Adding flexibility to your estate plan benefits most families, often to the tune of hundreds of thousands of dollars.

For the purposes of this article, I will assume what I call "The Leave it to Beaver Family," though the concept can apply to many more families: two married grandparents with two children only from that union, and each of those children have two children of their own. No divorces, and no “love child” from the sixties.

Based on over 40 years of experience as an estate attorney and CPA, the overwhelming financial goal of these families is first to provide for both grandparents, then the survivor, then their children equally, and only then, their grandchildren. I refer to these estate plans as "I Love You" wills. For most traditional families, they are an excellent starting point.

The problem is that for most families, the starting point is also the ending point. This standard approach is simple and intuitive, and it is usually what grandparents have in mind before meeting with an estate attorney. In many cases, however, it costs families hundreds of thousands of dollars in avoidable taxes.

The Case for “Building In” Flexibility

Back in the early '90s, I read an article that that seemed like a revelation from the Gods. Using disclaimers, I could draft a much better estate plan for most families. I changed the way I prepared estate plans practically immediately. Before I sold my law firm, we had prepared close to 3,000 estate plans that included disclaimer elements. Over 30 years later, many of those clients have since passed with these flexible documents in place, and after a death, their families have enjoyed life changing benefits in tax savings and the best positioning of family money.

A disclaimer is simply a legal way to refuse part or all of an inheritance. The person disclaiming can't redirect the money; they can only keep it or disclaim it, and if they disclaim, that money passes to the next beneficiary in line. For example, if Grandpa dies leaving an asset to Grandma, she can disclaim and that asset passes to their children. Assuming it is set up right, each child then has the option to disclaim their share into a trust for their children. The key insight is this: you don't have to decide today how to divide your estate among your heirs. You build flexibility into your documents so that after a death, the surviving family members can look at the actual circumstances and make the smartest decision at that time. They have nine months from the date of death to disclaim.

I call this approach Lange's Cascading Beneficiary Plan℠, which has appeared numerous times in The Wall Street Journal and peer-reviewed articles, in thousands of entries in Google pointing to me, and about which I write about extensively in most of my books.

How It Works in Practice

Under the standard "I Love You" plan, when the first grandparent dies, everything including the IRA goes to the surviving grandparent, and at the second death, to the children equally. Under the SECURE Act, those children must withdraw and pay taxes on the entire inherited IRA within ten years. If they are already in a high tax bracket, the tax acceleration is brutal.

Now imagine the same family with disclaimer provisions in place. After the first grandparent dies, the surviving grandparent could keep or disclaim whatever assets he/she chooses depending on his/her needs, the family's needs, and the best tax planning at that time. If the surviving grandparent disclaims, each child can then look at their own situation and decide: Do I need all this money? Or would our family be better off if I disclaim some of it, particularly the IRA money, into a trust for our children?

If a grandchild is in a much lower tax bracket than their parents, the tax savings can be substantial. You can mix and match. A child can keep some assets and disclaim others. They can keep the after-tax investments but disclaim IRA or Roth IRA dollars or disclaim only a portion of their share. The flexibility is enormous, and no one has to make these decisions until nine months after a death.

How Did Things Change with the Passing of the SECURE Act?

Before the SECURE Act took effect for deaths after 2019, disclaiming IRA money to grandchildren or trusts for grandchildren was fantastically profitable. The grandchildren could stretch that inherited IRA over their entire lifetime, creating decades of tax-deferred (or in the case of a Roth, tax-free) growth. Families saved hundreds of thousands of dollars through these disclaimers. Some would say I helped set up hundreds of tax-deferred and tax-free dynasties.

The SECURE Act changed the math by requiring most non-spouse beneficiaries withdraw and pay taxes on inherited IRAs within ten years. That made disclaiming to grandchildren dramatically less advantageous, but it did not eliminate the strategy. There are still significant savings available when there is a meaningful disparity in tax brackets between generations.

And for certain beneficiaries who qualify as Eligible Designated Beneficiaries, including those who are disabled or chronically ill, the lifetime stretch is still available. Last month's article described one powerful application of that exception in my own family's planning that saved our daughter over a million dollars. A future article will describe how some beneficiaries may qualify for this lifetime stretch even if they don't qualify for SSI or SSDI, which could have an enormous impact on hundreds of thousands of grandparents with a grandchild with significant challenges.

What Should You Do?

If you are a former legal client of our firm, there is a good chance you already have disclaimer provisions in your estate documents. If you want a refresher on the plan you likely have and the options your family will have at your death, I encourage you to attend the webinar described in this newsletter.

And if you don’t have disclaimer provisions in your documents, I would strongly encourage you to attend as well. I will be covering these strategies in detail on March 24th, including a dedicated session on the Cascading Beneficiary Plan. I will include a section for grandparents of a grandchild with a disability. Registration details follow.

If you are a grandparent of a grandchild with a disability, I also highly encourage you to visit DisabledChildPlanning.com/Free for some phenomenal free resources. 

Disclaimer: Lange Accounting Group, LLC offers guidance on retirement plan distribution strategies, tax reduction, Roth IRA conversions, saving and spending strategies, optimized Social Security strategies, and gifting plans. There is no solicitation being made for legal services by James Lange or Lange Accounting Group, LLC. Although we will bring our knowledge and expertise in estate planning to meetings with clients, all recommendations are offered in our capacity as a financial planning professional and not as an attorney. We will, however, potentially make recommendations that clients could have a licensed estate attorney implement.