The biggest problem with estate planning is uncertainty. We don’t know what the future will hold. We don’t know when we are going to die. We don’t know how much money we will have when we die. We don’t know how our assets will be taxed. We can’t anticipate potential health problems or broad family needs.
The best solution to the problem of uncertainty for most traditional families is to build flexibility into their estate plans. How assets should be distributed will be much clearer after you die. Your family will have more information to make good decisions, and with appropriate planning, they will have up to nine months after your death to finalize decisions. And savvy post-mortem decisions regarding IRA and retirement plan assets could create life-altering potential tax savings to your family.
While the first goal is to provide for your spouse, there are situations when you can drastically cut the tax bill if a portion of the inherited IRA is passed to children or grandchildren instead of your surviving spouse. So, how can you provide first, for your spouse, but still preserve the option to enjoy substantial tax savings for your family when faced with enormous uncertainty?
Starting in the mid-nineties, I began adding additional flexibility to traditional wills and trusts and to the beneficiary designations of IRAs and retirement plans. In 1998, I described my plan in The Tax Adviser, a peer-reviewed journal. In 2001, immediately after a change in the law passed, I received coverage in Newsweek, The Wall Street Journal and other places for the strategy that I called Lange’s Cascading Beneficiary Plan (LCBP).
When it is properly drafted, LCBP gives your heirs an enormous amount of flexibility. Under my plan, your surviving spouse can make decisions based on his or her own needs, the needs of the family, and the tax laws that are in effect at the time of your death. Further, your heirs will have as much as nine months to make those decisions.
Perhaps the best description of my plan from a noted source comes from Kiplinger’s in 2001. Please see boxed text.
The key concept here is “disclaiming.” You can’t force anyone to accept a bequest. My plan allows the beneficiary of the IRA (or of other assets) to accept the IRA for themselves, or to say, “I don’t want that IRA.” If the latter happens, we look to see who is next in line—or, to use the official term, the contingent beneficiary. The primary beneficiary can also make a “partial disclaimer.” This means that they can accept part of the asset, and let the contingent beneficiary have the rest.
Think about how it would work. If your surviving spouse needs the money, that’s fine—he or she can keep it. End of story. But if your spouse doesn’t need the money, or more likely doesn’t need all the money, then he or she can disclaim either all or, again more likely, a portion of it, in favor of the next beneficiary on the list—your children. If your children don’t need the money, they can disclaim their inheritance or a portion of their inheritance to a trust for the benefit of their own children. If you have two children with unique needs, one can accept the inheritance and the other can disclaim to the trust for her own children. In addition, each beneficiary down the line can have a partial disclaimer if they want to retain some, but not all, of the inherited IRA. I like to specify in the IRA beneficiary designation that each beneficiary has the right to disclaim or even make a partial disclaimer, and what happens to the asset if the beneficiary does choose to do so.
Our law firm has drafted over 2,396 wills, trusts and estate plans, and LCBP has played a significant role in most of them. Unfortunately, many of the clients for whom we drafted these plans have since passed. However, because of advance planning, drafting a LCBP, and strategic planning after the married couple’s first and second deaths, we have helped save families hundreds of thousands, sometimes millions of dollars. We have done this all while fully protecting or even overprotecting the surviving spouse.
P.S. If you are interested in more financial information (we have written 5 best-selling financial books, many peer-reviewed articles, have 185 hours of our radio archives, etc.), we encourage you to visit our website, www.paytaxeslater.com. It has a wealth of valuable free material of special interest to IRA and retirement plan owners, or please call (412) 521-2732 for a free copy of The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA or to see if you qualify for a free second opinion consultation.