Originally Aired: October 18, 2017
Topic: The Best Estate Plan for Married Couples, Lange’s Cascading Beneficiary Plan, with Attorney Matt Schwartz
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of Attorney Matt Schwartz of Lange Legal Group, LLC
- Disclaimer: Beneficiary Can Decline All or Some Inherited Wealth
- Disclaimers Could Prevent Acceleration of Taxation If Stretch IRA Dies
- Disclaiming IRA to a Child or Grandchild Builds Family Wealth
- Documents Should Include Specific Language About Disclaimers
- If Stretch IRA Dies, $450,000 Could Be Exempt From Accelerated Taxation
- Disclaimer Is Just an Option, It Doesn’t Have to Be Implemented
- Even High-Powered Law Firms Get Flexible Estate Planning Wrong
- Today’s Estate Planners Worry About Income Tax, Not Estate Tax
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 paytaxeslater.com. Now get ready to talk smart money.
Dan Weinberg: And welcome to The Lange Money Hour. I’m Dan Weinberg, along with CPA and attorney Jim Lange, and this week, we welcome back to the program attorney Matt Schwartz. Matt is an attorney who manages the legal department at Lange Legal Group, LLC. He uses his training and expertise to design estate-planning documents for clients, guiding them through estate and trust administration after a loved one has passed away. Matt graduated from Northwestern University with a math major, not too common for attorneys, then went on to graduate from Washington University of St. Louis School of Law. He’s a member of the Council of the Allegheny County Bar Association Probate and Trust Section, and a member of the Pittsburgh Foundation’s Professional Advisory Committee.
Now, our topic this week is the use of disclaimers. That’s a flexible estate-planning tool, and Matt and Jim will be teaching you, among other things, what the advantages are of using a disclaimer plan, how they can help you take advantage of pending tax-law changes, and whether there are any downsides to using disclaimers. So, with that, let’s get right to our discussion by saying hello to Jim Lange and our guest, Matt Schwartz.
Jim Lange: Welcome, Matt.
Matt Schwartz: Welcome, Jim. Glad to be here.
Jim Lange: Well, it’s a pleasure to have you. The fact that Matt was a math major is not incidental; it is a critical part of the strategies that he employs, both while clients are alive, and frankly, after they die, which is what we’re going to be talking about today. Of course, it has to be set up right, but the idea of a disclaimer, and we’ll talk a little bit more about what it is, but first, the real quick history. In the early ’90s, when I was a young attorney, I saw the power of disclaimers and I thought, “Wow, this is the best thing since sliced bread,” and at the time, hardly any attorneys were actually utilizing disclaimers in their planning, and I started putting them in all the wills and trusts that I was drafting, or, at least most of them, and I just did it because I thought it was the right thing. And then, in 1998, I was writing a peer-review article for The Tax Advisor, and I thought, “I wonder what the peer-reviewers are going to say about my disclaimer idea,” and they actually loved it, and then we got a lot of press in 2001 with Jane Bryant Quinn, and then The Wall Street Journal dubbed it the Cascading Beneficiary Plan because they’re a snooty journal and they didn’t want to call it what I wanted to call it, which was Lange’s Cascading Beneficiary Plan, and then it was in Financial Planning and Wall Street Journal again, and I wrote about it in my book that has been endorsed by 60-plus people, including Charles Schwab and Jane Bryant Quinn, and, perhaps more importantly, we’ve actually been drafting these plans for over 20 years now, and unfortunately, many of the people that we have drafted these plans for have died, and we have seen the benefits of flexible estate planning because it has enabled people to make critical decisions on where and how money should be directed after death. So it has been really a tremendous boon to our practice and to, more importantly, the clients that we serve, and we now have, what is it, Matt? About 2,400 estate plans out there, wills and trusts that we’ve drafted?
Matt Schwartz: At least. I think the number’s a little bit higher now, Jim.
Jim Lange: All right, and the vast majority of them do have at least some disclaimer planning or some variation of Lange’s Cascading Beneficiary Plan. So, anyway, even though I was the original guy that kind of came up with the total plan of Lange’s Cascading Beneficiary Plan, Matt is actually the person who puts it together, and he does that while he is drafting documents, wills, trusts, beneficiary designations of retirement plans, which is probably the most important use of disclaimers, and he is also helping people on the front lines after somebody dies and making really important decisions that can and have saved millions of dollars for families after somebody died.
So, why don’t we start with the basics, Matt? What is a disclaimer?
Matt Schwartz: A disclaimer is when a beneficiary, whether it’s a beneficiary under a will or a trust or a retirement plan, makes a decision within nine months after death not to accept an asset.
Jim Lange: All right, so let’s do an example. I die and I leave everything to my wife. So, if you were to look at the beneficiary designation of my IRA, let’s say that it might say the primary beneficiary is my wife, but I know the way that you’re drafting, and I’ll kind of paraphrase, but in the event that my wife doesn’t want or need all of the money, she has the right to disclaim. So what would happen then, and let’s assume, for discussion’s sake, that my contingent beneficiary was my daughter. Could you kind of put disclaimer as an example in that particular situation, where we have basically the simple situation of a surviving spouse and then a child, and then we’ll also eventually get to grandchildren?
Matt Schwartz: So, Jim, in the scenario you described, one point that’s very important, that people are not always aware, is that you don’t have to make a full disclaimer of an asset. So it can be a partial disclaimer. So maybe it’s a situation where the spouse needs most of the assets to help meet their living expenses, but there’s a portion of the assets that they don’t need to meet their living expenses, and that could be the perfect amount to disclaim to a child, understanding that there is going to be one downside you wouldn’t have otherwise quite as quickly, which is you’re going to trigger Pennsylvania inheritance tax.
Jim Lange: Well, let’s say that I die tomorrow and I left … I’m going to introduce a second concept later on, but let’s just assume, for discussion’s sake, that I have $1.45 million in my IRA, and my wife determines that all she really needs is a million dollars. In fact, the million dollars is more than enough. What benefit would there be to our family for my wife to disclaim a certain portion of the IRA that was left to her? Why wouldn’t she just take the whole thing and then our daughter gets it when she dies?
Matt Schwartz: Jim, that would be commonly the strategy under the current law, which is to accept the entire IRA because the federal estate-tax exemption’s so high right now. We don’t have the $600,000 credit that we had back in the late ’90s. However, there is the very real threat of pending legislation that’s going to cause IRAs perhaps to be accelerated in their tax treatment, and there could be an opportunity at the first death to pass some of those IRAs down to the children and prevent that acceleration of taxation.
Jim Lange: Well, before we even go there, let’s even just use current law. What would be the advantage to our family? And let’s assume, for discussion’s sake, that I’m 70 years old and my wife is 70 years old, and the survivor would have a relatively high minimum required distribution. What would be the advantage of disclaiming to a future generation in terms of tax savings?
Matt Schwartz: So, within what’s called an inherited IRA, which would be the type of IRA that would pass to a child, there’s a special table the IRS uses to determine your minimum required distribution, and with younger beneficiaries, that table’s more generous and allows the beneficiary to take less out of their IRA than your spouse would have to take out of the IRA.
Jim Lange: So, basically, I’ve been saying, “Don’t pay taxes now. Pay taxes later,” and I’ve been saying it for over 30 years now. So we’re saying, even after you die, if your child has a very small minimum required distribution of your IRA — and remember, nobody’s paid income tax on this IRA — and they only have to take a very small amount out, and the rest can continue growing tax-deferred compared to, let’s say, my spouse, who would have a much higher minimum required distribution, that the tax deferral on that IRA could actually save our family a lot of money. Is that what you’re talking about?
Matt Schwartz: That’s a good way to articulate it, is the reduced income that you’re having to take out of the retirement plan allowing more of it to grow tax-deferred is allowing for a much bigger wealth transfer than otherwise.
Jim Lange: All right, so it is actually, in effect, a tremendous tax advantage under the current law to inherit an IRA because nobody has yet paid income taxes on it, and let’s just use a round number of a million dollars, and if our kids have to pay income taxes on the entire million dollars right after we die — boom! There’s going to be, let’s say, roughly a $400,000 tax hit. Now there’s only $600,000 to invest. Where if we have what’s called a minimum required distribution of the inherited IRA, and let’s say it’s $30,000 or $40,000, then that extra $960,000 is available for investment. So the child is earning income on the $960,000 of investments versus the $600,000. Is that right?
Matt Schwartz: Correct.
Jim Lange: OK. And if we do that over a lifetime, that becomes very significant, maybe even saving the child a half a million or a million dollars.
Matt Schwartz: That’s what the studies have shown, is the long-term tax deferral of money really creates a tremendous benefit for the family.
Jim Lange: All right, and let’s have some real fun. Let’s say, for discussion’s sake, that I have two children, and one of them is not doing very well financially and they need everything that I leave to them, and let’s say I leave the money 50/50, and let’s say that we use Lange’s Cascading Beneficiary Plan, which, in effect, says “I leave everything to my spouse. If my spouse doesn’t want it, or doesn’t need it, or doesn’t want all of it, they have the right to, again, disclaim, and if they disclaim a portion or all of it, it would go to the children equally. Then, each child has the right to keep his or her share, and if they decide not to keep it, then they have the right to disclaim,” and, as you mentioned, “including a partial disclaimer into well-drafted trusts for the benefit of grandchildren.” What would be the advantage of having a grandchild inherit an IRA compared to, say, a child or then a wife?
Matt Schwartz: So, let’s just say it was a million-dollar IRA, which is the example we have, and that, let’s just say, for purposes of discussion, the disclaimer was a million dollars, that there were enough other assets to provide for the surviving spouse. If you have a grandchild who’s 5 years old, their life expectancy under the Single Life Table may be 80. So, they may only have to take out $1,200, $1,300 out of that retirement account, which is really barely over 1 percent, and hopefully, it grows at 4 percent, 5 percent, 6 percent, and could be quite a long-term dynasty.
Jim Lange: Mmm-hmm. And how would that work if it was a Roth IRA?
Matt Schwartz: Well, with a Roth IRA, a lot of people are often confused and think that you don’t have to take money out of a Roth IRA when it’s getting distributed to a child as an inherited IRA, and it does have to come out, but it is income-tax free.
Jim Lange: So, literally, that would be a tax-free dynasty potentially to leave a Roth IRA to first, a spouse, and if your spouse needs it, end of story, spouse keeps it. Spouse doesn’t need any of it, they could disclaim all of it, or, let’s say, the more common case or a case that you mentioned, is the spouse keeps some. So it sounds like a pretty good thing because one of the problems with estate planning is we just don’t know what’s going to happen, you know? We don’t know if we’re going to have another 2008. We don’t know if there’s going to be a change in the tax law. We don’t even know what the changes of the tax law are going to look like next year. We don’t know what the situation for the survivor is. We don’t know what the situation for the grandkids is, et cetera, et cetera. So building in flexibility sounds like a good thing, and let’s assume, for discussion’s sake, that we have, what I call, a “Leave It to Beaver” family, that is, original husband, original wife, same kids, same grandkids. So, has this concept been tested? In other words, it sounds great, but what has been the result of the hundreds of wills that we have actually probated and beneficiary designations that you have worked on personally?
Matt Schwartz: So we have had clients utilize the disclaimer option. It’s not just something in theory; it actually happens in practice, and in those situations, not only has it provided the tremendous tax benefit that Jim and I have been describing, but it’s also provided the beneficiary with funds at a critical part of their lives rather than maybe having to wait until both parents pass away and receiving an inheritance in their 60s, or some cases, 70s, and not then really having as much of a use of the money then than they would’ve had 20 or 30 years before.
Jim Lange: Well, we certainly don’t want to reveal any confidential information, so feel free to change fact patterns for confidentiality, but can you give our listeners an example or two of somebody who has made a disclaimer and what the impact has been on the family?
Matt Schwartz: Well, I mean, I could just say, broadly, there’s been situations where that’s been money that the children were trying to send their children to summer camp and they were having a very difficult time being able to do that, and with the funds that came in through the disclaimer, they were able to provide for their children’s summer camp, they were able to provide for their children’s education, and it really made a big difference in that family’s life, and they just didn’t have the relationship where they could easily ask the parent for a gift, and the disclaimer method worked quite well.
Jim Lange: All right, and what was the tax benefit? If we look at the whole family as a unit, so let’s combine children, grandchildren and surviving spouse; what could be a potential tax difference between that family unit that utilizes, say, even a hundred-thousand dollar disclaimer, or, better yet, and we have had disclaimers of a million dollars or more? Let’s use that because that’s a little bit more dramatic. Let’s say that there is a million-dollar disclaimer. Now, in that case, you might have somebody that maybe has a $3 million IRA. The surviving spouse chooses to keep 2 million, and let’s say that there is a 1 million dollar disclaimer. What would the difference be just in taxes? So, you brought up the very human element that the children get the money earlier in their life when they are likely to need it more instead of inheriting when they’re in their 60s and 70s. What is the total tax benefit to the family of, say, a potential disclaimer of a million dollars to a combination of children and grandchildren compared to the spouse just keeping everything?
Matt Schwartz: Well, I think the way to look at that is the spouse, once their husband or wife passes away, assuming they don’t remarry, are going to be in the single tax table. Most of the time, they generally have more income than the younger generation. So not only are they taking out more, Jim, they’re having to pay it at a higher tax rate. So in an effort to try to quantify it, I mean, you might be looking over time at something that’s over a period of 30 years, 40 years, you could very realistically get into over a million dollars of value.
Jim Lange: Yeah, and that’s just to the child. If you do it to the grandchild, it can be even more. So my point is, this is not an inconsequential decision on whether to disclaim and then how much to disclaim. Do you like to include provisions when you are drafting documents, whether it’s wills, trusts, or perhaps a great as income-tax savings as the beneficiary of the IRA? Do you like to put in special language that will allow for disclaimers and partial disclaimers?
Matt Schwartz: I do, and the reality is that often you don’t absolutely have to use the word “disclaim.” You could just say if someone predeceases, and a disclaimer’s treated the same way as predeceasing, but the problem is the clients don’t know that. So if you’re sitting there with a family and they don’t see the word disclaim, they’re not realizing that the testator, or the parent who passed away, is giving them that permission to disclaim. So, often, putting the language there makes it more clear to them as to what to do, and it makes it more clear also to the institution as to what we’re trying to accomplish because we do have cases where the result could be different as far as who the beneficiaries are in a disclaimer situation as opposed to a death situation. Say, for example, you want to leave something to charity in a situation of death, that your spouse passes away and you want a certain amount to go to charity and you want the balance to go to your kids. But if it’s a disclaimer situation, the spouse is probably going to want to just disclaim to the kids and rather make the charitable gift themselves and get the income-tax deduction themselves.
Jim Lange: All right. So, basically, you’re saying to do this thing right, you actually want to have the disclaimer provisions in the documents while both the husband and wife are kicking. Is that right?
Matt Schwartz: Correct.
Jim Lange: And you also like to make it very clear that they can do a partial disclaimer, and I think you take a more belt-and-suspenders approach, and the point I think that you’re trying to make is even if somebody were to make the foolish move of having us draft their documents and then going somewhere else for estate administration, which, frankly, happens very rarely unless somebody moves out of state, that this is kind of like a cue to whoever is doing this, “Hey, what’s this disclaimer? Maybe I should think about it. Gee, husband died with more money than wife needs,” and, at least under the existing law, there are tremendous advantages of disclaiming. Like you said, it can save a million dollars for the family. If you think about how hard you worked to make your million dollars, and if you can provide for the spouse and save taxes also, isn’t that the best of both?
What is the potential downside of disclaimers?
Matt Schwartz: Well, unfortunately, Jim, you and I have seen this happen several times in our careers, where one spouse had the full intent of having the other spouse give up some of the IRA because they felt, and the spouse sort of nodded their head at the time, that the spouse didn’t need all of the IRA, and then it turns out that after that spouse passes away, the other spouse gets cold feet, they decide that their kids can make their own money, that they don’t need to disclaim, even though it makes a lot of tax sense, and then we end up with a situation that the family pays a lot more in tax and the spouse didn’t really need that additional financial security, but, in their mind, they did, and we’re always respectful of what the spouse wants to do.
Jim Lange: Sure. So let’s use that $3 million example, where there was a million-dollar disclaimer and we saved the family well over a million dollars. If the spouse had said, “No, I want to keep everything,” and even though they were spending, say, $6,000 or $7,000 a month and the truth is a million would’ve been more than enough, 2 million would’ve been way more than enough, but if the spouse kept everything, you’re saying we would’ve been giving up a million dollars in taxes for the family and it wouldn’t have had any impact on the lifestyle of the surviving spouse, is that right?
Matt Schwartz: I would say that with one caveat, which is it’s really important for us to have an opportunity when we can to educate the family, because if we do this great disclaimer idea and then the kids just say, “Oh, I’m putting a big, new kitchen into my house and I’m going to tap my IRA to do it,” then we’re not going to achieve the goal of the disclaimer. So the advice has to be coordinated.
Jim Lange: All right, so in that situation, we don’t want to deprive any of these beneficiaries of their big kitchen, and let’s say that they inherit some, what I’ll call, after-tax dollars or non-IRA dollars, and they inherit some IRA dollars that are, under the current law, stretched or deferred. Are you saying that what they should do is spend money that they inherited from outside the IRA and maintain the inherited IRA?
Matt Schwartz: Yes.
Jim Lange: All right. Or possibly, and they don’t have to do the whole thing, but maybe they themselves can disclaim maybe $100,000 each into well-drafted trusts for the benefit of their kids.
Matt Schwartz: And we’ve seen clients do that, though I’ve seen, in practice, that what clients tend to do is they’ll tend to use some of the money they’ve received from mom and dad’s IRA to help out with their kid’s expenses, knowing that they’re honoring mom and dad’s intent, but they have a hard time sometimes letting go full control unless the kids are a little bit older, the grandkids.
Jim Lange: All right, and we have some potential new laws pending, and we’re going to talk about the advantage of having these flexible estate plans in your documents, whether the new law passes or not, and for some of you, this might be the most important reason why you would do disclaimers and this type of flexible planning, and that will be explained after the break.
Dan Weinberg: That’s right. When we come back, we’ll continue talking about how to use disclaimers in your flexible estate planning.
Dan Weinberg: And we are back on The Lange Money Hour, Where Smart Money Talks, and this week, CPA/Attorney Jim Lange is talking with his colleague from the Lange Legal Group, attorney Matt Schwartz, and the topic is disclaimers, which is one of the many flexible estate-planning tools in the Lange Financial Group’s toolbox.
Jim Lange: So, Matt, one of the things that our office has been very aggressive in talking about and promoting is information regarding the potential death of the stretch IRA, and by the way, I will mention that we actually have something for KQV listeners. If they go to www.paytaxeslater.com, we actually have a whole book on the death of the stretch IRA that could also be called the “sneaky tax” because hardly anybody’s talking about it and it could make a difference of literally hundreds of thousands of dollars. But can you maybe briefly explain what the death of the stretch IRA is, and then we will get to how the Cascading Beneficiary Plan or flexible estate plan might be the perfect antidote to, or answer, to the death of the stretch IRA?
Matt Schwartz: Sure, Jim. I guess there’s a little bit of legislative history that would be helpful to explain. So Congress, for the last five years, has been contemplating a way to raise revenue, and one of the ways they’ve been coming up to raise revenue is by changing the laws regarding inherited IRAs. In 2013, they nearly passed a law, they were short one senator, I believe, of passing a law that impacted the ability of a child to take out an IRA over his or her lifetime, which is the current law, rather the law proposed that they would have to take the IRA out over five years. And in the fall of 2016, the Senate Finance Committee voted unanimously, 26 to 0, to implement this new proposed law to cause the IRA to have to come out over five years to a non-spouse beneficiary, with certain exceptions. Now, this passed near the end of the legislative session. It did not get to a full vote of the Senate, but we do know that tax reform is on the agenda this upcoming fall.
Jim Lange: And also, we know that the tax rates will likely be lowered. Some of the punishments like alternative minimum tax, and even the estate tax, let’s say, there’s potential relief there, but in order to pay for some of this, and at the risk of sounding a little bit political here, so basically, they’re going to give multimillionaires and billionaires a huge break, and they’re going to nail the children of people who have IRAs. So in the example before when we were talking about, we said the child would have the ability to continue to defer, let’s say, roughly a million dollars in their IRA compared to having to come up with the tax. Yes, it’s not immediately, but the proposed law, the kid would have to basically come up with $400,000 in taxes, and the difference between earnings on a million dollars over time versus $600,000 over time over the child’s life might be a million dollars. So it really is pretty important, and our office has been very aggressive in utilizing the stretch IRA to the extent that we are allowed. And I’d like to say, God forbid, but I think that the odds of it passing are much greater than the odds of it not passing, if not in 2017, 2018, or whenever the next major tax legislation is passed. I don’t think it’ll pass as a standalone bill. I think it’ll be attached to the big bill. But let’s assume it does pass. Can you tell us about the proposed exclusions, and then, with that background, get into why the flexible estate plan, or Lange’s Cascading Beneficiary Plan, might be so beneficial?
Matt Schwartz: Sure. So we were anticipating initially when we saw a draft of the bill from the Senate Finance Committee in 2016, we were assuming that every dollar that was going to go out to a non-spouse beneficiary was going to have to be taxed over five years, and Jim, in fact, I think you had a book almost ready to go that was written on that premise.
Jim Lange: In fact, it was not only not ready to go, if you sign up for it, that’s the book that you get. Now, we did write an addendum to cover the issue that you’re about to, but yeah, that’s right. So, wrote the book basically saying the death of the stretch is coming, the death of the stretch is coming, but what curveball did the Senate Finance Committee throw us? By the way, this was a good curveball.
Matt Schwartz: Right! We were actually very grateful for this. The Senate Finance Committee decided that each IRA owner could exempt $450,000 from the new proposed law of a five-year payout and have it paid out over the beneficiary’s lifetime, and I remember Jim’s excitement at first was not only do we have this $450,000 exemption, but how do we play with it? How can we allocate it to different types of assets? And unfortunately, the news was not so good when it came to ability to allocate among assets.
Jim Lange: Yeah, meaning Matt read the statute closer than I did and said that some of my wonderful plans wouldn’t work. But let’s talk about what does work. So, basically, what you’re saying is each IRA owner can pass $450,000, even under the proposed law, that would work just like the old law did, that is $450,000 could be stretched over the non-spouse’s beneficiary’s life, and then the other million, or the other amount over and above that, would be subject to income tax acceleration. So, let’s go back to my initial example, how we started the show, which is I have $1.45 million in my IRA. At the time of my death, my wife thinks a million dollars is more than enough for her use. What advice would you give my wife, assuming that the documents were drafted as we’re talking about, using Lange’s Cascading Beneficiary Plan, if my wife came in to see you, what advice would you likely give her if you knew — and by the way, this is another one of the reasons why your math background is so important — if you knew, based on her other assets and her spending, et cetera, et cetera, that a million of the IRA would be more than enough for her needs?
Matt Schwartz: Well, in that situation, I would strongly recommend the disclaimer of $450,000 of the IRA to take full advantage of the exemption to allow that amount to be stretched out over the child’s lifetime.
Jim Lange: All right. So in our old example, we said if you disclaim a million, it might save the family a million, let’s say, roughly, and we had actually done peer-reviewed analysis on this. So, basically, that potential disclaimer would save, say, $450,000 or $500,000 for the child. All right, so let’s say that my wife now does this, and she keeps a million for herself, she disclaims $450,000 that goes to our daughter, and now, let’s assume it is years later. Now, my wife dies, and let’s forget about growth in the IRA, let’s say she dies with a million dollars and she leaves her million dollars in the IRA to our daughter. Now, our daughter has already received $450,000 and is presumably stretching it over her lifetime. Then what would happen with the remaining million dollars that would go to our daughter?
Matt Schwartz: So, the remaining million dollars, now, another $450,000 because each IRA owner has a $450,000 exemption, would qualify for the stretch IRA treatment, and basically, if we would assume for purposes of this case that your daughter was 40 years old when your wife passed away, we might be looking at a 40-year payout on that $450,000, whereas the other $550,000 in our example would have to come out over five years.
Jim Lange: All right, so let’s compare that example to the example where we don’t think about this at all, and I just die with $1.45 million. By the way, this is what I think’s going to happen to probably 98 percent of the cases out there because people aren’t going to be thinking like this, and it’s why we’re in such a strong position to give advice because we actually understand the math of inherited IRAs. But let’s compare that example to what I would call the status quo, which is I die with $1.45 million to my wife, disclaimers are never discussed, and again, we’re talking about what happens under the proposed law, which, again, I think is coming, and then what happens years later is that my wife dies and leaves the money to our daughter. What would happen then? How would that compare to the first example where we had a $450,000 disclaimer?
Matt Schwartz: Well, so, just to try to compare the apples to apples here, in the second example, we’d have a million dollars that would be unprotected. In the first example, we had $550,000 that’s unprotected using Jim’s example of 40 percent in income tax, even if stretched out over five years, in the smaller example, it’s $220,000 and in the bigger example, it’s $400,000.
Jim Lange: So, we’re really talking about a massive amount of money, and particularly if my wife can make the decision not now, but she can make it within nine months of my death. So let’s take a situation where we might not want to disclaim. I’m assuming that my wife doesn’t need it all. What if we have another 2008 and the market goes down 40 percent, and the $1.45 million now becomes, let’s say, a million or $800,000 and my wife would need it. What advice would you give my wife at that point?
Matt Schwartz: Well, so, in that situation, you would want to have some additional security because, as Jim said, if she makes the decision to do the disclaimer and the asset goes way down and then she doesn’t have enough for herself, that’s a bad result.
Jim Lange: Well, I was actually talking about the situation where the market went down between the time that we draft the documents and my death. So, I’m not talking about the market going down after she dies. I’m talking about the market going down before I die, but after we draft the documents.
Matt Schwartz: Oh, OK.
Jim Lange: So, we have the disclaimer situation set up, but it turns out that the market goes way down. What would you recommend then?
Matt Schwartz: Well, you don’t have to disclaim. I mean, a disclaimer is an option, and some people don’t understand that they have that option, but it’s just an option. So, if we were really concerned about the spouse’s welfare, which is always our first concern before we even consider tax strategy and disclaimers, we’d probably advise the spouse to keep the money.
Jim Lange: Right, so basically, I kind of call it a free second look. Again, the classic problem with estate plans is we just don’t know what’s going to happen. We don’t know how much money there’s going to be. We don’t know what the needs of the spouse are going to be, the needs of the kids, the needs of the grandkids. With these disclaimer provisions, we can let the spouse make that decision, not now, but within nine months of our death. Well, Matt, let’s try to be consistent. Would you want to have disclaimers in the wills, in the revocable trusts, in the IRAs, in the Roth IRAs, in the life insurance; which assets would you prefer as a planner to have disclaimer provisions in?
Matt Schwartz: Well, ultimately, for flexibility purposes, you would like to have disclaimer options with all your documents. There is something we brought up before, which could change the calculus if this proposed law goes through, is what if we really feel that we can’t trust the spouse to disclaim and it’s a prudent thing to do? Will we be more inclined to set aside a certain percentage for a child to make sure we achieve that objective if the family’s onboard with it?
Jim Lange: So, basically, what you’re saying, I think, is that everybody’s a snowflake and you can’t just mechanically have the same plan for everybody. And Matt is the person who actually implements the disclaimer-type planning, both on the drafting end and, perhaps as importantly or even more importantly, on the estate-administration end after somebody has died, and he’s already given us examples of where he has saved clients literally a million dollars by having a surviving spouse disclaim money to a child. I’m going to take the next step because part of Lange’s Cascading Beneficiary Plan goes beyond the ability to disclaim for the surviving spouse to the children equally, but we also provide that each child has the right to disclaim, again, as Matt pointed out, or a partial disclaimer into well-drafted trusts for the benefit of their children. So, Matt, can you be a little bit more specific about, let’s say, the last part of the Cascading Beneficiary Plan and what is included in the drafting stages?
Matt Schwartz: Sure. So, generally speaking, a child may consider disclaiming to a grandchild, one, if it’s going to be in a trust for the grandchild, the child wants to have some control. So a child is a lot more comfortable making a disclaimer if they can be the trustee for the benefit of their child for distributions for that child’s health, education, maintenance and support.
Jim Lange: OK, and by the way, you notice the difference between the documents that we’re drafting and the standard documents. The standard documents, the only way the grandchild is going to inherit anything is if the child is dead, and what we are anticipating is that the child might be alive and well and doing well financially, not needing all the money, seeing the opportunity to save another half a million dollars, or even a million dollars, for the family, allowing the child to disclaim, or partially disclaim, to a well-drafted trust for the benefit of the grandchild, and then the parent can actually be the trustee. Is there anything special that has to go into the trust for the grandchild, assuming the underlying asset is an IRA or a retirement plan?
Matt Schwartz: Well, that’s where most people miss the boat, is on the specifics that have to go into the trust, and they tend to miss it in two ways. One is in the actual drafting of the trust itself, that some things are relatively straightforward. The trust has to be a valid trust under state law, but then there has to be specific language to make sure that the minimum required distribution is either going to get paid out to the beneficiary or it’s going to be accumulated in a permissible way under the IRS regulations. So most drafters aren’t aware of that language, and perhaps more seriously, Jim, what I think we would both agree that we commonly see in practice is we see these very elaborate wills and trusts that are prepared by other law firms, and then we ask the client about their beneficiary designation, where the majority of their wealth may be, and commonly, the beneficiary designation, we could describe in six or seven words: spouse first, children and equal shares as the contingent.
Jim Lange: So they don’t have the magic language needed in order for the grandchild to defer the income taxes. So, Matt, as a practical matter, one of the things that I don’t want to do when I am meeting a new prospect is to redo an estate plan when what they have is perfectly fine and perfectly functional, and a lot of times, since you have greater expertise in this than I do, I will bring the documents in to you, and I say, “Well, Matt, do these documents work that would give the grandchild the right to stretch the inherited IRA in the form of a trust?” So we obviously get a wide variety of other attorneys who have drafted this, including, with all due respect, some of the very big and some of the very expensive firms. How often would you say that it is done to your level of satisfaction, and what percentage of cases would you say that it really isn’t done to your level of satisfaction?
Matt Schwartz: I mean, you’d be almost surprised that we could say this, but probably only 10 percent or 15 percent are done to our level of satisfaction and the rest of them have some type of glaring lack of language that’s needed to make the stretch work.
Jim Lange: All right. Well, by the way, that’s pretty significant. So if you think about it, and this is particularly for parents of children who are doing well, or, in the event that you are interested in providing for grandchildren, that very few, Matt mentioned 10 percent or 15 percent, I’d say that’s probably a pretty good estimate, of the documents that we see … and the people that we tend to attract, they don’t typically go to Joe Schmoe attorneys. They’re usually going to, at least, some type of decent attorney, often a big name downtown, and they think that they’re OK. Sometimes, they come in just for a second opinion, and it’s not what they think, and they are not giving themselves, their kids and their grandkids, the opportunity to save hundreds of thousands, maybe millions, and maybe even, under existing law, more than millions of dollars, and you’re saying that this happens much, much more often than it’s done right.
Matt Schwartz: I am saying that, and in fairness, it may just be that some of these attorneys are being shortsighted. They realize that they’re not putting the care into the retirement account, but they’re so focused on what they were taught 20, 30, 40 years ago in law school about planning around the estate tax, and now, you have to be really, really wealthy. You’ve got to have nearly $11 million to worry about estate tax. So people are just not emphasizing these retirement beneficiary designations the way they should.
Jim Lange: Yeah, so, basically, I think what you’re saying is that the game, and particularly for people who have $500,000, a million dollars, $2 million in an IRA, and maybe that’s the majority of their estate, that the old traditional plans just don’t work anymore, and that they don’t have an estate- or transfer-tax problem. What they have is an income-tax problem, both while they are alive and after they’re gone. Of course, that’s our area of specialty. I will take the liberty of mentioning, and we often offer a free consultation for those of you who qualify, with me, but I’m going to make a special offer today for people who are interested, they maybe have heard this program and they start to realize some of the power of disclaiming and some of the power of getting the estate plan right, particularly when the underlying asset or a major portion of the estate is an IRA or a retirement plan, and we’ll take the liberty of mentioning that we are offering a free second opinion where you would actually meet with Matt, and Matt will take a look at your documents, and he’s a very honest guy, scrupulously honest, I completely trust him, and how long have you been working with us, Matt?
Matt Schwartz: Fifteen years.
Jim Lange: Just 15 years. But anyway, so how many of these have you drafted?
Matt Schwartz: I think we’re probably at the point now where we’re pushing a thousand.
Jim Lange: OK. So, basically, you do this in your sleep. But you would have the opportunity to come in. We do ask you to bring a list of your assets, and we would ask you to bring in your wills or trusts or beneficiary designations of IRAs because Matt’s an ethical guy, and if you are one of the, let’s say, 10 percent of the people where everything was done right, Matt will tell you, “Hey, everything is done right and I don’t think that we should make any changes to your wills or your trusts or your beneficiaries of your IRA.” But for the vast majority of you, I think he will say, “Well, I’d really prefer if it had this language, or if it had that language, and here’s what I think needs to be done,” boom, boom, boom, and he will tell you what he thinks needs to be done, and then rather than give you either a range or an hourly amount, he will give you a flat-fee quote. “This is what I think needs to be done,” boom, boom, boom, “and this is how much it would cost.” And then, you would have the decision of going forward or not going forward. I’ll also mention that if that is your primary concern, Matt is the guy to see on this, whether you want to call it a free initial consultation or a free second opinion, et cetera.
If you are interested in some of the other things that we talk about, such as Roth IRA conversions and how much money you can spend and Social Security maximization and developing, what I would call a master plan, and you’re interested in having at least a portion of your money managed, then the person to see would be me. Now, I think we had mentioned in more than one previous show, that we have actually surpassed a milestone. We have $500 million under management, and with our current arrangement with P.J. DiNuzzo, we actually have $300 million, and, more importantly, a 96 percent retainage rate. So if you are interested in, let’s say, some of those types of services, you might want to have the consultation with me, but in the event that you are interested in the wills and trusts and beneficiary designations of the IRAs and retirement plans, then you would actually see Matt, and Matt would be the person to go to. The way you would do that is, you would call our office at (412) 521-2732 and ask for Alice, who has control of Matt’s schedule, and even though Matt’s much tighter than I am, we find that it’s better if Alice does the scheduling, and you can come and meet with Matt.
So, anyway, Matt, you have been a terrific guest. You’ve given us all kinds of very good information regarding the use of disclaimers and flexible estate plans and the implementation of the Cascading Beneficiary Plan. It’s been a pleasure to have you. I hope we can have you come again.
Matt Schwartz: I’d love that, Jim. Thanks.
Dan Weinberg: All right, thank you, Jim and, of course, thank you, Matt, and listeners, if you’d like to meet with Jim or Matt in person, give the Lange Financial Group a call at (412) 521-2732 to see if you qualify for the Lange Second Opinion service. That’s (412) 521-2732. You can also connect through the website, www.paytaxeslater.com. While you’re there, you can also get a free digital copy of Jim’s latest book, The Ultimate Retirement and Estate Plan for Your Million-Dollar IRA. For now, I’m Dan Weinberg. For Jim Lange, thanks so much for listening, and we will see you next time for another edition of The Lange Money Hour, Where Smart Money Talks.