Tax Planning Opportunities During Coronavirus

Posted on March 31, 2020 by Matt Schwartz in Current Events, Economy, Income Tax, Roth IRA, Roth IRA Conversions, Tax-Loss Harvesting, Trusts.

Article by Matt Schwartz

Two months ago if you’d told me that in a matter of weeks I’d be walking two miles each way to an ATM to deposit a check or walking a mile and a half round trip to the nearest post office box to put a letter in the mail, I would have questioned your sanity or asked you what planet you live on. But this is the reality of Coronavirus and the way it has totally upended our daily lives. At the same time, on these treks to the ATM or the post office box I have connected with neighbors, Mt. Lebanon professional colleagues and potential clients whom I would not have seen but for my walks. Of course, we always make sure to maintain a safe social distance during these impromptu catch-up sessions.

I have really enjoyed these interactions with fellow community members and they have reinforced my belief that connecting with friends, colleagues, and clients is particularly important during this period of social distancing. For our firm, this means finding methods of communication that can be used in place of in-person meetings. I’ve been reaching out to a number of clients by email, Facetime, telephone and even social distance signings at their homes by viewing clients signing in their garages or on their porches.

All of these discussions begin in a similar fashion with me asking the clients how they are doing and feeling very reassured when they tell me that they are doing OK. No one is doing great, but we are all in this together trying to figure things out one day at a time. Once we check in with each other, since clients always want to make sure my family is doing OK too, they ask me what planning opportunities that they should be considering right now.

Here are a few of the strategies I often recommend:

• Roth IRA Conversions – My wife, Beth, completed a Roth IRA conversion about a week and a half ago by making an in-kind transfer of all of the positions in her rollover IRA to her Roth IRA. She did not have to realize a loss by selling positions in her IRA, and she was able just to transfer the funds directly into the Roth IRA. This year clients will have additional opportunities to make larger Roth IRA conversions because of the recently passed Coronavirus, Aid, Relief and Economic Security Act or “CARES Act” (we only get acronyms like this from Congress) waives the requirement for clients to take required minimum distributions from qualified plans. This includes those that were inherited before 2020, whether they are inherited Roth IRAs or inherited traditional IRAs. If you are interested in utilizing this strategy this year, I recommend that you consult with one of the CPAs at Lange Accounting Group who can develop a Roth IRA conversion masterplan for you.

• Tax Loss Harvesting – With the volatility in the market, there are opportunities to recognize losses to offset remaining gains in equities, while buying a similar enough equity to get around the 30-day wash rules which prohibit you from buying back the same exact investment within 30 days. We recommend that you consult with your financial advisor on how you can best pursue this strategy.

• Charitable Giving – With the increased need in the community, the CARES Act allows those who can afford to do so to make cash contributions to public charities up to 100% of their adjusted gross income rather than 60%. Most of us do not have enough savings to be able to afford to do that. But the broader point is that we should consider charitable giving to the extent that we can afford to do so and perhaps even consider bunching (giving more than you normally would so that you can itemize the deductions and help the charities now).

I am confident that we will survive Coronavirus, and the economy will eventually get back on its feet. I also appreciate how difficult a time this is for all of us. At the same time, I encourage you to take advantage of these opportunities before the market really starts to recover.

Best wishes to all of you for what I hope is continued good health. I am looking forward to the time that we can meet again in person.

Best wishes,

Matt

The Devil is in the Details – Understanding Annuities

Posted on March 7, 2019 by Matt Schwartz in Trusts and tagged Trust.

What is an Annuity?

Recently, I was consulting with a client who owned several nonqualified annuities. A nonqualified annuity is an investment where an individual invests after-tax dollars with an annuity company in exchange for lifetime income guarantees and deferred taxes on any growth earned during the time that the assets are owned by the annuity. Usually, the costs of these annuities to individual investors are the significant commissions to the people who sell these annuities. Despite these commissions, nonqualified annuities are a common way for investors to save additional taxes when they have already maxed out the opportunities to save taxes through qualified plans and Roth IRAs.

Ownership of an Annuity by a Trust

What was unusual about this client’s situation was that the annuity was owned by the spouse’s Revocable Living Trust rather than by the annuitant. I believe the reason this form of ownership was recommended to them at the time they purchased the annuity was to have the proceeds of the annuity paid to the spouse’s Revocable Living Trust so that the proceeds would avoid probate at the surviving spouse’s death. If the annuity is owned by a Trust, then the proceeds will be paid to the Trust.

Although this ownership arrangement accomplishes the goal of avoiding probate on these assets at both spouse’s death, it took away a very important opportunity for the surviving spouse. Not only did the surviving spouse lose the opportunity to take advantage of the spousal continuation benefit to continue the tax deferral on the growth in the annuity until advanced age (90 under most policies) or death, but more importantly the annuity had to be fully liquidated within five years as a lump sum distribution (one distribution) meaning that the spouse had to recognize all of the deferred income from the annuity at one time. Since these annuities had several hundred thousand dollars of deferred income, the immediate taxation to a surviving spouse would have been significant (would have likely be over $100,000 in this particular case) which would have substantially reduced the initial benefit of deferring the taxes.

Ownership of an Annuity by an Individual

A better alternative is to have these policies owned by the annuitant and name the spouse as the primary beneficiary and a trust, if appropriate, as a successor beneficiary. Naming the spouse as the primary beneficiary allows the spouse in most cases to continue the tax deferral of the annuity which is normally advantageous. If the spouse chooses not to continue the annuity, he or she can choose to put the proceeds in their Revocable Trust (if they created one) or name a beneficiary on the account where they invest the proceeds (not what we normally recommend because of limited distribution options). Although we would likely recommend that the spouse continue the annuity in many circumstances, it is good for the surviving spouse to have options.

Should the Beneficiary of an Annuity be a Trust or an Individual?

The more interesting question is the successor beneficiary of the annuity. Some companies will permit a Revocable Trust to be a beneficiary and allow the individual beneficiaries of the trust to stretch out the proceeds over their lifetimes. However, most annuities require a five-year payout of the annuity to the trust (many of these distributions must be one-time distributions of the entire annuity within five years). For a trust with a subtrust for a spendthrift or special needs beneficiary, this immediate taxation can add insult to injury by forcing much of this taxation to be at the 37% maximum federal income tax rate.

In certain situations, liquidation of an annuity as a lump sum distribution may need to be considered by a beneficiary if the distribution options are limited to life income options which involve the risk of a loss of principal if the beneficiary does not live to his or her life expectancy.

Conclusion

It is crucial to have the right owner and beneficiary of a nonqualified annuity. To know the optimal owner and beneficiary, it is important to ask the right questions about the annuity. The attorneys at Lange Legal Group, LLC are trained to analyze these annuities and ask the right questions on your behalf. Please do not hesitate to reach out to Matt Schwartz, Esq., if you have questions about the ownership and beneficiary options of these annuities or other estate planning questions.

Planning For The End: Why Your Will Is Important by Matt Schwartz

Posted on July 12, 2018 by Matt Schwartz in QTIP Trusts and tagged Estate Planning Attorney, Life Insurance, Pittsburgh PA, Wills.

Image used for Pay Taxes Later blog. Blog post written by Matt Schwartz

Why Have a Will?

Perhaps one of the most common answers to the above question is that a responsible adult should have a Will. However, the benefits of a Will go far beyond satisfying an internal sense of responsibility to your family and loved ones.

Some of the benefits of a Will are expected. Perhaps the most common benefits that come to mind are the opportunity to state who should be in charge of the distribution of your probate assets (it is important to remember that Wills do not govern the distribution of joint assets or assets such as retirement plans and life insurance that pass by beneficiary designation) and how should those assets be distributed to a beneficiary (outright or in trust). Beyond those common benefits are the opportunities to address subtleties such as which beneficiaries should pay the inheritance taxes due on the transfer of your assets. Should those taxes be paid by the residuary beneficiary even if assets are being distributed as specific bequests to friends whom will likely pay inheritance tax at a higher rate than the residuary beneficiary (that is at least commonly the case in Pennsylvania). Additional considerations include determining which assets should be distributed to which beneficiaries. For example, a Roth IRA should never be distributed to a charity and it is far better to use a traditional IRA or retirement plan to fund a charitable bequest than funding that charitable bequest with after-tax assets under a Will.

Preparing or Updating a Will Should Give You Peace of Mind

Despite the above stated positive benefits of a Will, I believe the best benefits of preparing a Will are organizing your affairs. The exercise of preparing a Will should force you to do a formal inventory of your assets and cause you to ask questions such as Am I on track for retirement?, Will my assets last for my lifetime?, How do I want to be remembered? Would my loved ones be able to continue my investment philosophy if I pass away? Could my loved ones find all of my important papers and, if they can, would they know whom to contact first to take care of the administration of my estate?
When we complete estate plans at our office, our goal is not nearly to document your wishes but rather to leave detailed instructions to leave your family prepared to handle the distribution of your assets and to give you peace of mind. Why go through the hassle of meeting with an attorney, sharing some of your most private thoughts and thinking about your mortality if you cannot have true peace of mind as an outcome?

Call me to discuss, revisit, or develop your Will at 412-521-2732 x211 or:

Best wishes,

Matt Schwartz

The Incredible Tax Advantage of Young Beneficiaries

Posted on October 31, 2017 by James Lange in Beneficiary Designations, Estate Planning, Lange’s Cascading Beneficiary Plan, QTIP Trusts, Stretch IRA and tagged Beneficiary Designations, estate plan, Estate Planning, Lange's Cascading Beneficiary Plan, Wills, wills and trusts.

Let’s Talk About Your Kids:
The Advantage of Estate Planning with 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/.

Special Alert About the Equifax Data Breach

Posted on September 25, 2017 by James Lange in Current Events, Data Breach, Economy, Financial Scandals, Identity Theft, Market News, QTIP Trusts and tagged Data Breach, Equifax, Indentity Theft.

The Equifax Data Breach:
All You Need To Know

The Equifax Data Breach – What Should You Do

The recent data breach at Equifax has sparked a lot of discussion about how vulnerable the personal information of all Americans may be to theft. Is there anything you can do to protect yourself in our computer-driven society? While the Equifax hack was by far the largest in history, it’s not the first and will not be the last. In 2017 alone, Verizon, Blue Cross Blue Shield/Anthem, Dun and Bradstreet, Chipotle, Washington State University, and even the IRS have discovered that they’ve been hacked – exposing the personal information of millions of Americans to thieves. The breach at Equifax was so far-reaching that several corporate officers have retired, and many on Capitol Hill are calling for a complete investigation. With over 143 million Americans at risk of being involved in this massive breach, you could very easily be affected.

What You Can Do If Your Information Has Been Compromised

So what can you do to protect yourself? You probably know that Equifax has set up a website where you can check to see if your number has been exposed. If your information was exposed in the breach, you can get free credit monitoring for one year. In my opinion, that’s like closing the barn door after the horse has gotten out. They’re happy to let you know that someone has opened up a fraudulent account in your name, but it’s still up to you to clean up the mess if they do! And what happens when your year of free credit monitoring is over? If you don’t pay for credit monitoring every year for the rest of your life, you may never know if someone is using your identity at some point down the road.

What Does Freezing Your Credit Report Do?

Some experts are recommending that you place a freeze on your credit files. A freeze prevents lenders from even accessing your credit report. The advantage to freezing your file is that, if they do not know your credit history, lenders will not offer credit to a thief who is trying to use your identity. What are the disadvantages of freezing your credit files? First, it’s not an easy process. There are three major credit reporting bureaus, and you will have to place three separate freezes. You can do so by using these links:

Equifax freeze

Transunion freeze

Experian freeze

If you are a Pennsylvania resident, the law permits the credit bureau to charge you $10 to freeze your file. Equifax has agreed to waive their fee, but only after public pressure.

Unfortunately, the data breach at Equifax has caused all three credit reporting agencies to be overwhelmed with requests to freeze accounts. Many consumers are complaining that they can’t even get into the websites or if they do get in, that the site crashes after they fill out the application form. If you have not already frozen your account, you may have a better chance of getting through if you try before 7:00 a.m., or after 11:00 p.m. Another disadvantage of freezing your credit files is that if you need to apply for credit yourself – for a car loan, a home equity loan or even a medical credit card – you must first remove the freeze from your files. You will need a PIN number to remove the freeze and, if you lose your PIN number, you will be facing a time-consuming and difficult process to get another one.

The Equifax Data Breach and Your Tax Return

Opening phony credit accounts in your name, unfortunately, could be just the tip of the iceberg. The Internal Revenue Service (IRS), which has issued more than $20 billion in fraudulent tax refunds over the past few years, could be plundered unless there is intervention by Congress. By law, the IRS must process your tax return within a specified period – generally 45 days – or they have to pay you interest on your refund. To meet those guidelines, they’ve adopted a “pay first, ask questions later” philosophy. In our practice, it’s not uncommon to see a client get a tax refund check and then an audit notice a year later! The IRS’s system requires little more than a name, date of birth and Social Security number to process tax returns – information which was exposed in the Equifax data breach – and they accept returns as soon as January 1st. On the other hand, employers aren’t required to submit updated employment information to the IRS until March. By that time, about half of all of the refund checks have already been issued!

Protecting Yourself After the Equifax Hack

So what can you do to protect yourself? If you don’t want to freeze your credit files, then you should be checking your credit reports regularly for fraudulent activity. Most of the major credit card companies allow you to request that you be notified if a charge is processed on your account that exceeds a certain dollar amount. You should consider placing an alert for an amount that exceeds your normal spending threshold. If you are traditionally a procrastinator when it comes to filing your tax return, don’t wait – get it filed as soon as possible. Even if you owe, you don’t have to pay the IRS until April 15^th. If you have any credit card debt, get it paid off. Financial institutions that fall victim to fraudsters because of the Equifax data breach will have to pass the cost of their losses on to their customers – and you don’t want to be one of the unlucky ones footing the bill.

Last but not least – whatever you do to protect yourself, make sure that you do the same for those who might not, including children and elderly parents!

Stay safe out there!

Jim

Stop the Sneaky Tax!

Posted on September 6, 2017 by James Lange in Beneficiary Designations, Inherited IRAs, QTIP Trusts, Retirement Plan Options, Roth IRA Conversions, Stretch IRA and tagged death of the stretch ira, end of the stretch ira, inherited ira, James Lange, new ira laws, new ira rules, Retirement, Roth IRA, Roth IRA Conversion, Save Our Stretch IRA, Sneaky Tax, Stop the Sneaky Tax, stretch ira, stretch ira changes, stretch ira rules, stretch roth ira.

It’s Time to Stop the Sneaky Tax!

Those of you who follow my blog know that I have been somewhat obsessed with the legislation that I call the Death of the Stretch IRA. If you’re new to my blog, please read some of the preceding posts – they’ll tell you just how much this legislation will cost IRA owners. The worst part of the Death of the Stretch IRA is that most beneficiaries (your children and grandchildren) won’t have a clue about how much of their inheritance they have lost to taxes. When they inherit your IRA after you die, your beneficiaries will suddenly have more money than they had before. Our government is counting on them to be content with their higher bank balance, and is hoping that they never notice that an enormous chunk of their inheritance ended up in Uncle Sam’s pockets before the remainder found its way to them. That’s what makes this tax so nefarious and, well, sneaky!

Our government has a lot of expensive problems right now – they’re looking to come up with a viable heath care system, build a wall on our southern border and I can’t even begin to imagine how much it will cost to repair the damage done by Hurricane Harvey. The Treasury doesn’t even have enough money to pay for their day-to-day operations, much less all of this – they’re going to be raising the debt ceiling next month! I’d bet my own IRA on the fact that the government is planning to include the Death of the Stretch IRA – and the $1 Trillion in revenue that it will generate – as part of an appropriations or budget action that will be voted on before the end of 2017.

You Can Help Stop the Sneaky Tax

If you are a loyal reader, you know that we have been writing our clients and friends to warn them about the sneaky tax, and working on solutions to minimize the damage that this legislation will do. Now it’s time to send a shot across their bow and tell the government that they’d better find their revenue someplace else besides your IRA. We are asking your help to start a grass-roots protest against the Sneaky Tax which would kill the stretch IRA—an incredibly useful estate planning tool. This new law would be so absolutely devastating to so many families across the country, our clients included, that we can’t just sit by and watch it happen.

Write Your Congressman Now

Please help us get the message to our legislators that we will not stand for them picking the pockets of our children and grandchildren. Please consider going to www.stopthesneakytax.com to add your name to the list of people who are unhappy with this proposed new law and send an email to your Congressmen asking them to say NO to the sneaky tax. You can also keep up to date with what is going on with this law by joining our new private Facebook group: SOS Save Our Stretch! Stop the Sneaky Tax! You can join the group by going to www.saveourstretch.com. For a limited time, joining the Facebook group will entitle you to a free Advance Reader Copy of Jim’s newest book – The 5 Greatest Tax-Saving Strategies for Protecting Your Family from the New Tax Law.

Sign our Petition to STOP Washington’s Planned Trillion Dollar IRA Sneaky Tax at www.stopthesneakytax.com.

Join our Facebook Group for breaking news and updates at www.saveourstretch.com.

And please forward this to everyone you know who has an IRA!

-Jim

Action you can take:
Forward this petition to all of your friends’
Join our Facebook Group and for a limited time get a FREE advanced reader copy of my upcoming book dedicated to stopping the sneaky tax.

You can view my previous posts on the Death of the Stretch IRA by clicking the links below;

Recharacterizing Roth IRA Conversions? – Your Ace in the Hole When the Death of the Stretch IRA Passes?

Posted on August 24, 2017 by James Lange in IRAs, QTIP Trusts, Roth 401(k), Roth IRA, Roth IRA Conversions, Stretch IRA and tagged death of the stretch ira, end of the stretch ira, Finance, Financial Advisor, inherited ira, James Lange, new ira laws, Retirement, risk, Roth IRA, Roth IRA Conversions, roth ira recharcterization, stretch ira, stretch ira 2017, stretch ira rules, stretch roth ira.

What Are The Risk of Roth IRA ReCharacterizations?

This post is the last in a series about how you might be able to use Roth IRA conversions as a defense against the Death of the Stretch IRA.

Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017.

How does a Roth IRA Conversion Work?

Suppose you have an IRA worth exactly $1 million, and that it happens to be invested equally in ten different mutual funds of $100,000 each. Then suppose we run the numbers for you and figure out that $100,000 is the optimal amount for you to convert to a Roth IRA. How does a Roth IRA Conversion work?

Well, one idea would be to start by ranking your funds according to how much you expect them to fluctuate in value. Maybe you are holding a portion of your IRA in Certificates of Deposit at your bank. Most people would expect that money to be “safer” because it generally doesn’t fluctuate in value. Then suppose you have a portion of your IRA invested in large cap stocks. You’ve noticed the value changing as the stock market moves up and down but, in your case, we’ll say this fund fluctuates an “average” amount compared to your other holdings. Then suppose that you also a portion of your IRA invested in small cap stocks, and that fund has been known to lose 20 percent of its value overnight. We’ll call that one the “riskiest.”

So which part of your IRA should you convert? You could convert the CDs or the ones that you consider to be the safest. Or you could convert the small cap stocks – the one you consider to be the riskiest. Maybe you’d like to convert part of each fund that you own. Let’s look at the possible outcomes.

You can certainly convert your CDs but, in my opinion, going through all that paperwork to avoid paying taxes on the one or two percent you’ve probably earned on them doesn’t seem worth the time or trouble. What about converting a little bit from each fund you own? I’d prefer that to converting the CDs, but it still seems like more work than necessary. What about your “riskiest” fund – the one that has the value that fluctuates wildly? Let’s assume that you converted $100,000 of that fund. What position might you be in a year down the road?

Well, suppose that fund doubles in value. You now have a Roth IRA worth $200,000 but you only had to pay tax on a $100,000 conversion. Good for you! But suppose the fund went down in value, and now you have a Roth IRA worth $50,000. Worse yet, you’ve paid $25,000 in income taxes, and now you’re really mad at me.

Recharacterize Your Roth IRA Conversion

Remember, as long as you act by the October tax deadline, you can recharacterize, or undo, your conversion. This flexibility can give you enormous peace of mind while you’re waiting for the details of the Death of the Stretch IRA to be finalized. A recharacterization will NOT get back the money your investment may have lost – you will need to wait for the market to come back up for that. What the recharacterization can do is get back the money you paid in income taxes, if the account goes down in value.

A Risk of Roth IRA Conversions

As beneficial as Roth IRA conversions and recharacterizations can be, there is always one risk I make clients aware of when discussing them. It has to do with the IRS itself. Have you ever known anyone who has gotten tied up in an endless and stupid loop of government red tape? Let me tell you about a married couple I know, who have always filed jointly. The wife, whose name has always been listed second on the tax return, started a consulting business and, as she was required to, made an estimated tax payment for the income she earned. The couple filed a joint return and waited for their refund to arrive. They finally received a letter from the IRS and opened it, only to find that there was no refund enclosed. Worse yet, there was a letter saying that no refund would be coming because they had overstated the amount of tax they had paid – a transgression that not only caused the IRS to completely wipe out their refund but add a significant amount of penalties and interest to their tax bill.

Armed with copies of canceled checks, the wife went down to the local IRS office and demanded they retract their letter – which they eventually did. But do you want to know why it happened in the first place? When the wife made the estimated tax payment for her business, she paid it using her own Social Security number because that was the number shown on the 1099s she’d received for her consulting work. Unfortunately, when they received her check, the IRS didn’t recognize her as a taxpayer. Even though she’s always filed jointly with her husband, her name and Social Security number were listed on the second line of the return, not the first. And because hers was not the first name – even though it was a joint tax return – the IRS could find no record of her, and her tax payment just went into a big black hole!

Unfortunately, we have found that the IRS sometimes has trouble putting two and two together. If both your conversion and recharacterization forms aren’t filled out exactly right, you could risk getting a nasty letter in your mailbox. We fight those battles with the IRS on behalf of our clients, but if you’re a do-it-yourselfer, you need to know that it’s not unheard of for them to have a record of just one form or the other – but not both. If it happens to you, you need to stick to your guns and get it sorted out. A Roth IRA conversion can be your best defense against the Death of the Stretch IRA, and you can change your mind as long as you recharacterize by the deadline!

Thanks for reading, and stop back soon!

-Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

Posted on March 14, 2017 by James Lange in Charitable Remainder Unitrust, Inherited IRAs, QTIP Trusts, Stretch IRA, Trusts and tagged charitable remainder unitrust, crut, death of the stretch ira, inherited ira, new ira rules, stretch ira.

This post is the fourth in a series about the Death of the Stretch IRA. If you’re a new visitor to my blog, this post might not make much sense to you unless you back up and read the three posts, How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?, Are There Any Exceptions to the Death of the Stretch IRA Legislation?, & Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA? immediately before this one. Those posts spell out the details of the proposed legislation that will cost your family a lot of money. If you’re familiar with the specifics of the legislation, then please read on, because I’m going to talk about some possible solutions to the problems that will be caused by the Death of the Stretch IRA.

What is the best way to protect my IRA, once this Stretch IRA legislation is passed?

Many people have asked me, “What is the best way to protect my IRA, once this legislation is passed? Well, the Senate Finance Committee did say that some people could be excluded from the new tax rules – my post of February 28^th discusses them – so let’s look at how they might figure into your game plan.

I firmly believe in providing the surviving spouse with as much protection as possible, so I usually recommend that you name your spouse as your primary beneficiary and give him the right to disclaim your IRA to someone else. If your spouse needs the money, that’s great. He is excluded from the legislation, so he can still “stretch” your IRA after your death.

But suppose you have no spouse, or that your surviving spouse will not need your IRA because he has sufficient assets of his own? In that case, your IRA will likely go to your child or children. And the problem with that is that children are not excluded from these new rules unless they are disabled or chronically ill. So here is one possible solution that can protect your children from the harsh new tax structure.

Let’s assume that you have an IRA that is worth $1.45 million, and that your beneficiary is your child. Under the proposed new rules, your child can exclude $450,000 of your IRA and stretch it over the remainder of her life. The remaining $1 million, though, will be subject to the new rules and will have to be withdrawn from the IRA within five years. Even if she tries to spread the withdrawals out over five years to minimize the tax bite, she’ll still have to include about $200,000 in her income every year. Depending on her income from other sources, that will probably push her up into a higher tax bracket. The current maximum tax rate is 39.6 percent, so it’s possible that your child would have to pay $400,000 in federal income taxes – even more, if the state you live in taxes IRA distributions.

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA?

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA, and protect your child from these taxes? If you look at my post on February 28^th, you’ll see that charities and charitable trusts are excluded from the five-year rule! And while the CRUT has to comply with certain IRS rules regarding how and when money can be withdrawn, the IRA that is inside the trust is not subject to tax UNTIL you take withdrawals from it. So if your child receives the minimum possible from the trust every year, it is possible that he can avoid much of the income tax acceleration that will happen once this legislation is passed.

Will your child have more money over the long term with the income from the $1 million that goes into the trust, or if he has to follow the new IRA rules and has to withdraw your IRA and pay taxes within five years, leaving him with an after-tax amount of about $600,000? I’ll answer like a lawyer – it depends. One of the very real problems with a charitable trust is that, once the beneficiary dies, any money that is left over goes directly to the charity. So if your child dies after receiving just one distribution from the trust, the charity will end up receiving more money from your IRA than your family will. There are some possible ways to manage this risk, though, such as taking out a term insurance policy on the life of your child. So if he does die prematurely, the proceeds of the life insurance can replace the money that will go to the charity.

For some people, a CRUT can be a bad idea. There is a cost to draft the legal documents, but that cost is nothing compared to the cost of maintaining the CRUT over the long term. The Trustee must file a tax return for the CRUT to show the IRS how much has been paid to the beneficiary. The CRUT’s tax return produces a form that has to be included with the beneficiary’s tax return, just like a W-2 or 1099, and the extra paperwork means a higher tax preparation fee for the beneficiary every year. My rule of thumb is that it’s not worth the money or headaches to establish a CRUT and name it as your beneficiary if your IRA balance is below $1 million.

I encourage you to watch this short video to learn more about the pros and cons of Charitable Remainder Unitrusts, and how they can be used to help shield your retirement savings from the Death of the Stretch IRA legislation. However, do not take action and establish a CRUT until the final legislation has passed. If you are using Lange’s Cascading Beneficiary Plan, the current Stretch IRA rules will produce a far more favorable result than the trust.

Please stop back soon,
Jim

For more information on this topic, please visit our Death of the Stretch IRA resource.

P.S. Did you miss a video blog post? Here are the past video blog posts in this video series.

Will New Rules for Inherited IRAs Mean the Death of the Stretch IRA?

Are There Any Exceptions to the Death of the Stretch IRA Legislation?

How will your Required Minimum Distributions Work After the Death of the Stretch IRA Legislation?

Can a Charitable Remainder Unitrust (CRUT) Protect your Heirs from the Death of the Stretch IRA?

What Should You Be Doing Now to Protect your Heirs from the Death of the Stretch IRA?

How Does The New DOL Fiduciary Rule Affect You?

Why is the Death of the Stretch IRA legislation likely to pass?

The Exclusions for the Death of the Stretch IRA

Using Gifting and Life Insurance as a Solution to the Death of the Stretch IRA

Using Roth Conversions as a Possible Solution for Death of the Stretch IRA

How Lange’s Cascading Beneficiary Plan can help protect your family against the Death of the Stretch IRA

How Flexible Estate Planning Can be a Solution for Death of the Stretch IRA

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The Best Response to the New Estate Laws

Posted on April 4, 2011 by James Lange in Estate Planning, Estate Tax, Income Tax, IRAs, Lange’s Cascading Beneficiary Plan, QTIP Trusts, Tax Law.

The top estate planners in the country warn IRA and retirement plan owners to develop an appropriate response to the new estate tax laws just passed this December. We are now in a completely different tax environment ripe for the cruelest trap of all: where the standard language of traditional wills and trusts forces too much money (now up to $5,000,000) into a trust limiting the surviving spouse to income and the right to invade principal for health, maintenance and support. If the trust is overfunded, which is likely under the new law, less discretionary income is available for the surviving spouse. Furthermore, if this common trust is the beneficiary of an IRA or retirement plan, massive income taxes are also triggered – all this can be avoided with appropriate language in wills and trusts and appropriate beneficiary designations of IRAs, Roth IRAs and retirement plans.

Under the new estate tax laws, older traditional estate plans are not helpful, but harmful, because of the severe restrictions they place on the surviving spouse, something most couples do not want. Many IRA and retirement plan owners have this detrimental language in their existing wills and trusts and don’t even know it. IRA and retirement plan owners with assets between $600,000 and $5,000,000 are particularly vulnerable. Both spouses have likely become quite accustomed to making expenditure decisions based on desire in addition to need. To lose that control would be devastating. Without a review of their older traditional estate plan they could be thinking they have left everything under the control of their spouse, but in reality, they have not.

I encourage you to have your will reviewed and updated to comply with the estate planning law. In Pittsburgh? Please join us for one of our FREE workshops entitled, “How to Avoid the Cruelest Trap of All: Don’t Unknowingly Restrict Your Surviving Spouse’s Independence or Access to the Family Money After the Tax Relief Act of 2010.” See our location and times on www.paytaxeslater.com. Not in Pittsburgh, you can purchase this workshop to view in the comfort of your own home for just $97 – to order call our office at 412.521.2732.

Beneficiary Designations in a Second Marriage

Posted on June 5, 2009 by James Lange in Estate Planning, IRAs, QTIP Trusts and tagged Estate Planning, James Lange, Trusts.

Estate planning can be tricky to begin with — toss in a second spouse and children from different marriages and relationships and it becomes even more difficult.

Recently, Jim Lange came across an article in the Pittsburgh Post-Gazette that dealt with the estate planning challenges caused by divorce and remarriage. The example that was used was that after 15 years of a second marriage, a husband was getting ready to retire with $1 million in his IRA. His second wife was shocked to learn that she had no ownership rights to the account.

One of the proposed solutions listed in the article was a tool called a QTIP trust (qualified terminable interest property trust). In this case, a QTIP trust would be listed as the beneficiary of the husband’s IRA and would then provide an income stream for the surviving spouse while protecting a portion of the assets for the children.

Jim thinks that this is the wrong approach and offered his solution in a letter to the editor. Jim’s first point is that naming a QTIP trust as the beneficiary of an IRA accelerates income and taxes to the detriment of both the surviving spouse and the children. The surviving spouse is left with only an income stream and the kids don’t inherit anything until the second spouse dies. He’s also concerned about the fees generated by the QTIP trust solution — attorneys have to be paid to draft the trust and annual CPA and trustee fees have to be paid after the first death.

Instead, Jim prefers to leave a certain percentage of the IRA to the surviving spouse and give the rest to the children of prior marriages. It’s a simple solution that provides more money for the heirs and less for the IRS.

Coincidentally, the topic of the June 3rd edition of our radio show, The Lange Money Hour, was trusts — so, we started the show with a discussion about the Post-Gazette article. A special thank-you to a guest who agreed to join us on short notice — Tom Crowley, Senior Wealth Planner and VP at PNC Wealth Management. While Tom agreed with Jim about the tax consequences of naming a QTIP trust as beneficiary of an IRA, he pointed out that in his practice, some clients are willing to sacrifice more money in taxes in order to gain greater control over the distribution of the funds.

During the rest of the show, Jim went on to explain the ins and outs of various trusts including living trusts, spendthrift trusts, charitable trusts and trusts for minors. Keep in mind that every case needs to be evaluated on an individual basis. If you have questions about any of these trusts or think that you need a thorough review, be sure to call the office at 412-521-2732 and a member of the Lange team can help.

What is an Annuity?

Ownership of an Annuity by a Trust

Ownership of an Annuity by an Individual

Should the Beneficiary of an Annuity be a Trust or an Individual?

Conclusion

Why Have a Will?

Preparing or Updating a Will Should Give You Peace of Mind

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

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

If we take it one step further with your beneficiaries.

So, let’s pull it all together.

The Equifax Data Breach: All You Need To Know

The Equifax Data Breach – What Should You Do

What You Can Do If Your Information Has Been Compromised

What Does Freezing Your Credit Report Do?

The Equifax Data Breach and Your Tax Return

Protecting Yourself After the Equifax Hack

It’s Time to Stop the Sneaky Tax!

You Can Help Stop the Sneaky Tax

Write Your Congressman Now

What Are The Risk of Roth IRA ReCharacterizations?

How does a Roth IRA Conversion Work?

Recharacterize Your Roth IRA Conversion

A Risk of Roth IRA Conversions

What is the best way to protect my IRA, once this Stretch IRA legislation is passed?

Can a Charitable Remainder Unitrust (CRUT) provide a possible solution to the Death of the Stretch IRA?

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

The Equifax Data Breach:
All You Need To Know