What the Scaife Case Teaches Us: Using a Bank or a Lawyer as a Trustee doesn’t Guarantee Proper Fiduciary Care

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5MU0KKFTThe late Richard Mellon Scaife. The trust at the center of the litigation was created in 1935 by his mother, Sarah Mellon Scaife. (Photo Courtesy of Tony Tye/Post-Gazette)

http://www.post-gazette.com/local/2015/01/15/Scaife-children/stories/201501150289

On January 15, 2015 the Pittsburgh Post-Gazette ran an article (Scaife children seek details on drained trust) outlining an ongoing court case between the children of Richard Mellon Scaife and the trustees of their grandmother’s trust. The trust was set up in 1935 by the children’s grandmother for the benefit of Richard Mellon Scaife, but apparently language in the document also suggested that some of the principal should be saved for R.M. Scaife’s children. When Mr. Scaife died in July of 2014, Jeannie Scaife and David N. Scaife found that the fund that had contained $210 million dollars in 2005 was now completely drained. They allege that the trustees for the account allowed and even encouraged inappropriate spending from the fund by the late Mr. Scaife.

This case offers a vivid illustration of a point that Pittsburgh CPA, James Lange, has been sharing with his clients for more than 30 years: Trusts are wonderful vehicles to protect and provide for your family for generations, but choosing the right trustees makes all the difference. Creating trusts with banks and lawyers as trustees, even after paying the enormous fees, doesn’t guarantee appropriate fiduciary care.

Lange insists that the moral of the story, no matter how the case turns out, is that most people, even billionaires, will usually be better off with reliable family members as trustees. The family members can hire accountants, attorneys, and money managers to help them manage and maintain the trust. If those people aren’t appropriate or fulfilling their duties properly they can be fired, but control is retained by the family instead of bankers and lawyers whose first duty might not be to your family’s legacy.

If you need help with your financial planning contact us at (800) 387-1129 or (412) 521-2732.

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One Key to Financial Planning… a Roth IRA Conversion

Posted on by in 401(k), 403(b), Beneficiary Designations, Educational Resources, IRAs, Roth IRA, Roth IRA Conversions, Traditional IRA and tagged , , , , .

Roth IRA Conversion, James Lange, Lange Financial Group, LLCIf you’re approaching retirement, you might want to consider a Roth IRA conversion. A recent change to tax laws allows for the conversion to Roth IRAs, 401(k)s, and 403(b)s to gain enhanced benefits. For one, the changes made in 2010 have no income cap for Roth IRA accounts. Previously, only incomes of $100,000 were eligible for conversion.

If you’re still not sure, consider these factors that can help lead your family to financial stability.

For the most part, Roth IRAs grow incometax free. Additionally, owners are not required to take distributions at age 70 ½. Roth IRAs grow continuously as long as you or your grandchildren own it; whereas, regular IRAs are tax-deferred. The growth and investment are both taxed when money is withdrawn.

With the income cap of $100,000 gone, the Roth IRA becomes all the more appealing for retirees. At least a partial conversion is recommended, though the converted amount will require tax payment. However, as long as the conversion is strategic, your family can reap the long-term benefits. For example, converting $100,000 today can put you over $51,000 ahead in the next
20 years.

If tax rates increase, the conversion to Roth IRA sees the benefits, because conversion at a lower tax can help cut back taxable income as rates increase. While you’re planning a financial future for your loved ones, keep in mind that your living will and trust don’t necessarily establish who will inherit your IRAs, Roth IRAs, and retirement plans. Specify your IRA and retirement plan beneficiaries. For those still unconvinced, Lange Financial Group makes a limited number of free consultations available to Western PA residents. Because each case is different, it’s important to run the numbers on a case-by-case basis to find a solution that best fits you. If you want to further discuss the benefits of Roth IRA conversions, call Alice Davis, our Client Services Coordinator, at 412-521-2732 to schedule an appointment.

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The Hazards of Naming Different Beneficiaries for Different Accounts

Posted on by in 401(k), 403(b), Beneficiary Designations, Educational Resources, Lange’s Cascading Beneficiary Plan and tagged , , .

It is quite common in my practice for clients to say they want one particular account to go to one beneficiary and a different account to another beneficiary. The accounts might reflect the relative proportionate value that the client wants each of the different beneficiaries to receive, but I think this can turn into a nightmare.

• You will have a terrible time trying to keep track of the different
distribution schedules.

• As the different investments go up or down, the amount going to the different heirs would also go up and down, which is probably not the intent.

• A beneficiary designation may say, “ I leave my Vanguard account to beneficiary B and my Schwab account to beneficiary A. ” If during your lifetime you switch or transfer money from Vanguard to Schwab, you have, in effect, changed who is going to get what, and that may not be your intention.

In general, I prefer one master beneficiary designation for all IRAs, retirement plans, 403(b)s, 401(k)s, and the like. In it I describe distributions as I would in a will or irrevocable or revocable trust. That way, we can avoid mistakes and simplify estate administration after the retirement plan owner dies.

I recognize that, for investment purposes, people use different accounts for different beneficiaries. For example, you might treat the investments of a grandchild beneficiary differently from those of a child or spouse. Under those circumstances I would be willing to bend and accept different beneficiaries for different accounts.

The one area where it might make sense to direct certain money to particular beneficiaries is FDIC insured deposits. At press time, the amount that the FDIC would insure rose from $ 100,000 to $ 250,000 through 2009. Assuming the money is outside the IRA (there are different protections for IRAs) one way to get more FDIC insurance is to have different beneficiaries with different paid on death designations. If you are a parent with four kids and you have four $ 250,000 CDs, you can do a pod account for each child and have the entire amount federally guaranteed. If the money was in an IRA, you are also insured up to $ 250,000 but you can ’ t get additional coverage by naming additional beneficiaries.

Retire Secure! Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition, James Lange, page. 271-272 https://paytaxeslater.com/

Mistake 4: Immediately rolling over the money from the decedent’s IRA over to the spouse’s IRA.

Posted on by in Beneficiary Designations, IRAs.

This is not usually a good idea until the entire finances of the deceased and the beneficiaries are reviewed in detail. I always recommend contacting the client’s CPA and estate attorney in order to determine whether or not there are going to be any estate tax issues. For example, it is possible that the surviving spouse would actually want to disclaim some or all of the IRA in order to reduce any unnecessary estate taxes.

In addition to this, if you roll over your spouse’s money into your name and you are under age 59 ½, you may have to pay a penalty if you need to take a distribution before you turn 59 ½. This is called the “Spousal Rollover Trap.”

One of the options you could take in these circumstances is to utilize section 72(t) of the Internal Revenue code and take out the money before age 59 ½ without paying a penalty by using “substantially equal payments.” However, if you are many years away from this date and if you leave money in the decedent’s IRA, then you can take out money from the decedent’s IRA without any restrictions at all!

As you can see, a surviving spouse must be careful to investigate all options before rolling over the decedent’s IRA into their own name.

 

Adapted from MD Producer Materials

Jim Lange in Kiplinger’s

Posted on by in Beneficiary Designations, Roth IRA, Roth IRA Conversions and tagged .

Roth IRAs and Roth IRA conversions have been Jim Lange’s passion for the past decade and Jim is always happy to spread the word to the media. Jim’s latest appearance in print can be found in this month’s (September 2009) Kiplinger’s Retirement Report (Leave Your Kids a Tax-free Legacy on page 18).

To show the wealth-building potential of a Roth IRA conversion, Jim gives an example involving two 65-year old fathers.  They are both in the 28% tax bracket and both have IRAs valued at $100,000.  To simplify the example, both dads also have $28,000 in a taxable account.

The first dad decides to make a Roth IRA conversion and pays $28,000 in taxes up front.  The second dad decides to stick to his traditional IRA and will pay taxes upon withdrawal.  In Jim’s example, both dads live another 20 years and leave their IRAs to their children.

Thirty years after their parents die, the Roth IRA child has $1.8 million in future dollars.  The traditional IRA child only has $980,000.  Why the big difference?  For starters, the Roth parent never had to take required minimum distributions and the entire amount was able to grow tax-free for all of those years.  The traditional dad had to take an RMD starting at age 70 1/2 resulting in the parent and child paying taxes on the RMD every year.

This analysis really becomes powerful when you realize that a tax-law change starting on January 1, 2010 will make all taxpayers eligible for a Roth IRA conversion, regardless of income.  Considering that many wealthy taxpayers will be able to convert much more than the $100,000 in the example, the potential benefits of a Roth IRA conversion could be even more dramatic.

In the same Kiplinger’s article, Jim also stresses the importance of the beneficiary designation of your IRA.  If you hope to have your heirs stretch this tax-free shalter for their lifetimes, it’s important to get the wording correct.  Non-spouse heirs cannot roll an inherited IRA into their own Roth IRA.  Instead, they must set up an inherited IRA and the name of the deceased must remain on the account.  Jim advises using language along the order of “inherited IRA of Joe Sr. for the benefit of Joe Jr.”.  The money must then be transferred directly into the new IRA.

Remember – we are less than four months away from the big tax-law change.  Make sure that you’re up-to-speed on the benefits of Roth IRAs and Roth IRA conversions.  For a more detailed comparison between traditional IRAs and Roth IRAs, we offer another of Jim’s articles on this website.  Go to the homepage, click on articles and then click on Roth: Four Little Letters Lead to Long-term Financial Security.

As always, our excellent professional staff is available to help you with a complete Roth IRA analysis.  Get more details by calling our office at 800-387-1129.