The Incredible Tax Advantage of Young Beneficiaries

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

The Incredible Tax Advantage of Young Beneficiaries

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

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

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

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

If we take it one step further with your beneficiaries.

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

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

So, let’s pull it all together.

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

Until next time!

-Jim

 

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

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

Estate Planning Goals:
What Do Most Families Want?

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

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

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

What’s great about the I Love You Wills

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

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

That covers the basics.

What can be improved from with I Love You Wills?

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

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

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

See you soon!

Jim

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