Navigating IRA Withdrawals, RMDs, and the 10-Year Rule: Smart Tax Planning Strategies for Retirement

Posted on by in Required Minimum Distributions.

Navigating IRA Withdrawals, RMDs, and the 10-Year Rule Smart Tax Planning Strategies for Retirement James LangeBy Jim Lange

If you're a retiree, or about to become one, you might be sitting on a ticking tax time bomb without even realizing it.

One of the most common mistakes I see among wealthy retirees is to passively assume that the best tax strategy is to leave retirement money untouched for as long as possible. That decision can backfire. Required Minimum Distributions (RMDs), Social Security payments, the SECURE Act’s 10-year distribution rule for Inherited IRAs, increase the risk of unintended bumps into a higher tax bracket. For your heirs, the stakes could be even higher.

In this post, I’m going to walk you through what I consider the most critical strategies for optimizing your IRA, 401(k), and other retirement account withdrawals. With planning you can minimize bracket creep and taxes, and maximize the legacy you leave behind.

Why This Matters More Than Ever

Retirement planning isn’t what it used to be. If you’re like many Baby Boomers, you may have accumulated significant wealth in tax-deferred retirement accounts—exactly the types of accounts that are now under more scrutiny and tighter withdrawal timelines.

  • The SECURE Act eliminated the “stretch IRA” for most non-spouse beneficiaries. Now, most heirs must drain Inherited IRAs within 10 years.
  • Missed RMDs can result in up to a 25% penalty—something the IRS is now enforcing more strictly.
  • Changes under the SECURE Act 2.0 delay RMDs for some but also complicate planning.
  • For wealthier retirees, large RMDs can push you into higher tax brackets, affect Social Security taxation, and trigger Medicare Part B and D surcharges known as Income-Related Monthly Adjustment Amount (IRMAA).

And many beneficiaries inherit IRAs without fully understanding the tax traps—leaving them exposed to a significant and avoidable tax hit.

So let’s talk about what you can do to avoid these pitfalls.


Smart Strategies for Managing Retirement Account Withdrawals

Understand the Basics: What Are RMDs?

If you have a traditional IRA or employer-supported plan (like a 401(k) or 403(b)), the IRS requires Required Minimum Distributions beginning at age 73 (or age 75 if you were born in 1960 or later, thanks to SECURE Act 2.0).

The amount is based on your account balance as of December 31st of the previous year and your life expectancy, as defined by the IRS’s Uniform Lifetime Table. And here’s the kicker: your RMD is taxable income.

That’s where things get tricky. A $100,000 RMD may push you into a higher marginal tax rate, make more of your Social Security taxable, and even raise your Medicare premiums. It’s not uncommon for retirees to underestimate just how large these RMDs can become if accounts are left to grow unchecked for too long.

Master the 10-Year Rule for Inherited IRAs

Imagine your adult son inherits your $1 million IRA after you have begun taking your RMD. If you are still thinking that he will be able to stretch his withdrawals over his lifetime, you would be wrong. Under the SECURE Act of 2019 and Secure Act 2.0 of 2022, unless he qualifies as an Eligible Designated Beneficiary (e.g., your spouse, disabled child, etc.) he must take annual RMDs, based on his life expectancy, over a 10-year period, at which point the account must be liquidated.

Worse, if he fails to withdraw the funds in 10 years, he could face a 25% penalty on any amount not distributed in time.

If you die before your required beginning date for RMDs, and your son inherits the account he is not required to take annual RMDs in the years 1 through 9 of the 10-year period. He can wait until year 10 to withdraw the entire amount or take withdrawals at any time in the 10-year period. But taking our $1 million in year 10 could land him in a very painful tax bracket.

If you plan ahead, you can reduce the tax burden on your heirs—by reducing the IRA’s size before death through Roth conversions or strategic withdrawals.

Time Withdrawals and Roth Conversions Wisely

The years between retirement and when RMDs kick in (age 73 or later) are a golden window for Roth conversions. During this period, you may be in a relatively low tax bracket which is an ideal time to pay taxes on some of your traditional IRA funds and convert them into a Roth IRA.

Each year, you can run a tax projection to assess how much to convert without jumping into a higher marginal tax rate. These proactive conversions reduce the size of future RMDs and leave your heirs with tax-free Roth money instead of taxable IRA money.

Optimize Withdrawals Based on Tax Brackets

Many retirees withdraw too little or too much—beyond their RMD—in any given year. The secret is managing withdrawals to fill, but not exceed, your current tax bracket.

For example, if you’re comfortably in the 22% tax bracket, you might consider converting or withdrawing just enough IRA funds to “top off” that bracket, but not so much that you jump to 24% or higher.

Also consider:

  • Using Qualified Charitable Distributions (QCDs) after age 70½ to donate from your IRA directly to charity—thus avoiding tax on the withdrawal.
  • Coordinating Roth conversions with deductions and exemptions in any low-income years—for instance, the year after you retire but before Social Security, pensions, and RMDs kick in.

Plan Around Other Income Sources

Tax planning for IRA withdrawals can’t be done in isolation. Every dollar you take affects your Modified Adjusted Gross Income (MAGI)—and that in turn affects your:

  • Social Security taxability
  • Medicare premiums (IRMAA)
  • Eligibility for other deductions or tax credits

Suppose you're drawing $40,000/year in Social Security, have a modest pension, and withdraw $70,000 from your traditional IRA. That could expose 85% of your Social Security to taxation and push you into higher IRMAA thresholds.

Mapping out anticipated income streams is critical to tax-smart planning.

Common Mistakes That Can Cost You

Let’s walk through some real-world missteps that cost retirees—and their heirs—thousands.

Mistake #1: Waiting Too Long to Start Withdrawals

Raj delayed all IRA withdrawals until RMDs began at age 73. The result? A $120,000 RMD that boosted his income, pushed him into the 32% bracket, triggered higher Medicare premiums, and caused 85% of his Social Security to be taxed. Starting small withdrawals earlier or executing partial Roth conversions could have mitigated this.

Mistake #2: Skipping Roth Conversion Opportunities

Emma, 65, recently retired. With low taxable income, she could have converted $30,000/year to a Roth IRA, locking in a 12% tax rate. She waited too long, and after RMDs started, she was in the 24% bracket—nearly doubling her tax cost.

Mistake #3: “Going It Alone” Without Professional Input

RMDs and inherited IRA rules now involve detailed calculations, tax projections, coordination with Medicare, and more. One oversight can trigger penalties or tens of thousands in taxes. Always consult with a qualified financial advisor or CPA.


Four Examples That Bring It All Together

Let’s review these lessons with relatable scenarios.

Example 1: Linda Manages RMDs Proactively

Linda, 74, continues teaching part-time, earning $20,000. She times her IRA withdrawals to stay just below the 22% tax bracket threshold, uses QCDs to give $10,000 to charity (satisfying part of her RMD), and converts $15,000 to a Roth. Result? Efficient tax management and a growing Roth legacy for her children.

Example 2: Knowing the Rules for Inherited IRAs

Jake inherits $500,000.

  • Withdraws $50,000/year over the 10-year window = steady annual tax impact.

Knowing the rules made all the difference.

Example 3: The Snowballing RMD

Raj grew his IRA to $1.5 million but took no distributions before 73. His first RMD is almost $75,000, and it keeps rising. Not only does he pay higher income taxes, but his Medicare Part B premiums increase drastically due to IRMAA.

Example 4: Early Roth Conversions Work Wonders

Emma, 65, converts $30,000/year for 6 years before RMDs. Her taxable income remains modest, and she avoids future RMDs on that money. Her heirs inherit over $200,000 in Roth funds—tax free.


What You Can Do Next

Build a Multi-Year Tax Roadmap

The most successful withdrawal plans are crafted years in advance. We help clients model out their income and taxes for the next 5–15 years and start planning strategic withdrawals and Roth conversions during low-income windows.

Review and Update Your Beneficiaries

Don’t assume your wishes will be honored unless beneficiary forms are current. Also, consider whether your heirs understand their responsibilities under the 10-year rule. In some cases, naming a trust as a beneficiary could make sense but it must be done carefully.

Consult a Retirement-Focused Professional

Working with a professional who understands the tax implications of IRA withdrawals, the nuances of inherited account rules, and estate planning coordination is absolutely essential. DIY planning carries significant risk at this stage of life.

Leverage Smart Tools and Resources

We encourage readers to:

  • Use the IRS RMD calculator to estimate future withdrawals.
  • Review current tax bracket thresholds and plan accordingly.

Next Steps

Retirement account withdrawals are no longer a simple matter of “wait as long as possible.” Between RMD rules, the SECURE Act’s 10-year requirement for heirs, and Medicare/IRMAA thresholds, poor timing can erode both your income and your legacy.

If you’d like me to help you evaluate whether your withdrawal strategy is on track—and explore whether a more complete financial plan could strengthen your retirement and estate outcomes—the first step is to see if you qualify for a complimentary Retire Secure Consultation.

Learn more at: PayTaxesLater.com/Consult

 FAQS

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How can Roth conversions help my heirs?

Converting portions of a traditional IRA to Roth in relatively low-income years pre-pays tax at known rates. Heirs then inherit Roth assets they can withdraw tax-free (still within 10 years), avoiding a big taxable spike later.

See also: Time Withdrawals and Roth Conversions Wisely
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How do IRA withdrawals affect Social Security and Medicare?

More taxable IRA income can make up to 85% of Social Security benefits taxable and can push you into higher Medicare premium brackets (IRMAA). That’s why bracket-aware withdrawals and conversions matter.

See also: Plan Around Other Income Sources

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Navigating IRA Withdrawals, RMDs, and the 10-Year Rule

What is the SECURE Act’s 10-year rule for Inherited IRAs?

For most non-spouse beneficiaries, an inherited IRA must be fully distributed within 10 years of the original owner’s death, and future RMDs  will be based on the life expectancy of the beneficiary.  Compressing withdrawals into a decade can push heirs into higher tax brackets if they’re in peak earning years.

If a non-spouse beneficiary inherits the IRA before the original owner has begun taking RMDs the beneficiary is not required to take RMDs and could potentially withdraw the full amount in year 10—a potential tax nightmare.

Planning ahead by reducing traditional IRA balances during your lifetime or planning post-retirement withdrawals strategically  can soften the tax impact.

See also: Master the 10-Year Rule for Inherited IRAs

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Should heirs spread Inherited IRA withdrawals?

Spreading withdrawals across the 10-year window usually reduces bracket “spikes.” Consider increasing withdrawals during lower income tax rate years.

See also: Knowing the Rules for Inherited IRAs

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What are Qualified Charitable Distributions (QCDs) and why use them?

After age 70½, you can donate up to the annual limit directly from your IRA to charity. QCDs count toward RMDs but don’t increase taxable income—helpful for controlling brackets, Social Security taxation, and IRMAA tiers.

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What are the first practical steps I should take?

Map a multi-year tax plan, review beneficiaries, test bracket-fill and conversion amounts with projections, and coordinate decisions with your advisor, CPA, and estate attorney.

See also: What You Can Do Next

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What are the most common mistakes with RMDs and Inherited IRAs?

Waiting too long to start withdrawals, taking an Inherited IRA as a lump sum, skipping Roth conversion windows, or ignoring beneficiary/trust updates. DIY missteps can be costly; periodic reviews help.

See also: Common Mistakes That Can Cost You

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What does it mean to “fill a tax bracket”?

Each year, consider withdrawing or converting just enough to top off your current tax bracket without spilling into the next one. This keeps lifetime taxes lower and tames future RMDs.

See also: Optimize Withdrawals Based on Tax Brackets

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When do RMDs start, and why does timing matter?

RMDs generally begin at age 73 (and 75 for some younger cohorts under SECURE 2.0). RMDs are taxable income and can increase your marginal rate, make more of your Social Security taxable, and trigger Medicare IRMAA surcharges. Coordinated withdrawals and Roth conversions can help control these effects.

See also: Understand the Basics: What Are RMDs?

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When do trusts make sense as IRA beneficiaries?

Trusts can protect minors, special-needs heirs, or spending-risk beneficiaries. Conduit trusts pass out distributions annually; accumulation trusts can retain them but face high trust tax rates. Draft language carefully under post-SECURE Act rules.

The Defenses Against the SECURE Act

Posted on by in Beneficiary Designations, Educational Resources, IRAs, Retirement Plan Options, Roth IRA, Roth IRA Conversions, Stretch IRA and tagged , , , .

The Best Defenses Against the SECURE Act by James Lange

photocredit: Getty

 

This blog post has been reposted with permission from Forbes.com

I have posted several articles explaining the most important provisions of the SECURE Act and the devasting effect that its provisions will likely have on individuals who inherit IRAs or retirement plans.  This article will address some of the proactive steps you can take now and after the SECURE Act or something similar becomes law.

Reduce Your Traditional IRA Balance With Roth IRA Conversions

If timed correctly, Roth IRA conversions can be an effective strategic planning tool for the right taxpayer. Often, a well-planned series of Roth IRA conversions will be a great thing for you and your spouse and will be one of the principle defenses from the devastation of the SECURE Act.

You and your heirs can benefit from the tax-free growth of the Roth IRA from the time you make the conversion up to ten years after you die.  One of the advantages of making a series of conversions is that the amount you convert to a Roth IRA reduces the balance in your Traditional IRA, which will reduce the income taxes your heirs after to pay on the Inherited IRA within ten years of your death.

Inherited Roth IRAs are subject to the same ten-year distribution rule after death as Inherited Traditional IRAs under the SECURE Act.  The important difference between the two accounts is that the distributions from Roth IRAs are generally not taxable.  One good thing about Trump’s Tax Cuts and Jobs Act of 2017 is that it temporarily lowered income tax rates, so this year is probably a better than average year for many IRA and retirement plan owners to consider Roth IRA conversions as part of their long-term estate planning strategy. We did several posts on Roth IRA conversions earlier this year and concluded this was a great time to look at Roth conversions.  Now, it is even more important.

In short, it may make more sense for you to pay income taxes on a series of Roth IRA conversions done over a period of years than it would for your heirs to pay income taxes on the accelerated distributions required under the SECURE Act.  The strategy of doing a series of Roth IRA conversions over several years tends to work better because you can often do a series of conversions and stay in a lower tax bracket than if you did one big Roth conversion.  Of course, there is no blanket recommendation that is appropriate for every IRA and retirement plan owner.

Spend More Money

Many of my clients and readers don’t spend as much money as they can afford.  Maybe if they realized to what extent their IRAs and retirement plans will be taxed after they die, they would be more open to spending some of it while they are alive.  Assuming you can afford it, why don’t you enjoy your money rather than allowing the government to take a healthy percentage of it?  Considering taking your entire family on a vacation and pay for everything. My father in law takes the entire family on a four-day vacation in the Poconos every year.  Yes, it costs him some money, but those family memories will be a much more valuable legacy than passing on a slightly bigger IRA – especially if your IRA is destined to get clobbered with taxes after you die.

A variation on the same idea is to step up your gifting plans – not only to charity but also to your family.   Sometimes it makes sense to give a financial helping hand to family members who might need one sooner than later. Not only might you be able to ward off additional troubles for them, but it might help your own peace of mind if you don’t have to worry about them.  What about that new grandbaby?  Consider opening a college savings plan – it could open a whole new world of opportunity for him when he reaches college age.

If you donate to charity, make sure that you “gift smart”.  The Tax Cuts and Jobs Act of 2017 made it more difficult for many Americans to itemize their charitable contributions.  If you fall into this category, you need to know about a provision in the law that allows you to make charitable contributions directly from your IRA.  Known as a Qualified Charitable Distribution (QCD), this strategy allows you to direct all or part of your Required Minimum Distribution (RMD) directly to charity.  The amount of the QCD is not an itemized deduction on your tax return – but it’s even better.  It is excluded from your taxable income completely!  So, if you are required to take RMD’s from your retirement plans and intend to donate to charity anyway, a QCD may be a much more tax-efficient way to do it.

Update Your Estate Plan

Thoughtful estate planning can provide options for survivors that will allow them to make better decisions because they can do so with information that is current at the time you die. Even if you have wills, life insurance and trusts, the changes in the laws suggest you review and possibly update your entire estate plan.   This includes your IRA beneficiary designations too, and that’s particularly true if you have created a trust that will be the beneficiary of your IRA or retirement plan.   Assuming some form of the SECURE Act is passed into law, you would likely improve your family’s prospects by updating your estate plan.

Consider Expanding Your Estate Plan

The changes brought about by the SECURE Act could make life insurance even valuable to your estate plan than in the past.  The idea is you would withdraw perhaps 1% or 2% of your IRA, pay taxes on it, and use the net proceeds to buy a life insurance policy.  The math on this type of policy stays the same as in the past.  The difference is in the past your heirs could stretch the IRA over their lives.  This makes the life insurance option much more attractive because the alternative is worse.  Charitable Trusts might also become a good option depending on the final form of the law.

One idea that we think can be a good strategy for some IRA owners under the SECURE Act are Sprinkle Trusts.  If used in an optimal manner, they can provide families with the opportunity to spread the tax burden from inherited IRAs over multiple generations by including children, grandchildren, and great-grandchildren as beneficiaries.  Sprinkle Trusts have been one of the many “tools” in the sophisticated estate planner’s repertoire for years but have become much more attractive recently because they can offer significant tax benefits to certain IRA owners.   They can also have hidden downfalls, so consider talking with an attorney who has expertise in both taxes and estate planning to help map out a strategy that is appropriate for your situation.

Combine Different Strategies

Perhaps the best response to the SECURE Act involves a combination of strategies.  For example, in some situations the most course of action might be revised estate plans, a series of Roth IRA conversions, a series of gifts, and the purchase of a life insurance policy.

Spousal IRAs

The SECURE Act will not apply directly to an IRA or retirement plan that you leave your spouse.  After your spouse dies and leaves what is left to your children, then the SECURE Act does rear its ugly head.

The SECURE Act is a money grab – an action by Congress that betrays retired Americans.  You will likely be able to at least partially defend your family against its worst provisions by taking action.  This is not one of those posts where you think “great post, now back to watching television”.  It is a post meant to create dread that the IRA you worked so hard to accumulate will get clobbered with taxes after you die unless you take action.  The ideas discussed above are some of our favorite action points.  This post should be the beginning, not the end of your research and action on this enormous problem.

For more information go to https://paytaxeslater.com/next-steps/ to take next steps to protect your financial legacy.
If you’ll be in the Pittsburgh area, go to https://paytaxeslater.com/workshops/ for updates on Jim’s FREE retirement workshops to learn even more about how to established retirement plans that will be beneficial to make the most out of what you’ve got for your family.

 

James Lange

The SECURE Act: Is It Good For You Or Bad For You?

Posted on by in Beneficiary Designations, Educational Resources, Estate Tax, Government Programs, Income Tax, Inherited IRAs, IRAs, Retirement Plan Options, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged , , , , .

Is The SECURE Act Good for You or Bad For You by CPA/Attorney James Lange on Forbes.com

Will you be able to retire safely under the SECURE Act?

 

This blog post is republished with permission from Forbes.com

My previous post introduced the potential consequences of the SECURE Act, which is being promoted as an “enhancement” for IRA and retirement plan owners.  This is because it includes provisions allowing some workers to make higher contributions to their workplace retirement plans. I think it is a stinking pig with a pretty bow, so I wanted to give retirement plan owners the good and bad news about it.

I am a fan of Roth IRAs because they allow you to have far more control over your finances in retirement than you might have otherwise had.  You are not required to take distributions from your Roth IRA, but the good news is that they’re not taxable if you do take them.  These tax benefits can be a critical factor for seniors, especially if you are suddenly faced with costly medical or long term care bills.   Saving money in a Roth account can offer financial flexibility to many older Americans – and one good thing about the SECURE Act is that it can help you achieve that flexibility.  Here’s how.

The Good News About The SECURE Act

Under the current law, you are not allowed to contribute to a Traditional IRA after age 70½.  (You can contribute to a Roth IRA at any age as long as you have taxable compensation, but only if your income is below a certain amount.)  The age limitation for making contributions to Traditional IRAs is bad for older workers – and that’s an important point because the Bureau of Labor Statistics estimates that about 19 percent of individuals between the ages of 70 and 74 are still in the workforce.  The SECURE Act eliminates that cutoff and allows workers of any age to continue making contributions to both Traditional and Roth IRAs.

That same provision of the SECURE Act offers a hidden bonus – it means that it will also be easier for older high-income Americans to do “back-door” Roth IRA conversions for a longer period of time.  The back-door Roth IRA conversion, currently blessed by the Tax Cuts and Jobs Act, is a method of bypassing the income limitations for Roth IRA contributions.  The current law prohibits contributions to a Roth IRA if your taxable income exceeds certain amounts.  Those amounts vary depending on your filing status.   But even if you are unable to take a tax deduction for your Traditional IRA contribution, you can still contribute to one because there are no income limitations.  Why bother?  Because, assuming you don’t have any other money in an IRA, you can immediately convert your Traditional IRA to a Roth IRA by doing a back-door conversion.  That’s a good thing because the earnings on the money you contributed can then grow tax-free instead of tax-deferred.

Here’s more good news.  The current law requires Traditional IRA owners to start withdrawing from their accounts by April 1st of the year after they turn 70 ½.  These Required Minimum Distributions (RMDs) can be bad for retirees because the distributions are taxable.  The increase in your taxable income can cause up to 85 percent of your Social Security benefits to be taxed and can also move you into a higher tax bracket.  And once you begin to take RMDs, you are no longer allowed to make additional contributions to your account, even if you are still working.  The SECURE Act increases the RMD age to 72, a change which will allow Traditional IRA owners to save more for their retirements.

There’s a hidden bonus in this change as well.  Increasing the RMD age to 72 will allow retirees more time to make tax-effective Roth IRA conversions.  What does that mean?  Once you are required to take distributions from your Traditional IRA and your taxable income increases, you may find yourself in such a high tax bracket that it may not be favorable to make Roth IRA conversions at all.

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The Hidden Money Grab In The SECURE Act

Posted on by in Educational Resources, Inherited IRAs, IRAs, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA, Traditional IRA and tagged , , , , .

Capitol Building Washington DC used in Pay Taxes Later Blog Photo Courtesy of Delgado Photos

*Please note this blog post is a repost with permission from Forbes.com

On May 23, 2019, the House of Representatives overwhelmingly passed the SECURE Act (Setting Every Community Up for Retirement Enhancement). A more appropriate name for the bill would be the Extreme Death-Tax for IRA and Retirement Plan Owners Act because it gives the IRS carte blanche to confiscate up to one-third of your IRA and retirement plans.  In other words, it’s a money grab.

The SECURE Act is wrapped with all kinds of goodies that are unfortunately of limited benefit to most established IRA and retirement plan owners.  But if you have an IRA or a retirement plan that you were hoping you could leave to your children in a tax-efficient manner after you are gone, you need to be concerned about one provision in the fine print that could cost them dearly. Non-spouse beneficiaries of IRAs and retirement plans are required to eventually withdraw the money from its tax-sheltered status, but the current law allows them to minimize the amount of their Required Minimum Distributions by “stretching” them over their own lifetimes.  This is called a “Stretch IRA”.  Distributions from a Traditional Inherited IRA are taxable, so the longer your beneficiaries can postpone or defer them (and hence the tax), the better off they will be.   The bad news is that the government wants their tax money, and they want it sooner than later.  The ticking time bomb buried in the SECURE Act is a small provision that changes the rules that currently allow your beneficiaries to take distributions from Traditional IRAs that they have inherited and pay the tax over their lifetimes,  virtually cementing “the death of the Stretch IRA.” (The provisions of the SECURE Act also apply to Inherited Roth IRAs, but the distributions from a Roth IRA are not taxable.)

If there is any good news about the SECURE Act, it’s that it does not require your beneficiary to liquidate and pay tax on your entire Traditional IRA immediately after your death.  For many people, that would be a costly nightmare because they would likely be bumped into a much higher tax bracket.  Under the provisions of the SECURE Act, if you leave a Traditional IRA or retirement plan to a beneficiary other than your spouse, they can defer withdrawals (and taxes) for up to 10 years.   (There are some exceptions for minors and children with disabilities etc.) If you leave a Roth IRA to your child, they will still have to withdraw the entire account within 10 years of your death, but again, those distributions will not be taxable.  But any way you look at it, the provisions of the SECURE Act are a huge change from the old rules that allow a non-spouse heir to “stretch” the Required Minimum Distributions from a Traditional Inherited IRA over their lifetime and defer the income tax due.

That’s not the end of the bad news.  Once your beneficiary withdraws all the money from your retirement account, it will no longer have the tax protection that it currently enjoys.  In other words, even if your children inherited a Roth IRA from you and the distributions themselves weren’t taxable, the earnings on the money that they were required to withdraw are another story.  Even if they wisely reinvest all the money they withdrew from their Inherited Traditional or Roth IRA into a brokerage account, they’re still going to have to start paying income taxes on the dividends, interest and realized capital gains that the money earns.

I know there are readers out there who are thinking “it can’t be all that bad”.  Yes, it is that bad.  Here is a graph that demonstrates the difference between you leaving a $1 million IRA to your child under the existing law, and under the SECURE Act:

Child Inherits Stretched IRA Under Existing Law versus Child Inherits 10 Year IRA Under SECURE Act Reprinted with Permission from Forbes.com for Pay Taxes Later website

Child Inherits Stretched IRA Under Existing Law versus Child Inherits 10 Year IRA Under SECURE Act – James Lange

This graph shows the outcome if a $1 million Traditional IRA is inherited by a 45-year old child, and the Minimum Distributions that he is required to take are invested in a brokerage account that pays a 7 percent rate of return.  Other assumptions are listed below*.  The only difference between these two scenarios is when your child pays taxes! The solid line represents a child who can defer (or “stretch”) the taxes over his lifetime under the existing rules. At roughly age 86, that beneficiary who was subject to the existing law in place still has $2,000,000+.  The dashed line represents the same child if he is required to take withdrawals under the provisions of the SECURE Act.  At age 86, that same beneficiary has $0. Nothing. Nada. The SECURE Act can mean the difference between your child being financially secure versus being broke, yet Congress is trying to gloss over this provision buried in the fine print. I don’t think so!

The House of Representatives passed the SECURE Act by an overwhelming majority, so the probability that the Senate will pass a version of this legislation is quite good. In 2017, the Senate Finance Committee recommended the Death of the Stretch IRA by proposing the Retirement Enhancement and Savings Act (RESA).  In true government fashion, RESA was unbelievably complicated. It allowed your non-spouse beneficiaries to exclude $450,000 of your IRA and stretch that portion over their lifetime – but anything over that amount had to be withdrawn within five years and the taxes paid. And if you had more than one non-spouse beneficiary, the amount that they’d be able to exclude from the accelerated tax would have depended on what percentage of your Traditional IRA they inherited.  Imagine trying to plan your estate distribution around those rules!

The Senate is now floating an updated RESA 2019 that seems to say that it will change the original exclusion amount to $400,000.  It will be a good change if it is passed.  That is because instead of each IRA owner getting a $400,000 exclusion, the new version includes language to allow a $400,000 exclusion per beneficiary. When I first read that provision I thought I had either read it wrong or that it was a typo.    That little detail would be extremely valuable (and make estate planning for IRAs and retirement plans far more favorable), especially for families with more than one child. But even in the Senate version, anything over and above that exclusion amount will have to be distributed (and the taxes paid) within five years of your death (instead of ten years like the House version).

Unfortunately, our “peeps” think the House version of the bill (which has a 10-year deferral period, but no exclusion) will be what eventually becomes law. This is particularly troubling because the Senate version would allow room for far more creative planning opportunities (and tax savings, because of the $400,000 per beneficiary exclusion).  As of the time of this post, Senator Cruz is attempting to hold up the bill, but his reasons have nothing to do with the fine print that affects Inherited IRAs.  The original version of the Act contained provisions about college tuition (Section 529) plans, but those provisions were stripped in the version the House voted on and Senator Cruz wants them restored.  Unfortunately, no one is arguing about the biggest issue with the SECURE Act, which is the massive acceleration of distributions and taxes on your IRA after your death.  And unless someone in Congress objects to the provision in the SECURE Act about Inherited IRAs, your non-spouse beneficiaries will find out the hard way that their elected officials have quietly arranged to pick your pockets upon your death.

I have been a popular guest on financial talk radio lately. Many of the hosts want to blame one political party or the other. I blame all of Congress. This is one of the few truly bipartisan bills that has potential devasting consequences, at least for my clients and readers, and it is highly likely to pass both sides of Congress.  I wonder how many of our legislators in the House actually read this bill or understood what is was they voted for.  Did they realize they are effectively—by accelerating income-tax collection on inherited IRAs and other retirement plans—imposing massive taxes on the families of IRA and retirement plans owners – even those with far less than a million dollars?    Or perhaps they did understand it and hoped that the American public wouldn’t.

If you can’t tell by my tone, I am upset. I am also motivated to examine every strategy that we can use to legally avoid, or at least mitigate, the looming hammer of taxation on your Traditional IRAs and retirement plans. I’m going to address these strategies in a series of posts, so please read them to see how this proposal could affect someone in your specific situation.  Even though the Senate version has a five-year tax acceleration instead of a ten-year, the Senate version could be better for most readers because of the value of the exclusion – especially if you have multiple beneficiaries.

Please check for follow-up posts on this subject.   I will show you some strategies to protect your family from the Death of the Stretch IRA and keep more of your hard-earned money in your hands.

James Lange

  • Assumptions used for Graph
  1. $1 Million Traditional IRA inherited by 45-Year Old Married Beneficiary
  2. 7% rate of return on all assets
  3. Beneficiary’s salary $100,000
  4. Beneficiary’s annual expenses $90,000
  5. Beneficiary’s Social Security Income at age 67 $40,000

 

The Potentially Dire Consequences to Your Legacy with the “Death of the Stretch” IRA

Posted on by in Beneficiary Designations, Educational Resources, Estate Tax, Financial Scandals, Government Programs, Inherited IRAs, Roth IRA, Stretch IRA and tagged , , , , .

The Death of the Stretch IRA is rearing its ugly head again.

 

Death of the Stretch Inherited IRAs by James Lange CPA/Attorney in Pittsburgh, PAAs I have written about, this is personal to me. I was hoping that distributions from my Roth IRA and IRA would be “stretched” over the life of my daughter and maybe grandchildren.  It could make a difference of well over a million dollars to my family.

If you have a million dollar or more IRA or retirement plan, this threatened (but as yet not totally defined) legislation could be just as devastating to you and your family.  Once the two houses reconcile their differences (see the above post for the details of the different proposals), established estate plans will likely need to be reevaluated.  This threat increases the merits of Lange’s Cascading Beneficiary Plan or a similar flexible estate plan. It also creates an even greater incentive for IRA owners considering significant Roth IRA conversions.

I wrote two books on this topic based on the proposal that advanced through the Senate Finance Committee beginning in 2016. While the changes to IRA and retirement plan distribution rules weren’t included in the last set of tax changes (much to our surprise), clearly the idea still has a huge bipartisan appeal.

The action points in both books was to reconsider and revisit the idea of converting more of your IRAs to Roth IRAs. This is consistent with my most recent recommendations encouraging higher conversions because of the low income-tax rates we are currently enjoying.  The threat of losing the ability to stretch distributions from IRAs and retirement plans for generations only makes looking into Roth IRA conversions more compelling. If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please call our offices at 412-521-2732.

The Death of the Stretch is Back On Congress’ Agenda

Posted on by in Educational Resources, Estate Tax, Government Programs, Inherited IRAs, Market News, Stretch IRA and tagged , , , , , .

The Death of the Stretch is Back On Congress’ Agenda

This just in.

Stretch IRA James Lange Pittsburgh PennsylvaniaThe House is scheduled to vote on Thursday, May 23, 2019, on the SECURE ACT. Then, it will be in the Senate’s court to vote on RESA. Then the House and Senate will need to reconcile the differences between the bills. Experts, including us, think a compromise will be found and that the “stretch IRA” as we know it, will be gone, dealing a severe blow to IRA and retirement plan owners who were hoping their heirs would be able to continue deferring the distributions on their inherited IRAs and retirement plans for decades.

Here is the story so far.

In mid-April, Senate Finance Committee Chairman Chuck Grassley, R-Iowa, and ranking member Ron Wyden, D-Ore., reintroduced their Retirement Enhancement and Savings Act (RESA).

Under this bill, which we’ve been talking about since 2016, the account balance in a defined contribution plan or IRA must be distributed and included in income by the beneficiary five years after the employee’s or IRA owner’s death. Surviving spouses, beneficiaries who are disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or the child of the employee (or IRA owner) who has not reached the age of maturity are excluded from this rule. Plus, an exception to the five-year distribution deadline is provided for each beneficiary to the extent that the balance of the account they receive from the deceased employee or IRA owner does not exceed $400,000.

Also in April, the House Ways and Means Committee passed a bill known as the Secure Act (Setting Every Community Up for Retirement Enhancement Act of 2019). What was remarkable about the Secure Act is that it was fast-tracked and approved with lightning speed, with the intention “To amend the Internal Revenue Code of 1986 to encourage retirement saving, and for other purposes.” And while it does include some incentives for people to participate in retirement plans, it also proposes the “death of the stretch IRA.” The House version of the bill differs from RESA in that it proposes a 10-year time limit on holding an inherited IRA or inherited Roth IRA or other defined contribution plan before all of the funds in the account must be distributed.  According to the summary provided by the House Committee on Ways and Means:

Section 401. Modifications to Required Minimum Distribution Rules: The legislation modifies the required minimum distribution rules with respect to defined contribution plan and IRA balances upon the death of the account owner. Under the legislation, distributions to individuals other than the surviving spouse of the employee (or IRA owner), disabled or chronically ill individuals, individuals who are not more than 10 years younger than the employee (or IRA owner), or child of the employee (or IRA owner) who has not reached the age of majority are generally required to be distributed by the end of the tenth calendar year following the year of the employee or IRA owner’s death.

We have been anticipating the death of the stretch IRA for years and wrote two books about its consequences.  We were pretty convinced it was going to be eliminated in the last round of tax law changes, and frankly, we were surprised when the limit on non-spouse heirs stretching distributions from inherited IRAs over their lifetimes was not included. But, it’s back, and once again the devil is in the details which will have to be hashed out between the two houses. In the next post, I will offer some insight into the consequences and preliminary recommendations.

If you have an IRA and/or other retirement plan and were hoping to leave it to your heirs with a favorable tax treatment and want to be kept up to date with this information, please contact our offices at 412-521-2732.

Protect Your Social Security from Cyber Criminals

Posted on by in Data Breach, Identity Theft, Social Security and tagged , .

Social Security Fraud Blog for PayTaxesLater.com
As many of you know, I am a strong proponent of waiting until age 70 to apply for Social Security, because I want both you and your surviving spouse to receive the highest benefit possible during your lifetimes. And one of the technical points about Social Security that I’ve never covered in detail in my books – because it’s only been in rare cases that I have recommended that my clients do it – involves applying for benefits retroactively. But in order to make you understand how your future Social Security benefits could be at risk from cyber criminals, I find myself in the strange position of having to give you a quick lesson on how retroactive benefits work.

Suppose that you could have applied for Social Security at your Full Retirement Age (FRA) of 66, but you took my advice and waited so that you can receive the highest benefit possible at age 70. When you turn 67, you go to your doctor for your annual physical. There, the doctor gives you some terrible news – you have six months to live! Now you’re cursing at me because you missed out on all of this Social Security money that you could have collected since you were 66 – or did you? Not necessarily. In certain instances, Social Security will allow you to apply for retirement benefits retroactively. If you qualify, Social Security will send you up to six months of retroactive benefits, paid as a lump sum.

A True Horror Story of a Social Security Fraud Victim

I won’t waste time telling you how you can qualify for retroactive benefits because it’s a complicated topic, and I will not recommend you do it because it will result in lower monthly benefits for the rest of your life. I am going to tell you something very important that you need to understand about retroactive benefits: if you are at least Full Retirement Age but are waiting until age 70 to file for Social Security so that you can earn Delayed Retirement Credits, your account may be compromised by cyber criminals who are trying to get their hands on any lump sum retroactive benefits to which you might be entitled, but have no intention of ever claiming. Here’s a real-life example of what I’m talking about:

I have a client who received an unexpected letter from the Social Security Administration. She and her husband had intended to hold off applying for benefits so that they could earn Delayed Retirement Credits. The letter they received, however, stated that Social Security had approved their request for a lump-sum retroactive benefit payment, which amounted to almost $12,000. Immediately my client and her husband went to their local Social Security office, and in the several hours spent there, discovered that the criminal(s) had called the office and pretended to be her husband. During the conversation, which was on a recorded line, the criminal simply said that he had changed his mind and wanted to apply for benefits retroactively! And the Social Security office complied with his request!

It Seems to Have Become Easier for Criminals

I found this situation to be so unbelievable that I called the Social Security office myself and asked how it could happen. What I learned might shock you. In order to access my client’s Social Security account, the criminals had to provide them with only the husband’s full name, date and place of birth, mother’s maiden name, and his current address and phone number. Personal information like this is widely available online through sites such as Facebook and Ancestry.com, not to mention what is available on the dark web thanks to the infamous Equifax hack in 2017.

My client spent hours at the Social Security office trying to put a hold on the “lump sum withdrawal,” and were assured that everything had been resolved. We thought that the criminals had been thwarted and everything was fine, but yesterday they received a 1099 from the Social Security Administration saying that they had received $12,000 in benefits that they needed to report on their tax return! So now we’re back to square one, and are still trying to get this mess sorted out. It’s bad enough that the IRS has been notified that they need to pay tax on money they never received, but now I’m wondering whether my client is still earning Delayed Retirement Credits after these criminals filed for benefits under his name!

How Can You Protect Yourself?

The bottom line is that you need to treat your Social Security account like a bank or investment account. Even though you might not think of it as being an asset, it is – because if a criminal manages to take control of it, the consequences could be costly and far-reaching. One way to protect yourself is to open an account with Social Security online, at this website: https://www.ssa.gov/myaccount/. Even if you do not plan to file for benefits in the near future, this action can prevent someone else from opening an account in your name without your knowledge. For your security you will be required to create a user name and password, and they’ll send a one-time security code to your email or phone.

Once you’ve established your account, you should check it periodically to make sure that information such as your name, address and phone number is correct. They also have a feature called “Block Electronic Access,” which prevents anyone (including you) from changing your personal information online or over the telephone. If you block access to your account and then change your mind, you have to ask Social Security to unblock it for you.
Years ago, the fear of Social Security theft was largely confined to the possibility of armed thugs waiting outside the bank for retirees who had just cashed their monthly checks. Unfortunately, criminals are constantly looking for ways to liberate you from your money, and their creativity can be surprising. Remember, protect yourself and your spouse by making sure that your benefits are safe – even if you don’t plan to apply in the near future!

Are you interested in learning more about Social Security maximization strategies? Visit our Social Security section of our website here for more information.

How Does the Tax Reform Affect Retirees?

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How does the Tax Reform Affect Retirees? Read More on https://paytaxeslater.com/how-does-the-tax-reform-affect-retirees/

How does the Tax Reform affect Retirees?

I was able to spend some time reading over the holiday, and of course much of my efforts were devoted to finding out how people were reacting to the new tax reform bill. In quick succession, I came across three articles published by three different media outlets. The first said that the tax reform would hurt poor people; the second insisted that the tax reform would hurt the middle class, and the third swore that the tax reform would hurt the rich. Many of our clients are retired, and they are asking “how will the tax reform affect me?” So I thought I would give you some ideas about how the tax reform might affect retirees.

One concern for retirees involves the changes made to the rules affecting Schedule A, Itemized Deductions. Will the tax reform affect you if you are retired, and you have been able to itemize? The short answer is that, depending on what and how much you deduct, the tax reform may affect you because some of the itemized deductions were reduced or even eliminated. Let’s look at specifics.

Tax Reform and Medical Expenses

Many retirees have high medical costs – and the good news is that medical expenses will still be deductible in 2017 assuming that they exceed a certain threshold. What makes this statement less than straightforward, though, is that there were two different thresholds when you did your taxes last year. Prior to the tax reform, individuals who were younger than age 65 had to have medical expenses that exceeded 10% of their adjusted gross income in order to be able to use the deduction.

If you or your spouse were 65 or older, though, the threshold was lower – only 7.5%. And whatever your age, you could only deduct the medical expenses that were in excess of your threshold. The bottom line for retirees? If you itemize, tax reform shouldn’t affect your medical deductions unless both you and your spouse are younger than 65 years old. The tax reform may actually benefit younger individuals who have high medical costs because, starting in 2017, everyone regardless of their age will have to meet a threshold of only 7.5% before they can deduct any medical expenses.

Tax Reform and Property Taxes

Many retirees could be affected by the changes in state and local tax (or, SALT) itemized deductions. Through 2017, you can deduct all of your state, local, real estate, sales and personal property taxes on Schedule A if you itemize. In 2018, those deductions will be capped at $10,000. How does this affect retirees? It depends. If you didn’t deduct these expenses because you used the standard deduction last year, this provision in the tax reform won’t affect you at all.

But if your income is high enough that it is subject to state and local tax, or if you own a home on which you pay high property taxes, any deduction that you might be able to take after the tax reform could be reduced. If this sounds like you, you will need to check the Schedule A on your prior year return to see exactly how much of the taxes you paid were deductible in the past. The tax reform could affect you negatively if you’ve been able to deduct more than $10,000 because, starting in 2018, your deduction will be limited to that amount.

Tax Reform and Mortgage Interest

Many retirees prefer to have the mortgages on their homes paid off before they leave the work force. If that’s you, the changes to the mortgage interest deduction rules, by themselves, shouldn’t affect you. Prior to the tax reform, married couples could deduct the interest they paid on mortgages that were less than $1,000,000. Under the tax reform, that mortgage limit is lowered to $750,000 – which means that individuals who have large mortgages may not be able to deduct as much of the interest as in the past. If you are retired, this change should not affect you unless you are planning to buy a new home in 2018 or later. If you do buy a new home and finance more than $750,000 (and you itemize) you will not be able to deduct as much as you would have prior to the tax reform.

Tax Reform and Miscellaneous Deductions

How about miscellaneous itemized deductions? The big ones for my clients are their investment account fees and, in some cases, employee business expenses, but includes smaller deductions such as tax preparation fees and safety deposit box fees. The new law temporarily repeals all of those, so if you itemize and have taken advantage of them in the past, the tax reform may hurt you in this area of your return.

Tax Reform and Charitable Contributions

What about charitable contributions? The tax reform will not affect charitable contributions at all. If you don’t itemize, your charitable contributions weren’t deductible in prior years and so nothing has changed for you. If you do qualify to itemize, contributions that you make to legitimate charities will still be deductible in 2018.

This leads me to my big finale! My theme throughout this post has been, “assuming that you qualify to itemize”. Even if you were able to itemize in the past, you may not need to itemize after the tax reform because the standard deduction (or, the amount that the government gives to everybody with no strings attached) has almost doubled. In 2017, the standard deduction for married couples filing jointly is $12,700 but in 2018 it will be $24,000. So even if you fall into one of the categories where you believe the tax reform might initially hurt you – for example, if you have a significant amount of investment account fees that are no longer deductible – it might be a moot point if the government is going to just give you more than what you would have gotten by itemizing anyway.

Confusing? You bet! So please bear with us during tax season as we try to sort this out!

Stop back soon!

-Jim

Learn how Jim Nabors saved $4.8 Million by marrying his husband.

Jim Nabors Saved $4.8 Million in Taxes By Marrying His Husband

Posted on by in Estate Tax, Income Tax and tagged , , , , , .

How Jim Nabors saved $4.8 Million in taxes by marrying his husband. Courtesy of PayTaxesLater.com

 

Jim Nabors: Actor, Singer, and Comedian

On November 30, 2017, Jim Nabors, perhaps most famous for his role as Gomer Pyle, died at the age of 87.  Jim is survived by his husband Stan Cadwallader, whom he married in 2013. Their marriage came one month after same-sex marriages became legal in Washington State.

It is quite eye-opening to look at the tax consequences of their decision to get married; Mr. Nabors died with a $13M estate.  The terms of his will are not public, but for the sake of argument let’s assume he left his estate to his husband. Because of the marriage, no Federal or Hawaiian estate or inheritance taxes are due at death because of the unlimited marital deduction.

Smart Estate Planning

If Jim and Stan had remained unmarried partners the payout to the Government would have been astronomical. A $3,000,000 payment in federal estate taxes alone is bad enough. A payment of over $1,800,000 in Hawaiian inheritance taxes would add a total of $4,800,000 in total taxes. These numbers don’t include the income taxes that will be saved because of the longer “stretch” a spouse receives on an inherited IRA or retirement plan.

The moral of the story is that for many life-long partners, gay or straight: Get Married for the Money.  Obviously the decision to marry hinges on more than whether marriage is a financially strategic move. But if you are simply avoiding the formalities, it might make sense to think about the long-term tax consequences on your financial security—for both you and your partner. Marriage is usually a big plus for purposes of Social Security, especially if one partner has a much stronger earnings record than the other partner.

More Information Is Always Available

For more information visit www.paytaxeslater.com. To schedule an appointment with Jim Lange, please call his office at 412-521-2732. You can always contact Jim at jim@paytaxeslater.com.

James Lange, CPA/Attorney of Lange Financial Group, LLC, is the author of several books on retirement and estate planning, including Live Gay, Retire Rich.  His books on retirement strategies have been endorsed by Charles Schwab, Larry King, Jane Bryant Quinn, Ed Slott, and many more.  He hosts a weekly financial show on KQV News Radio in Pittsburgh. PA.

 

The Essence of Lange’s Cascading Beneficiary Plan

Posted on by in Beneficiary Designations, Educational Resources, Inherited IRAs, IRAs, Lange’s Cascading Beneficiary Plan, Roth IRA, Stretch IRA and tagged , , .

The Essence of Lange's Cascading Beneficiary Plan

Learn how Lange’s Cascading Beneficiary Plan can help ease your worries for your family’s financial future.

Somewhat tongue-in-cheek, I refer to “Leave it to Beaver” families as the perfect candidates for the Lange Cascading Beneficiary Plan (LCPB). Just to be clear about what I mean by that, I am showing you a basic version of the family tree for that type of family. Blended families with children from different unions sometimes need to have estate planning with more complicated beneficiary designations. It is not that the LCBP cannot work, but it is not as straightforward. With that in mind, let’s look at the essence of Lange’s Cascading Beneficiary Plan.

Lange Cascading Beneficiary Plan example photo

It is important to think long-term with financial planning using the Lange Cascading Beneficiary Plan.

In previous content of the Lange Cascading Beneficiary Plan series, I have discussed the tax and long-term estate planning benefits of leaving your IRA and retirement accounts, when possible, to the youngest members of your extended family to get the longest stretch possible. Remember, keeping money in the tax-deferred environment (traditional IRAs and retirement plans) or the tax-free environment (Roth IRA etc.) for as long as possible works to your heirs’ advantage.

But, let’s be realistic. Even if you understand that the tax benefits are greater when you leave your IRA to your grandchildren, most couples want to ensure that their surviving spouse will be financially sound with enough discretionary money to lead a happy and fulfilling life. So, if we take that attitude, it might seem that the simplest and safest route is to simply leave all your money to your surviving spouse.

Or, you make some calculations and decide your surviving spouse will probably be fine with most of your IRA but some of it could go to the kids upon the first death. Maybe your plan works out perfectly, but maybe it doesn’t.  Let’s look at an example. You have a two-million-dollar IRA, and you think, based on future calculations that your spouse will only need about $1,500,000.

You could make your children the beneficiaries of $500,000 at your death. Conducting your estate planning in this manner could provide your children with some inheritance after the death of the first parent. It might be very useful to them, especially if they have children of their own that will be needing money for school or facing other monetary challenges associated with raising a family.

The financial market is in constant flux, keep that in mind when making plans.

That sounds like a great plan but what happens if the market takes a big dive? The two million you thought was going to be there has dropped to 1.5 million, and you have designated $500,000 of that to go to the children. Now, your surviving spouse has less money to live on, and you fail to meet your objective of providing for your spouse. That would be horrible. Divvying up an estate appropriately is one of the biggest hurdles of estate planning.

So, you go back to square one, and leave everything to your surviving spouse outright.  Down the road, your family will likely have to give up more in taxes. Furthermore, if changes in the tax code modify the advantages of the stretch IRA, you could potentially forfeit the tax advantages that might be offered to compensate a bit for the loss. There was talk, for instance, of allowing $450,000 of an Inherited IRA to be stretched over a lifetime, and this exemption allowance would be available to both spouses.

If your estate planning leaves everything to your spouse, you forfeit one $450,000 exemption. Whereas, if the first spouse to die leaves $450,000 to the kids (giving them the advantage of the stretch), then when the second spouse dies, the children can take advantage of the second exclusion and stretch another $450,000. That is a big difference.

This is why the Lange Cascading Beneficiary Plan is right for you.

What we come back to time and again, is that we don’t have a crystal ball that allows us to plan for the future with any confidence that we are making decisions that will be appropriate for the circumstances at that time. That is precisely why the LCBP is so effective. You can draft the documents in such a way that your surviving spouse (with the help of an advisor and perhaps the grown children) can make good decisions about allocating the estate that are both tax-savvy and in the best interest of the family.

Picking up on our previous example where the stock market took a dive and there is less money overall for the surviving spouse. Under the terms of the LCBP, he or she could say, “Hey, I’d love to help the kids out, but I need all the money.” End of story, surviving spouse just keeps everything and we get a good result.

The essence of the LCBP will put you at ease.

Alternatively the surviving spouse has more than enough money for long-term security and a comfortable lifestyle, so he or she decides that money should go to the kids. So, with the cascade in place, divided among the children equally, and with disclaimers available, the surviving parent can look at each child’s situation and help them in the way that makes the most sense. Perhaps one child has a bright financial future, and it would make more sense to pass money onto their children (the grandchildren). In that instance, the first child could disclaim their portion directly to their children via well-drafted trusts.

Second child would love to do the same, but actually, he or she could use the money.  So, he or she accepts the inheritance, and does not disclaim to his or her children. Flexibility works. And, a further advantage is that none of these decisions must be made quickly. The family has nine months after the first death to finalize all decisions. A little breathing room after a crisis can be very welcome.

With documents that offer flexibility, you don’t have to predict the future to provide for your family in a way that makes sense for the time. Lange’s Cascading Beneficiary Plan allows for terrific post-mortem planning that can make an enormous difference for the family.

Next week, we will examine estate planning with the potential $450,000 exclusion in more detail.

See you soon!

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