc., and one of my very first tax returns that I did on the side, I did the whole family. I did two brothers, a sister and the parents, and I went and I picked up all the information, I did the returns, brought it back, and then I hand delivered each one, and they shocked me. They started saying, “Let’s see yours! Let’s see yours!” It’s like a report card. And it just blew me away because I was not used to being that open about money and what people are doing. What do you think about the need or importance of informing people ahead of time?
Paul Hood: I believe that it is absolutely…if it’s not essential, it is definitely advisable because what people don’t understand, Jim, is that their plans have impacts on the survivors that exceed the financial impact. They can impact the survivor’s relationships amongst themselves, and if someone goes to the trouble of confecting an estate plan, it doesn’t have to be a democracy. You don’t need to ask for consent or anything like that, but at least get some input from the persons who will be impacted by that plan.
Jim Lange: Well, anyway, you have been a wealth of information. Again, I’m just going to put in a last plug for your book. For financial professionals, The Tools & Techniques of Estate Planning for Modern Families by Paul Hood, which is part of the Leimberg family. For consumers, who are either listeners or members of the blended family, the book Estate Planning for the Blended Family by Paul Hood is, I think, the way to go.
David Bear: Well, and thanks for listening to this edition of The Lange Money Hour, Where Smart Money Talks. Thanks to Paul Hood. You can reach him directly at www.paulhoodservices.com. Thanks to Dan Weinberg, our in-studio producer, and Lange Financial Group coordinator, Amanda Cassady-Schweinsberg. As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and you can also access the audio archive of past programs, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com, under ‘Radio Show.’ You can also call the Lange offices directly at (412) 521-2732. And finally, mark your calendar for Wednesday, March 19th at 7:05, and the next new edition of The Lange Money Hour, when Jim welcomes back investment advisor P.J. DiNuzzo.
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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.
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