New Year, New Tax Laws, With Bruce Steiner, Author and Lawyer

Episode: 44
Originally Aired: January 19, 2011
Topic: New Year, New Tax Laws with Bruce Steiner, JD

The Lange Money Hour - Where Smart Money Talks

The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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  1. Introduction of Estate Planner and Tax Expert Bruce Steiner
  2. Tax Relief Plan of 2010 Exempts $5 Million From Estate Tax
  3. Estate-Tax Exemption Scheduled to Fall to $1 Million in 2012
  4. Credit Shelter Trust Should Allow for Great Flexibility
  5. Leave Surviving Spouse Flexibility in Determining Who Gets What
  6. Giving IRA to Surviving Spouse Can Save Substantially on Taxes
  7. Income-Tax Returns Must Be Filed on Credit Shelter Trusts
  8. On Roth IRAs, the Only Question Is When to Convert
  9. Converting a Large IRA Can Push You to Higher Tax Bracket
  10. Distributions From Roth IRAs Are Free of Tax

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Welcome to The Lange Money Hour: Where Smart Money Talks with expert advice from Jim Lange, Pittsburgh-based CPA, attorney, and retirement and estate planning expert. Jim is also the author of Retire Secure! Pay Taxes Later. To find out more about his book, his practice, Lange Financial Group, and how to secure Jim as a speaker for your next event, visit his website at Now get ready to talk smart money.

1. Introduction of Estate Planner and Tax Expert Bruce Steiner

Nicole DeMartino: Hello, and Happy New Year. Welcome to a new season of The Lange Money Hour, Where Smart Money Talks. I’m Nicole DeMartino, your host. Thanks so much for joining us this evening. Tonight, as always, I am here with Jim Lange, CPA and Attorney. Jim is a nationally acclaimed IRA and Roth IRA expert based right here in Pittsburgh, and he’s also the best-selling author of the first and second edition of Retire Secure!, and just out last November of 2010, The Roth Revolution (Pay Taxes Once and Never Again). Well, this is our first show of the year and we are live tonight. The studio line number is (412) 333-9385. This is a great night to call because we have Bruce Steiner on our show tonight, and we’re going to be covering several topics all surrounding the new estate and income-tax law just passed at the end of 2010. So, very timely, very valuable, so definitely stay tuned because this law will most likely affect you and you need to know how to respond to it. Before Jim and Bruce get started, let’s give Bruce an introduction here. Our guest tonight, Bruce Steiner. Bruce, are you there?

Bruce Steiner: Yes.

Nicole DeMartino: All right, well, welcome! How are you this evening?

Bruce Steiner: Good, good.

Nicole DeMartino: Great! Bruce is a New York City-based attorney who has over 30 years of experience in the areas of taxation, estate planning, business-succession planning and estate and trust administration. He is a much sought after lecturer and author and has been quoted in Forbes, the New York Times, Financial Planning, Kiplinger’s and the New York Post, and that’s just to name a few. We will also want to mention and congratulate Bruce for being named a New York Superlawyer in 2010, and if you want the full scoop on Bruce, you can visit his LinkedIn profile, and then you can read his whole bio, see all of his articles, see where he’s published, and you can click on the links and take a look at those articles. So, with that, I’m going to turn it over to Jim.

Jim Lange: And before we get into it, I just want to say that I’ve been a great fan of particularly Bruce’s articles and the things that he writes. He has wonderful content and is a good writer, and I was just thrilled that you were able to make it and you agreed to do the show tonight.
Anyway, Bruce, there’s a lot of estate attorneys who are talking about the new tax act, the Tax Relief Act of 2010, as a brand-new ballgame, with the new provisions. Could you tell our listeners what you think are the most important changes in the act and how you think that some of these changes will impact most of our listeners tonight?

Bruce Steiner: Well, that’s quite a broad question …

Jim Lange: How about let’s just break it down and say what are some of the most important provisions of the tax relief of 2010 as it applies to estate planning?

2. Tax Relief Plan of 2010 Exempts $5 Million From Estate Tax

Bruce Steiner: OK. On the estate-tax side, the estate tax has returned except with a $5 million exempt amount for two years, for 2011 and 2012, and then it reverts to a million dollars in 2013. The gift tax, which had been a million-dollar exempt amount for many years, is now unified with the estate tax. So, it’s a $5 million exempt amount for 2011 and 2012, and then it’s scheduled to revert to a million dollars in 2013. The generation-skipping transfer tax is likewise a $5 million exempt amount for 2011 and 2012, and then it reverts to a million dollars in 2013. The tax rate, the gift tax was 35 percent last year, and for the next two years, for 2011 and 2012, the estate tax, the gift tax and the GST tax rate are all at 35 percent, and they’re scheduled to revert to 55 percent in 2013. So, you have a two-year window for taking advantage of the lower tax rate and the higher exempt amount.

Jim Lange: All right. I think that that’s great. Could you tell our listeners what you mean by the exempt amount in case there’s some people who are a little bit unclear as to what the exempt amount means, and what happens if you die with a certain amount of money, either less than, equal to or more than the exempt amount?

Bruce Steiner: Sure. Let’s say you die and you have $10 million and the exempt amount this year is $5 million. So, ignoring some of the little nuances and complexities, $5 million is exempt and the next $5 million is subject to tax at 35 percent. If you make gifts during your lifetime, that counts against your estate-tax exempt amount. So, during my lifetime, let’s say today I gave away $2 million to somebody. I didn’t pay any gift tax because I had a $5 million gift tax exempt amount, but I used up $2 million over what would be my estate-tax exempt amount. It’s the same exempt amount. I don’t get to use it twice. So, when I die, I only have $3 million of it left.

Jim Lange: All right, that is good. I think that that really helps people. Now, you say that there is now a $5 million exempt amount, but what if you’re married? Are you allowed to exempt $5 million each, or is it $10 million now?

Bruce Steiner: Yes. Well, it’s a little of each of those things, Jim. For gift tax, there has always been the ability to treat gifts as if they were made half by each spouse, so that if today you were married and you gave your child $10 million, you and your spouse could agree to treat that gift as if you each made $5 million of it, and thereby not pay any gift tax, and when you die, there’s no tax on anything that you leave to your spouse. So, if you died worth $10 million and you had a spouse, and you, to take a simple case, left $5 million to your child and $5 million to your spouse, you’d pay no estate tax. The $5 million to your child is exempt because there’s a $5 million exemption, and the $5 million to your spouse is not taxed because it went to your spouse, and for the next two years, there’s something called portability that says that if you leave it all to your spouse, your spouse inherits your exempt amount, your $5 million exempt amount that you didn’t use because you left everything to your spouse where it wasn’t taxed because it went to your spouse. Your estate can then agree to give your spouse your $5 million exemption that you didn’t use, and then she’ll have $10 million of exemption, and this is for two years only. It’s a little bit like the 2001 law where the provisions of the law ended at some point. So the 2010 law, its provisions only go for another two years and then they’re scheduled to end, and Congress, in 2012, maybe they’ll have another lame duck session at the end of the year and extend it or make it permanent or … you know, no one knows what they’ll do.

Jim Lange: Well, whether you like it or not, at least they got it done. But anyway, Bruce, one of the things that you were talking about, well, if you have $5 million, if you have $10 million, and then you continued, and everything that you said was right and accurate and well-expressed, but what happens if you don’t have $5 or $10 million? Let’s say that you’re in Pittsburgh and you’re not broke, but maybe you have a half a million or a million or two million or even three million. What kind of advice would you be giving to somebody who maybe has existing wills and trusts, et cetera and doesn’t have $5 or $10 million, and presumably they would not be subject to estate tax, but, of course, there’s uncertainty. What advice would you have for people that have less than $5 or $10 million, in terms of what they should be doing?

3. Estate-Tax Exemption Scheduled to Fall to $1 Million in 2012   

Bruce Steiner: Those are harder, Jim, because if the 2010 law expires in two years and the estate-tax exempt amount reverts to a million dollars, then the spouse’s estate is likely to pay estate tax. So, it’s hard to know what to do. Let’s say, if you had $3 million and your spouse had, let’s say, nothing — (to make it simple — if the exempt amount stays at $5 million, you could leave it all to your spouse, pay no estate tax, and then the spouse’s estate is less than $5 million, then the spouse wouldn’t pay estate tax either.

Jim Lange: After the spouse dies.

Bruce Steiner: Right, but if the exemption drops down to a million dollars, and you could have left your $3 million in a way that wouldn’t be subject to estate tax … oh, there’s portability right now, but that expires in two years also. So, we can’t be sure that if you died today that, if your spouse lives until 2013, we’re not sure the portability is still there.

Jim Lange: Well, let me ask you this. You said it’s a tough one. Well, you probably know how I would handle that, but before we get into that …

Bruce Steiner: I certainly do.

Jim Lange: All right, and it’s perfectly fine for us to disagree, you know, it really is. Let me give you two situations. One, let’s say that you have an existing client and you have done their will, and let’s just say, for discussion’s sake, that you have done a traditional A/B will, because I know that maybe you do some variation of that, but I know that that is a portion of your practice. Are you planning to alert people and say, “Hey, it’s time to consider changing your will?” And two, how would handle that if there was a new client that came to your office, or is it always going to be a case-by-case basis?

Bruce Steiner: I think it’s a little bit of a case-by-case basis because there are so many considerations. There’s state estate taxes in New York. In Pennsylvania, you’ve got your state inheritance tax, and about half the states have estate or inheritance tax and about half don’t. There’s creditors and protection against remarriages and Medicaid and all sorts of other things besides taxes. So, it’s not that easy to have a blanket answer. Some people would say, “Let me take my three million dollars and leave it to, what you call, the B trust.” That’s a trust that’s set up to be not included in the spouse’s estate, but available to the spouse in case she needs it, and that means that at the first death, you may or may not pay some state taxes. In New York, where the exempt amount is a million, you pay a couple hundred thousand dollars to do that. In Pennsylvania, your exempt amount, I understand, at the state level is zero.

Jim Lange: Zippo! The first dollar, the governor gets the money.

Bruce Steiner: You’d pay and hundred and some thousand dollars to do that, but you’d be sure that it would be protected against being included in the spouse’s estate. You’d be pretty sure it would be protected against the spouse’s creditors. You’d be pretty sure it would be protected if the spouse remarried, and you’d have a pretty good chance it’s protected if the spouse goes into a nursing home and wants Medicaid. On the other hand, if this were in, say, New York, where you had a New York exempt amount of a million dollars, you’d be paying estate tax to New York on the excess $2 million, whereas, if you, for example, only sheltered, say, a million dollars and then let the other $2 million go to the spouse, you’d save some New York tax, and if the spouse moved to a state like Florida that didn’t have estate tax, you’d save state income tax on all of it. So, some people might only shelter the amount that’s free of not only federal but state estate tax, and, I guess, in Pennsylvania, that means you wouldn’t shelter anything if that was your goal. So, it’s sort of a choice. It’s hard to know for sure.

Nicole DeMartino: All right, we’re going to take a quick break. We’ll be right back with The Lange Money Hour, Where Smart Money Talks.


Nicole DeMartino: Welcome back. We’re here with Jim Lange and Bruce Steiner, and we’re talking about the new estate-tax law.

Jim Lange: Anyway, Bruce, you were starting to talk about some of the issues with the B trust and what the best course of action is, and I’m going to add in a few other wrinkles that I think are very important in real life, and that is uncertainty. We have so much uncertainty that we don’t know what’s going to happen. We don’t know if we’re going to die in this two-year period. We don’t know what’s going to happen after the two-year period. We don’t know how much money’s going to be in the estate. We don’t know what the market’s going to be. We don’t know the needs of the surviving spouse. We don’t know the needs of the kids or even the needs of the grandchildren. There’s so much that we don’t know, and I was curious how you handle that. I am going to give the listeners a little idea of how I handled it, and then I’m going to ask what your opinion of that is, and you have license to not agree with me, but out of curiosity, how have you traditionally handled that problem, the problem of uncertainty? And now, I would say that uncertainty is exacerbated these days because you have uncertainty in the estate-tax laws. In fact, we’re relatively certain that something is going to happen in two years, not to mention, again, uncertainty of the market and the needs of the survivors. How have you handled uncertainty in the past, and what is your plan to handle it in the future?

4. Credit Shelter Trust Should Allow for Great Flexibility

Bruce Steiner: I think that the thing that we have to pay more attention to, in addition to how much goes into the credit shelter trust, but what are the terms of the credit shelter trust? In other words, if the credit shelter trust is sufficiently flexible, if it allows the trustees to distribute income and principle to the spouse or the children or the grandchildren, or accumulate the income, depending on what seems best from time to time, and if it’s appropriate, the spouse has, what we call, the power of appointment, the power to essentially make gifts out of the trust either to the children or grandchildren or maybe even to anybody she wants, and maybe the spouse should be a trustee and maybe the spouse should even have the power to remove and replace her co-trustee. So, you may want to give more thought to just how flexible you want to make the trust and how much control do you want to give the spouse over the trust, and if you do all those things, then how much goes into the trust is more of just a tax question, balancing the tax benefits and detriments.

Jim Lange: I actually think that’s a very good idea. I’ll tell you my approach, which is a little different, but a quick technical question about that. It sounds like what you want to do is have very, very flexible provisions on what is in that B trust, and I conceptually agree with you, but typically, I find that the spouse themselves wants to be the trustee of their own trust. Do you have a technical problem if you have very flexible and loose provisions in the trust and name the spouse as the trustee?

Bruce Steiner: Well, she can be a trustee, and she can have the power to remove and replace her co-trustee …

Jim Lange: All right, so when you say “a” trustee, that’s not “the” trustee. That’s one of two or more trustees, is that right?

Bruce Steiner: One of two or more trustees, but she can have the power to remove and replace her co-trustee, provided the replacement trustee is not either a close relative or a subordinate employee, if she is employed somewhere. That still leaves a few hundred million people she can pick as a replacement trustee, and if I’m the co-trustee and I don’t do what she wants and she can fire me, yeah, I’m probably going to pay some attention to what she wants.

Jim Lange: I actually think that’s a good answer. As you might know, I have a slightly different approach, and what I’d like to do is spend a few minutes telling the listeners what my approach might be, and then, again, I’m going to ask you to feel free to disagree with me, or tell me if you like or don’t like or like some of what my approach is.
My approach is something like this: as I think there’s so much uncertainty, and I’m going to make a very important assumption for this approach that I’m about to describe, and that is that you are talking about a traditional married couple — I call them the Leave It to Beaver couple — the original husband, the original wife and the same kids, not kids from his marriage or kids from her marriage, but kids from our marriage, and let’s assume people have been married for 30 or 40 years, or just a long time, and they trust each other and, in fact, I always even ask, “Do you trust your spouse,” and I sometimes get a joke. But let’s assume the answer is yes. Since, to me, the four basic choices are … so let’s say you have this traditional family. You have husband, wife, children, grandchildren, and they’re the same kids from each … that is, they have the same parents and they have the same grandparents. And first of all, let me ask you a question: Are the four basic choices in your opinion, the surviving spouse, the B trust that we have talked about, which you’re saying should have flexible provisions, which I would agree with you, kids equally, or well-drafted trusts for the benefit of grandchildren, particularly if they’re minors. Would you say that those are the four basic choices?

Bruce Steiner: OK.

5. Leave Surviving Spouse Flexibility in Determining Who Gets What

Jim Lange: All right. So, let’s say that those are the four basic choices, and what I’m saying is since I don’t know what the needs of the spouse are going to be, I don’t know what the exemption amount’s going to be, I don’t know what the investments are going to be. And I have found, and you may or may not have found the same thing, that clients today are more interested in providing for each other and making sure that they never run out of money, and after the husband dies, his concern is “I want to make sure my wife has enough money to live comfortably, do whatever she wants for the rest of her life.” I’m getting more and more of that and less and less of trying to save taxes, and now with a $5 million exemption, tax has become even more remote. The way I would approach something like that is rather than deciding today and locking in stone who gets what, so much money goes to the spouse, so much money goes to the B trust, so much money goes to the kids equally, so much money goes to the grandchildren, and not just money, but we haven’t brought in the issue of the different types of assets like IRAs, retirement plans, 401(k)s, 403(b)s, Roth IRAs, Roth 401(k)s, et cetera. You have all these different assets.

My approach to this for the traditional married couple, not always, but I would say the vast majority of the time, might be rather than decide today who gets what, create wills and trusts and beneficiary designations, et cetera that will give the surviving spouse the power to decide not today, but within nine months after the first death, and in nine months, we’re going to know more. We’re going to know what the federal estate-tax law is after the first death. We’re going to know what the portfolio is. We’re going to know what, maybe not perfectly, but we’ll have a better idea of the needs of the surviving spouse and the children and the grandchildren. So, I tend to prefer a very flexible plan, and as you probably know, I made some hay writing about it in many sources, and I was curious as to what you think of the flexible plan? I’ll also mention that another New York state attorney is not necessarily a huge fan of it, but I thought I would ask you and see what you think of this flexible plan for the couple that I have described, and I would say that there would be a fairly wide variation in terms of the people I would use it for in terms of how much money they had. That is, well, if they only had a million dollars, we might not need the B trust at all, but I’m not sure that there’d be any harm in leaving that as an option.

Bruce Steiner: Well, let’s put aside the retirement benefits for a moment, although I really want to come back to that because for the modest estates, they’re often the largest asset.

Jim Lange: Right, that’s most of my clients, by the way, people who are, what I would call, IRA or retirement-plan heavy.

Bruce Steiner: Sure, sure, and I, too, since I speak and write so much on retirement benefits, I see a lot of that as well. If it’s someone in a state like Florida with no state income tax, I think I’d want to shelter the whole $5 million and give the spouse control over the credit shelter trust, so that, effectively, she controls it. If I’m in New York …

Jim Lange: Wait, time out. Let’s even say you’re in Florida. Doesn’t the credit shelter trust say health maintenance and support? And what if the surviving spouse wants more than health maintenance and support? What if they want to go to Aruba?

Bruce Steiner: Well, first of all, it’s only after she’s used up her own money that this becomes relevant.

Jim Lange: Well, that’s true!

Bruce Steiner: But we’re going to see more and more of this because if we’re sheltering $5 million, we may have ended up with everything in the credit shelter trust, the very thing that you were concerned about.

Jim Lange: That is my fear. My fear is we are going to restrict the surviving spouse, and I don’t think that spouses want to be restricted.

Bruce Steiner: But if you limit distributions to health maintenance and support, you set up a straw person here because there’s no reason to limit the things that you can make distributions for, and there’s lots of other reasons not to limit distributions to health maintenance and support. So, I don’t recall having done that in, I don’t know, many, many, many years.

Jim Lange: But if you more or less let the spouse do whatever they want, which is what you’re saying, is that trust not also subject to being challenged as being a sham and letting the surviving spouse do whatever they want?

Bruce Steiner: It’s not a sham at all. The spouse cannot vote to make distributions to herself. Only the other trustees can make distributions to the spouse.

Jim Lange: OK.

Bruce Steiner: And if the spouse has the power to fire their co-trustee, the co-trustee is going to be receptive to the spouse’s request for distributions. If I’m in New York, I’m going to at least want to shelter a million dollars. Even if I don’t think I’m concerned about federal estate tax, I’m going to want to shelter the million that’s New York exempt. You’re in Pennsylvania. You’ve got a zero Pennsylvania state estate tax amount, so in the smaller estates, you may want to give it all to the spouse and not pay Pennsylvania tax at the first death. If you do it via disclaimer and the spouse disclaims to get money into the credit shelter trust, let’s say you’ve got $10 million and you leave it all to the spouse and she disclaims $5 million to fill up your credit shelter trust, you have a less flexible credit shelter trust because if the trust gets money as a result of the spouse’s disclaimer, she can’t participate in discretionary distributions to other beneficiaries. She can’t have a power of appointment in favor of the children and grandchildren. So, you end up with her having less control than if the credit shelter trust got the money from the get-go. So, that’s your tradeoff.

Jim Lange: Well, by the way, I think that was well spoken because I think that that is one of the tradeoffs or weaknesses of my very flexible plan is that while the traditional documents are starting with the B trust as the primary beneficiary, I’m saying no, no, no, I want the spouse to be the primary beneficiary. I want the B trust to only come into existence if the spouse doesn’t want a portion.

Bruce Steiner: And you may do that more often in Pennsylvania because to put even a penny into the credit shelter trust, you’re paying Pennsylvania tax, which somebody might not want to, and the other thing, let’s circle back to the retirement benefits.

Jim Lange: I knew you were going to get there. Well, you’re a national expert in the area and it would be a shame to have you on and not have your opinion on it.

6. Giving IRA to Surviving Spouse Can Save Substantially on Taxes

Bruce Steiner: I appreciate that. With the retirement benefits, I would absolutely do what you proposed because with the retirement benefits, even if it means not filling up your credit shelter trust … let’s take the example of someone who has a $3 million IRA and $3 million of other assets. So you’ve got a tradeoff. If you fill up the credit shelter trust in order to get $5 million in there, you’ve got $3 million of other assets and then you’ve got to use up $2 million of the IRA to put into the credit shelter trust, and if you give the IRA all to the spouse, which has some income tax benefits that we’ll get into in a minute, you’re not filling up your credit shelter trust because you gave the spouse the IRA for $3 million and you only have $3 million left for the credit shelter trust. You’ve got to choose your poison. You’ve got to choose one or the other. The income tax benefits of letting the spouse get the IRA are very substantial. She can roll it over into her own IRA. She can convert it to a Roth IRA, which has lots and lots of benefits, which hopefully we’ll have some time to talk about. She can name new beneficiaries. She can get a much longer stretch out period for the distributions, and my experience has been that given a choice between the income tax benefits of taking the IRA and the estate tax benefits of filling up the credit shelter, that people more often choose to take the IRA. I have three estates right now where that’s a factor, and in all three of them, I think they’re going to take the IRA. In one, there’s a possibility of a disclaimer of a very small sliver of it to fill up the state exempt amount, but I’m not even sure that that’s going to happen because, again, the income tax benefit of taking the IRA and rolling it over, converting to a Roth and naming new beneficiaries may well outweigh the possible estate tax benefit, and in the modest estates, there may not be any estate tax in the second estate. No one knows what the tax law will be down the road.

Jim Lange: Well, we are in agreement on the beneficiary of the IRA and retirement plan in Pennsylvania.

Bruce Steiner: That we would do in any state with the IRA. Your third tier, the children, we would have the children take in trust rather than outright.

Jim Lange: Well, sure. Maybe it shouldn’t go without saying, because we always do that.

Nicole DeMartino: Jim, I need to pop in. We’re a little over halfway through the show. We’re talking with Jim Lange and Bruce Steiner. We are live, so if you want to give us a call, that number’s (412) 333-9385. We’ll be right back. You’re listening to The Lange Money Hour, Where Smart Money Talks.


Nicole DeMartino: Welcome back to The Lange Money Hour. We are here with Jim Lange and Bruce Steiner for the last segment of our show.

Jim Lange: All right, very good. Bruce, we were talking about that we were in agreement on how to treat the IRA beneficiary and the retirement-plan beneficiary and the Roth beneficiary, and I think really we’re in agreement on most things. The only, I guess, difference that we have is I would probably be willing to suffer a few limitations on the surviving spouse, in terms of what she could do if the money went into the trust, in favor of giving her complete access to making her the primary beneficiary of not only the IRA, but also the after-tax dollars and making the surviving spouse the boss. Is that a fair characterization of our disagreements, if you will?

Bruce Steiner: I think disagreement is a little bit strong. I think we’ve done it in different ways in different cases, and if you’ve got a cooperative co-trustee, there’s possibilities for the co-trustee to get you to the desired result.

Jim Lange: Yeah, I do see that and I understand the practical implications of what you’re suggesting. I’m also, frankly, taking into account the surviving spouse’s psychological frame of mind.

Bruce Steiner: Sure, sure.

Jim Lange: I just find that spouses don’t want to be limited, and let’s say that the total estate is $1 million or $2 million or whatever it is, right now, when the husband and wife are both alive, together, they have access to 100 percent of the marital money, and I think that often the surviving spouse is not going to be happy if they don’t have access to the marital money after the first death.

Bruce Steiner: Well, I think you’re right. I think in the smaller ones like that, especially with portability, they don’t even need portability if the exempt amount stays high, and we’ve all been wrong in predicting what Congress would’ve done last year, so I hesitate to predict what they’ll do two years from now. But if I can stick my head out on a limb, I can’t see the exempt amount going back to a million two years from now after being $5 million for a couple years. I think, in the smaller ones, a lot of people will do just that, although there’s that tradeoff also if the spouse goes into a nursing home and wants Medicaid, and in the smaller estates, people might think that preserving the inheritance for the children might be worth something. But if that’s not a concern or if you’re willing to trade that off, I think a lot of people will just simply let it go to the spouse.

Jim Lange: All right, well that actually brings up another issue. Have you had any trouble in terms of what happens to these B trusts? Because I know sometimes lawyers love to set up different entities, whether it be B trusts or corporations or other things, and they draft these things, and then the client is done, and then somebody dies, or in the event of a corporation, people start doing business, and then it’s the CPA who has to deal with the fallout. In other words, the complications of the tax return, the complications of administering the trust, or, in the event of incorporating, I sometimes prefer simple just a plain old Schedule C, or leaving money to the trust. Have you had, let’s say, problems in administrating the trust?


7. Income-Tax Returns Must Be Filed on Credit Shelter Trusts

Bruce Steiner: In administrating a credit shelter trust? Well, we’ve had our share of credit shelter trusts where no one has bothered to file income-tax returns for the trust.

Jim Lange: Ouch, that sounds painful.

Bruce Steiner: And if we’re administering the estate, we’ll coordinate with the accountant and just make sure that he or she understands what it is he or she is supposed to do in terms of fiduciary income-tax returns. But we’ve had cases where people have come to us later and there was a credit shelter trust in place for a while, so that nobody bothered to file income tax returns. It’s happened probably more than once.

Jim Lange: OK. I’ll just bring that up as, let’s say, one more reason why I like to sometimes keep things simple, and I know that one area that we’re 100 percent in agreement on is that we don’t like these B trusts as beneficiaries of IRAs or retirement plans. There was an article in the Post-Gazette maybe about a year or two ago when somebody was quoting one of the big bank trustees as saying that QTIPs were wonderful solutions for IRAs and retirement plans, and I wrote a letter to the editor and strenuously objected.

Bruce Steiner: They’re occasional solutions where the spouse is going to need a lot of money out of it anyway, so that you’re not giving up that much stretch, and we absolutely don’t want the spouse controlling it, but they’re very, very occasional solutions. I can count on the fingers of one hand the occasions I’ve had where it made sense. I’m doing one right now where it’s going to be a QTIP and then to charity and it seems to fit what the person wants, but it’s unusual.

Jim Lange: Well, QTIP to charity is a slightly different issue. You know something? It was my goal tonight not to talk about Roth IRA conversions, because we have talked about Roth IRA conversions quite a bit.

Bruce Steiner: You can never talk about it enough.

Jim Lange: When we were talking for a few minutes on the phone earlier today and we were saying what we were going to talk about, the first thing you said was, “Well, we have to talk about Roth IRA conversions!” So, listeners, this is not prompted by me. This is really prompted by Bruce, so Bruce, I’m going to put the blame on your shoulders.

Bruce Steiner: I’ll happily take it.

Jim Lange: Or the credit!

Bruce Steiner: The Roth has been around since 1998, I think, was the first year you could do a Roth conversion?

Jim Lange: That’s right, because my wife and I made a $250,000 conversion back then.

Bruce Steiner: Wow.

Jim Lange: Well, that was everything for us. We were in our early 40s.

8. On Roth IRAs, the Only Question Is When to Convert

Bruce Steiner: Wow, wow. And it still hasn’t been very well understood, perhaps because last year was the very first year that you could convert even if your income was over $100,000, and I think most lawyers in our field spend most of our time dealing with clients with income over $100,000. And so, it hasn’t gotten as much attention as it should have. For most people, the question is not whether to convert, the question is when to convert. In other words, do you convert all at once or do you dribble the conversion out over time, and do you convert or begin to dribble out the conversion now or do you wait until some future time? We had, last year, a number of clients who said that not only were they in the top tax bracket, but they expected that they would always be in the top tax bracket. So, for them, it was a no-brainer. You convert it all at once.

Jim Lange: And did you do a number of multimillion-dollar conversions?

Bruce Steiner: Yes.

Jim Lange: Yeah, so did we, and I think that that was the right thing. And are you planning on recognizing that income in 2010 or 2011 and 2012?

Bruce Steiner: That was interesting. At the time, we thought the rate would surely go up from 35 percent to 39.6 percent, and so you’d pick up all the income in 2010 to have it at 35 percent, but now, maybe you do it half in 2011 and half in 2012 since it’ll stay at 35 percent.

Jim Lange: Well, I’m smiling because I’ve independently come to the same conclusion. And what about, let’s say for what I would imagine a more typical listener, who isn’t in the top tax bracket and won’t always be in the top tax bracket, but let’s say is in the middle tax brackets. What would you say to them in terms of what amount and when to recognize?

Bruce Steiner: Well, if you expect to be in the middle tax bracket, sort of, forever, and you converted a big IRA all at once, it would throw you into the top tax bracket all at once. So, let’s put numbers on it. The brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent and 35 percent, if I’ve got them right.

Jim Lange: Yeah, that’s right.

Bruce Steiner: So a middle tax bracket is 25 percent.

Jim Lange: Fair enough.

9. Converting a Large IRA Can Push You to Higher Tax Bracket

Bruce Steiner: So, if you’re in the 25 percent and you convert, or, worse yet, if you’re in the 15 percent and you convert a very large IRA, now you’re in the 35 percent in that one year. So, you might be better off, you know, most certainly be better off to dribble out the conversion a little bit each year to not put yourself into too high a bracket in one year, and we found the most typical is to convert up to the top of the 28 percent bracket. In other words, if you’re in the 15 percent or the 25 percent or the 28 percent bracket, you might convert as much as you can without going past 28 percent. I have one person who’s in the 15 percent bracket and is very timid. He’s converting every year the amount he can convert and still be in the 15 percent bracket. I think he’s a little timid. I think he should go for 25 percent or 28 percent because it’s going to be hard to get that money out in the 15 percent bracket because it’s too much money. But whatever, it’s better what he’s doing than nothing at all.

Jim Lange: Yeah, and frankly, I lean a little bit conservative also, so I’m typically…and it also depends on how many years we have in the 15 percent bracket.

Bruce Steiner: Right, right, right, it depends. Now, if you’re working and earning a high income, but your income’s going to drop off when you retire, maybe wait and you begin the conversion when you retire, or maybe after you’re not around, your spouse begins the conversion, whichever one of those happens first.

Jim Lange: Right. Although sometimes, and I hate to be morbid about this, but sometimes in a terminal situation, we have been doing some deathbed Roth IRA conversions.

Bruce Steiner: Do it all at once. I have that now. I have somebody who’s about 90 years old. I just got involved because a guardian got appointed for her because she couldn’t handle her affairs anymore, and she’s got quite a bit of income anyway, and is, if not in the 35 percent, is probably 28 percent or maybe 33 percent, and we just had her convert her entire IRA last year for fear that if we spread it over a few years, she might not make it, and we were expecting to just pick up the income all in 2010. Now, it may be half in 2011 and half in 2012. I think we’re going to sort of wait until October 15th when we have to decide, and then decide at that point.

Jim Lange: I like waiting, and that has the added benefit of helping the tax preparer spread out their tax season burden.

Nicole DeMartino: Jim, we’re going to take one more break before the end of the show. You’re listening to The Lange Money Hour, Where Smart Money Talks.


Nicole DeMartino: Welcome back to The Lange Money Hour. We’re here with Jim Lange and Bruce Steiner, and I think we have a few minutes left, Jim, so what are you going to next?

Jim Lange: Well, one thing I want to do before we do end the show is I want to tell our listeners how they could benefit from some of Bruce’s information, and Bruce, when somebody says, “Hey, do you know a good attorney in New York City?” I mention your name. In fact, I mentioned your name today, and if you could give our listeners contact information for you, and I have enjoyed some of your articles, and particularly, one called something like The Ten Worst Mistakes That You Can Make, if you could tell people how they could get ahold of you and some of your information, I think that that would benefit our listeners.

Bruce Steiner: Well, my phone number is (212) 986-6000, and if you just Google me, you’ll find lots of things.

Jim Lange: You’re all over the place. You’ve written a lot of stuff for a lot of years.

Bruce Steiner: Yeah, if you just Google my name or maybe my name and the word ‘attorney’ and the words ‘New York’ or something, you’ll come up with lots of things that are pretty easy to find.

Jim Lange: And again, by the way, that’s Bruce Steiner.

Nicole DeMartino: Yes.

10. Distributions From Roth IRAs Are Free of Tax

Bruce Steiner: Thanks, Jim. Back to where we were before the break, as I mentioned before, we always have our clients provide for their children in trust rather than outright to keep it out of the children’s estates and to protect against the children’s creditors and predators and spouses. But trusts get to that top 35 percent income-tax bracket at about $11,000 or $12,000 of taxable income, and with other assets, you have some control over taxable income. But traditional IRA benefits come out and they’re taxable. So, the only way around that is to give up the benefit of the protection of the trust by distributing out the money. So, there’s a tradeoff there, and the Roth conversion avoids that because if you’ve converted to a Roth, the Roth distributions come out free of tax. So, when you’re comparing the tax rate on the conversion against the tax rate you’d otherwise pay when the money came out, the tax rate you’d otherwise pay when the money came out if you want the protection of the trust, is likely to be 35 percent.

Jim Lange: All right, so that’s interesting. So, let me clarify to see if this is what you’re doing. Let’s say you have a plain old IRA and not a Roth IRA. You would typically leave that to children, not in a trust, but outright to avoid the acceleration of income and to avoid high income tax rates in the event that you wanted to accumulate, but if it was a Roth, you’d feel more comfortable in a trust.

Bruce Steiner: Well, no, either way. We’d leave a regular IRA to children in a trust as well, but then, as the tradeoff, that the trustee either keeps the money in the trust and pays tax, probably at 35 percent, or distributes the money that comes out each year to the children or grandchildren, saves some income tax, but give up the protection of the trust. So, it’s a tradeoff.

Jim Lange: Yeah, and I see that, and frankly, again, this might be one area…and, of course, it’s always the client’s decision, but when a client tells me hey, they trust their kids and their kids are responsible and they don’t have lots of creditors, and, to me, the biggest creditor that I fear is their future ex-spouse, and I sometimes like to account for that with pre- or post-nuptial agreements. I might be a little bit less trust-oriented than you. I know Natalie Choate in New York. She assumes nobody’s just going to disclaim anything, and she’s very interested in having it pretty locked up, where I, on the other hand, tend to maybe have some more trusting clients, and I tend give discretion to the surviving spouse, and then after the surviving spouse is gone, I tend to give some discretion to the children. But that might be a little difference that I might be a little bit more inclined to leave to children outright, although I would never do that for young children or for spendthrifts or people with drug problems or alcohol problems, et cetera.

Unfortunately, we’re not going to get anywhere near 10 of your business mistakes. You’ve just given us a lot of information. But one of the things that you did say, and one of my big things which was your number nine in terms of mistakes, which was not considering a disclaimer, and I thought maybe if you could expand on that, and I’m going to even put it in two areas: one, while you are drafting the documents, that is while everybody’s still alive, and then two, after the first or second death. So, if you could talk a little bit about what you have been doing about disclaimers because as you know, I’m a huge fan of disclaimers and I put an enormous flexibility both at the first death and the second death. And you know something? You’re going to have about one minute.

Nicole DeMartino: Yeah, you have about 30 seconds, Bruce!

Jim Lange: That’s not fair, is it?

Bruce Steiner: Well, you have nine months within which to disclaim, meaning refuse to accept something that someone gives or leaves to you, in which case, it goes as if you had predeceased, unless the will provides some other alternative position. We probably do disclaimers in a third or half of the estates that we administer, someone disclaims something. It’s a very useful tool.

Nicole DeMartino: All right, Bruce. Thank you so much. This was Bruce Steiner. If you want more information on him, just Google him. He said tons pops up. It does do that. Jim, good night. Thank you very much. Great show. If you want more information, go to, and again, listen every Sunday at 9:00 am to The Lange Money Hour, Where Smart Money Talks.