How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning

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Blog Post 'How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning by Matt Schwartz featured on PayTaxesLater.com

How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning

On March 25th, Senator Sanders and Senator Whitehouse presented in the Senate Budget Committee an initial draft of the “For the 99.5 Percent Act” which will have a significant impact on estate planning going forward. There are still a lot of specifics to be determined through the political process but understanding the blueprint of the Act is crucial to determining what actions to consider in 2021 before the 2022 effective date of any new estate tax legislation.

Federal Estate Tax Exemption Amount Adjustment:

Currently, the federal estate tax exemption amount is $11,700,000 per person or $23,400,000 per married couple and is adjusted each year for inflation. The proposed federal estate tax exemption would be reduced to $3,500,000 per person or $7,000,000 per married couple adjusted each year for inflation. Policy experts in Washington DC think it is more likely that the exemption will drop by 50% to $5,850,000 with any unused federal estate tax exemption remaining portable from the deceased spouse to the surviving spouse.

Federal Gift and Estate Tax Rates:

The proposed rates under the proposed Act are 45% between $3,500,000 and $10,000,000, 50% from $10,000,000 to $50,000,000, 55% from $50,000,000 to $1,000,000,000 and 65% on any amount above $1,000,000,000.

Federal Gift Tax Exemption Amount Adjustment:

Since 2011, the federal gift tax exemption has been unified with the federal estate tax exemption. The proposed Act would reduce the federal gift tax exemption to $1,000,000. Although policy experts believe that it is likely that the gift tax exemption will remain unified with the federal estate tax exemption, this development is something to watch closely in the proposed legislation.

Annual Exclusion Gift Adjustment:

The proposed Act reduces the annual exclusion from $15,000 per year (adjusted for inflation) to $10,000 per year (to be adjusted for inflation) and reduces the exemption to all restricted gifts in a year to $20,000 per year such as gifts to trusts or other gifts with limitations.

Limitations on Dynasty Trusts:

Multi-generation trusts created after the effective date of the proposed Act (currently, that date would be January 1, 2022, if legislation is passed in 2021) would only be allowed to last fifty years. Pre-existing trusts would have to be terminated fifty years after the enactment of the act.

Limitations on Irrevocable Trusts for Estate Planning Purposes that Qualify for Step up in Basis Treatment:

The proposed Act is seeking to eliminate the opportunity of creating the power to have a step-up in basis on an irrevocable trust for a beneficiary which means that there would be significant capital gain exposure on long-term trust accounts.

Estate Planning Action Steps

  • Make annual exclusion gifts to the beneficiaries of your estate if you have the means to do so. If outright gifts will not be effective, consider gifts in trust that can be controlled by a trusted family member.

  • Consider making credit-consuming gifts above the annual exclusion. Large gifts made now above the future exemption will not be clawed back (taxed again at your death) even if the federal estate tax exemption at the time of your death is less than your lifetime use of the exemption.

  • Develop a flexible estate plan in 2021 without mandatory trusts that have a proactive giving bent to maximize current tax benefits while they still exist.

  • Consider second-to-die life insurance with long-term trusts for family members (if appropriate) to maximize long-term tax-free money to the family while these opportunities still exist.

  • With the additional likelihood of higher income tax rates in 2022 and beyond for some taxpayers, consider Roth IRA conversions and other means to accelerate income in 2021.

  • Have a discussion with your Lange Legal Group attorney in 2021 to put a plan in place now that will maximize your protection against these pending law changes.


    • Although it is likely that the final federal estate tax act that Congress passes will be different than the “For the 99.5 Percent Act”, it is critical not to bury your head in the sand with regard to your estate plan and to act this year. Federal estate tax changes will most likely be in effect for 2022 so now is the time to contact us to revisit or to develop your estate plan and wealth transfer plan.

    Fortunately, there is light at the end of the tunnel for COVID-19 but the light in the tunnel may be dimming for proactive estate planning. We look forward to hearing from you.

    For more information, send an email to Matt by clicking the button below.

    Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

    Optimizing Your Estate Plan Now in the Event of a Biden Presidency and a Democratic Congress

    Posted on by in Beneficiary Designations, Current Events, Economy, Estate Planning, Retirement Planning and tagged , , .

    Optimizing Your Estate Plan Now in the Event of a Biden Presidency and a Democratic Congress

    by: Matt Schwartz, Esq.

    Image featured in a blog post by Matt Schwartz, Esq on PayTaxesLater.comAs the 2020 election approaches, a frequent question that I receive as an estate planner is what should I be doing now to maximize what I leave to my family as an inheritance.

    One can reasonably assume that if Trump is reelected or the Senate remains Republican that there will unlikely be any sizable tax increases over the next four years.  However, what if Biden is elected and both the House and Senate are Democratic?  In that scenario, it is likely that the estate tax exemption returns to $5,000,000 adjusted for inflation per person and that the step-up in basis rules on appreciated assets will be repealed with immediate recognition of capital gain at the time of the taxpayer’s passing.  In addition, the maximum personal income tax rate will rise to 39.6% on income over $400,000 with capital gains being subject to ordinary income tax rates of 39.6% on income (including the capital gain) over $1,000,000.

    What can I do now to be safe no matter what happens in the election?

    Consider Recognizing Some Capital Gains Now: Over the years many people have ignored sound economic theory regarding diversification of your financial portfolio because of the extremely adverse tax consequences of capital gain recognition when such capital gain could be forgiven at the time of death.  Perhaps this thinking needs to be reevaluated.  With today’s current low income and capital gains tax rates, perhaps it makes sense to recognize $50,000 to $100,000 of unrealized appreciation through a capital gain if the federal income tax is 15% (or 20% depending on your other income).  For some families, it may make sense to recognize significantly more at 20% if you are looking at a future prospect of having some of this income be recognized at 39.6% at the time of death.  The prospect of recognition of the capital gains tax on the transfer of appreciated assets (especially less liquid appreciated assets such as business interests and commercial real estate) when most of the other assets to pay the tax are retirement assets could be draconian.

    Consider Second-to-Die Life Insurance: In recent years, I have been less of a fan of second-to-die life insurance based on the high federal estate tax exemption.  However, life insurance (probably ideal to get before 70 if you are a couple) could be a great asset (income tax-free) to cover the tax that will be due on the transfer of appreciated assets at death where the primary assets remaining to pay this tax in many estates could be retirement assets that are subject to income tax upon withdrawal. 

    Consider Transferring Some Appreciated Assets to Lower Income Family Members Now: Traditionally, we have recommended transferring appreciated assets to individuals who are in low tax brackets so that they can recognize the gain with little or no tax consequence.  In addition, to continue transferring a modest amount of appreciated assets to lower-income family members to keep their income down on the recognition of the capital gain, you may want to consider transferring more to them if they can recognize it at current favorable 15%-20% rates compared to having to recognize it at the time of your death at a possible 39.6% rate.

    Consider Transferring Appreciated Assets to Charity: It is always a good idea to fund a gift with highly appreciated assets as long as the gift is large enough to be deducted as an itemized deduction.  It will make even more sense to transfer highly appreciated assets to charity if Biden becomes President and both houses of Congress are Democratic.

    Consider Roth IRA Conversions Particularly if you are currently Married: We are seeing more and more widows and widowers in the 32% bracket or higher so considering Roth IRA conversions while you are still married to maximize the 24% bracket is a good planning strategy.

    The first of these four ideas is a relatively new idea for consideration in light of the understanding of many estate planners including myself that the step-up in basis was a permanent part of the tax law.  So, I would wait until after we know the outcome of the election to act too aggressively on recognizing capital gains.  However, all of the other ideas are good tax, retirement, and estate planning ideas to consider now irrespective of the outcome of the election and I would act on those sooner than later if they are a good fit for your situation.

    Please do not hesitate to send me an email to matt@paytaxeslater.com or give me a call at (412) 521-2732 if you are interested in having a further discussion on these topics or any other retirement and estate planning topics.

     

    The Defenses Against the SECURE Act

    Posted on by in Beneficiary Designations, Current Events, Economy, Estate Planning, IRAs, Retirement Plan Options, Retirement Planning, 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, Current Events, Estate Planning, Estate Tax, Government Programs, Income Tax, Inherited IRAs, IRAs, Retirement Plan Options, Retirement Planning, 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.

    Pages: 1 2

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

    Posted on by in Beneficiary Designations, Current Events, Economy, Estate Planning, 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.

    What Happens If You Don’t Have A Will?

    Posted on by in Beneficiary Designations, Estate Planning, Lange’s Cascading Beneficiary Plan and tagged , , , , , , , , .

    New Blog by Lead Estate Attorney Matt Schwartz of the Lange Financial Group

    Other than getting a tooth pulled, most people would tell you that there are few things that are as unpleasant to them as talking about their future death and wills. Death is an emotional and difficult topic for many people because it forces them to assess their legacy and their life purpose. So what happens if you don’t have a will?

    How Are My Assets Distributed at My Death?

    To help clients get over their discomfort of discussing their mortality, I explain to clients what will happen if they do not have a Will. Certain assets such as retirement accounts, life insurance policies and joint accounts pass to the successor owner irrespective of whether you have a Will. All other assets that do not have a joint owner or a beneficiary designation would be distributed in accordance with Pennsylvania intestacy law if you pass away without a Will. Examples of such assets are individually owned real estate and individual financial accounts without beneficiary designations.

    Who Controls the Distribution of my Assets? Advice from an Estate Attorney

    If you are married, it is quite possible that all of your assets are either jointly owned with your spouse or will pass to your spouse by beneficiary designation. If so, it will not be necessary to use a Will to transfer any assets at the first spouse’s death because all of the assets will pass to the surviving spouse independent of any Will. However, if assets are individually owned without a beneficiary designation, then the distribution of those assets will not be permitted until an administrator is appointed for the estate. Although the initial choice for administrator would be the spouse, how will the children decide who should be administrator if your spouse predeceases you or does not have capacity to serve as administrator? Will a majority of the children agree on one of them to serve as administrator?

    Who Receives My Assets if I Don’t Have a Will?

    Finally, how are individually owned assets without a beneficiary designation distributed if you do not have a Will? Contrary to what most people think, the individually owned assets will be split at the first spouse’s death between the spouse and the children. The surviving spouse is already upset enough about losing their spouse. Finding out that they might not inherit all of the assets of their spouse (this result can be common with families that own real estate or closely held businesses) only adds insult to injury for these surviving spouses.

    In future blog articles, we will focus on positive benefits of having a Will. Please do not hesitate to send me an email or give me a call at 412-521-2732 x211 if you would like to have a discussion to revisit your current Will or to develop an initial Will.

    Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

    The Essence of Lange’s Cascading Beneficiary Plan

    Posted on by in Beneficiary Designations, 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/.

    The Incredible Tax Advantage of Young Beneficiaries

    Posted on by in Beneficiary Designations, Estate Planning, Lange’s Cascading Beneficiary Plan, QTIP Trusts, Stretch IRA and tagged , , , , , .

    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 https://paytaxeslater.com/estate-planning/.

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

    Posted on by in Beneficiary Designations, Estate Planning, Lange’s Cascading Beneficiary Plan, Video Resources and tagged , , , , , .

    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 https://paytaxeslater.com/estate-planning/.

    The Best & Most Flexible Solution for Your Estate Planning Concerns: Lange’s Cascading Beneficiary Plan

    Posted on by in Beneficiary Designations, Estate Planning, Lange’s Cascading Beneficiary Plan, Retirement Plan Options, Retirement Planning and tagged , , , , , , , .

    The Ultimate in Flexible Estate Planning:
    Lange’s Cascading Beneficiary Plan

    The Ultimate in Flexible Estate Planning: Lange's Cascading Beneficiary Plan

    This post is the first of series on Lange’s Cascading Beneficiary Plan, the gold standard in estate planning for traditional married couples.

    What is Lange’s Cascading Beneficiary Plan?

    Estate planning would be so much easier if we just had a crystal ball. We simply cannot predict the future with much confidence. And the unknowns stretch beyond the plan rules, tax laws, and the investment environment. Family and financial circumstances can change dramatically over time as well. So we are faced with questions like: How much money will you have? How much money will you need? How many grandchildren will you have? Who will live the longest?  An estate plan that is intricately thought through and seems in-line with your testamentary intent today could be completely inappropriate once you die.

    In the early nineties, I began thinking creatively about this problem. My objective was to revolutionize my firm’s estate planning practice by drafting documents that could accommodate changing circumstances—the key, as I saw it, would be flexibility within a reasonable set of assumptions. Lange’s Cascading Beneficiary Plan, as it came to be called, uses specific language and disclaimers to provide the most flexibility when it is needed the most—at the time of the death of the first spouse when the surviving spouse and the family have the most current picture of their finances and family dynamics.  We were aiming for less guess work decades in advance!

    I thought it was the best thing since sliced bread!  And it turns out, I wasn’t alone.  Not only did my estate planning clients love the idea of giving the surviving spouse the option to make important financial decisions at the time of the first death, Jane Bryant Quinn did too.  She picked up on it through an article I wrote and sent out to my email list.  She first published a description of Lange’s Cascading Beneficiary Plan in Newsweek and from there, it has been featured in dozens of major publications like The Wall Street Journal and Kiplinger’s.  The plan is also featured in my flagship book, Retire Secure!, along with other nuggets of my best retirement and estate planning recommendations.  (By the way, you can download a free copy of the book from www.paytaxeslater.com/books or buy it on Amazon if you’d like a hard copy)!

    We have been drafting this type of plan now for more than 25 years.  It works beautifully with our other cutting-edge strategies including stretch IRAs, Roth IRA conversions, and inventive gifting plans. Clients are happy knowing they have flexibility built into their plans, and sadly, but realistically, we have had to execute many plans over the years.  Fortunately, we have also been there to witness the peace of mind that the surviving spouse and heirs get from knowing they are making the best decisions possible given the circumstances.

    What to expect in this series:

    Over the next few weeks, I am going to spell out the details of Lange’s Cascading Beneficiary Plan.  Sure, I might slip in a current event post or two, but I am going to focus on providing you with a full understanding of what I truly believe to be the best in estate planning for traditional married couples.  I’ll explain which situations LCBP is best suited for, walk you step-by-step though the decision making, discuss how it can be adjusted to fit almost any situation to provide the greatest flexibility and tax savings, and tell you why flexibility will be more important than ever.

    Let’s face it, tax changes are coming in our near future, but they will also inevitably change again in the more distant future. That is the nature of the beast. So, having a plan that can adjust to changes, that doesn’t fix things in stone, can give you a measure of comfort that you won’t end up with estate planning documents that have to be redrafted with every single change!  In my opinion, one of the best things you can do for your family is to develop a smart and flexible estate plan that saves them from additional stress and anxiety when you are gone.

    Thanks for reading, as always, and stop back soon!

    -Jim

    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/.