Episode 115 – Estate Planning with guest Matt Schwartz

Episode: 115
Originally Aired: February 11, 2015
Topic: Estate Planning with guest Matt Schwartz, 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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Please note: *This podcast episode aired in the past and some of the information contained within may be out of date and no longer accurate. All podcast episodes are intended to be used and must be used for informational purposes only. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment strategy or plan will be successful. Investment advisory services offered by Lange Financial Group, LLC.


Wills, Trusts and Estates
James Lange, CPA/Attorney
Guest: Matt Schwartz
Episode 115

Click to hear MP3 of this show


  1. Guest Introduction – Matt Schwartz
  2. Money Saving Strategies for your Legacy: Leaving to Charities
  3. Avoiding Probate
  4. Trusts as Beneficiaries
  5. Attorneys and Financial Advisors Working Together for You
  6. Special Needs Trust
  7. The Importance of Having Assets in the Right Name
  8. Naming Trustees and Executors
  9. Money Saving Strategies:  For You and Your Livelihood
  10. The Threat of the Death of the Stretch IRA
  11. Disclaimers

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1. Guest Introduction – Matt Schwartz

David Bear:  Hello, and welcome to this edition of The Lange Money Hour, Where Smart Money Talks.  I’m David Bear, here in the KQV studio with James Lange, CPA/Attorney, and author of two best-selling books, Retire Secure! and The Roth Revolution: Pay Taxes Once and Never Again.  What is the best way for you to preserve your legacy and protect your heirs?  When is it wise to establish a trust and when is it not?  How about naming a trust beneficiary of your IRA and/or retirement plan?  For perspectives on the many issues involved in answering that question, we welcome attorney Matt Schwartz to this edition of The Lange Money Hour.  Lange Financial Group specialist in estate planning and administration, Matt is a graduate of Washington University of St. Louis School of Law, a member of the Council of the Allegheny County Bar Association, Probate & Trust Section, and the Pittsburgh Foundation’s Professional Advisory Committee, and the past president of the Allegheny Tax Society.  Particularly well versed on issues regarding Roth IRAs and conversions, Matt’s gifts for mathematics, quantitative thinking and strategic analysis translate well into developing and executing comprehensive estate plans that produce more money for his client’s heirs.  Tonight, Jim and Matt will offer a potpourri of their favorite retirement and investment strategies, and since the show is live, you can join the conversation with your comments and questions by calling the KQV studios at (412) 333-9385, and with that, I’ll say hello, Jim and welcome, Matt.

Jim Lange:  Welcome, Matt.

Matt Schwartz:  Thank you.

Jim Lange:  Everything that David said is true, but I wanted to add a quick thought.  When you have the mathematical abilities that Matt has, and we’re talking about a math degree from Northwestern, one of the best schools in the country, and you bring with it the desire to save people money and taxes, to help people retire more securely, to help pass on wealth to the next generation and two generations, you have a really powerful combination because there’s a big difference between, let’s say, implementing some of the strategies that Matt and I often come up with and not.  One of the things that Matt said when he was working for me in the very early years was he said, “Boy, this is so much fun working here because we’re not just being mechanics and setting up wills and trusts, etc., we’re actually being strategists and really helping people.”  And it’s just been a wonderful association for, what is it, eleven years?

Matt Schwartz:  Going on twelve.

Jim Lange:  Going on twelve years.

David Bear:  Twelve.

2. Money Saving Strategies for your Legacy: Leaving to Charities

Jim Lange:  All right.  So, with some of these issues, I actually think that we can really make a difference.  So, when Matt and I were talking about, well, what kind of show should we talk about tonight, what are some of the things, rather than just kind of limiting ourselves to kind of black letter law and trusts and things like that, we thought we would go over some of the strategies that we have used that have saved people a lot of money.  And one of the things that we had, we had a relatively recent death, and there were some strategies that we had employed before the death, and it worked out very well for a combination of the family and a number of charities, is I thought we would talk about a few of the charitable techniques that we have used that frankly, I don’t know if any other law firm uses, and to me, they make so much sense that I don’t know why every law firm doesn’t use them.  But why don’t we talk about some of the techniques?  And I sometimes call these ‘greedy giver’ techniques, and a greedy giver is somebody who wants to provide for their family, but also has some room in their heart for charity, but not a lot of room in their heart for the IRS.  So, they want money for their family, they want at least some money for charity, but they don’t want any money for the IRS.  So, Matt, what are some of the favorite strategies that you have seen us use and that you have implemented, both in the planning stages and in the post-death estate administration stages, that could potentially save listeners and their families and their charities a lot of money?

Matt Schwartz:  Well, Jim, first, thank you for your kind words in the introduction.  As I was thinking about different ideas, it’s so often we’ll see wills that come into our office, and we’ll see a $5,000 bequest in a will, and what happens is, the clients says, “I want to change the charity.”  So, then, they have to pay you to change the charity, and often, they’re using the wrong asset to give to charity.  When you own an IRA and you pass away, that IRA, if you give it to an individual, they’re going to have to pay income tax on every dollar.  But if you give it to a charity, a charity’s a tax-free entity.  So, it doesn’t have to pay income tax on the IRA.  And as simple as you can update your beneficiary designation at any point to include charitable beneficiaries, and if you fall out of favor with a particular charity, all you have to do is fill out a new form.

Jim Lange:  Yeah.  So, let’s even just take one minute and do the math on that.  Let’s say you have $100,000 that you want to give to an heir, and $100,000 that you want to give to a charity, and most people are, let’s say, giving the $100,000 to the charity in their will, and they’re leaving the money in their heir to their IRA.  So, let’s say, for discussion’s sake, that the heir has to pay tax on that.  We’re actually losing maybe $40,000 of taxes.  So, just by switching the order of who you leave what to, you’re actually creating a bigger pie for everybody except the IRS.

Matt Schwartz:  The heir’s getting to keep $100,000 and the charity’s getting $100,000.

Jim Lange:  And the IRS gets…

Matt Schwartz:  Zero!

Jim Lange:  All right.  That’s the way we like it!  Are there some techniques where you can leave money to charity and further enhance the family’s values by combining a charitable technique and other ideas?

Matt Schwartz:  Absolutely.  I mean, commonly, in law school, we learn all about charitable trusts, and they do have a time and place, but they are often complicated, and most people don’t want to deal with the complicated rules, the complexity, that’s involved with the charitable trust, and you don’t get any leverage from your dollars.  But if you have a situation where you have a couple that’s insurable, and they’re thinking about making a charitable gift, they can buy life insurance and have whoever the charity is own it, and they’ll pay less dollars to the charity to ultimately fund the charitable gift.  And then they could use that tax deduction in strategic ways, Jim.

Jim Lange:  All right.  So, let’s say, for example, you want to leave a lot of money to a university or the charity of your choice, what you’re saying is, if you actually set up a life insurance policy where the owner of the policy isn’t you, but it’s actually the charity itself, then every time you pay the premium, you get a tax deduction?

Matt Schwartz:  That’s correct.

Jim Lange:  All right.  So, you’re actually saving some money in taxes, and then the charity, of course, gets it income tax-free.

Matt Schwartz:  That’s right.

Jim Lange:  And it’s out of your estate.  All right.  Now, you talked about combining some techniques.  So now, let’s say you have a big deduction for a charitable gift that was used to fund life insurance.  What can you use that big charitable deduction for?  What are some of the other planning techniques that you can combine with that?

Matt Schwartz:  Well, obviously, if you just take the deduction, it’s going to reduce your taxable income, but it could be a very valuable opportunity either to get more money out of your tax-deferred plans, or if you have a long-term objective, you can do a Roth conversion…

David Bear:  Umm-hmm.

Matt Schwartz:  …at much lower tax rates than you could otherwise.

Jim Lange:  Yeah.  By the way, we have done this multiple times in practice, and it is really cool to be able to have the family get as much, or almost as much, money by combining life insurance, charitable deductions, Roth IRA conversions, and getting this in place, and we have done that relatively recently, and it’s such a joy, really, to have a meaningful legacy when it didn’t cost your family a lot of money.  And maybe people at the IRS are wincing right now, but I love some of these strategies!

David Bear:  And you kind of create a diversified income stream at that point, don’t you?

3. Avoiding Probate

Jim Lange:  That’s true.  You know, you basically are getting Roth IRA dollars, no minimum required distributions, you can transfer the money, change investments however you like, and there’re no tax consequences.  So, there’re a lot of things that we can do in that area.  Let’s talk about some of the simple things that people talk about.  And by the way, the issue that we’re about to bring up, which is going to be avoiding probate, there’ll be a commercial coming up, but we’re actually doing a two-hour talk on trusts on January 25th.  But one of the issues that we come up with in practice all the time is does it make sense to avoid probate?  And there’re a lot of lawyers who just want to avoid probate no matter what, and they talk about all the money that you can save by avoiding probate, and I’d say, in many cases, at least to some extent, they’re right, but does it really make sense to avoid probate all the time?  And what have you seen?  Because you’ve done it from both ends, that is, you’ve been very involved in the planning process, but you’re also involved in the estate administration process after people die.  What are some of the advantages and disadvantages, and do you have some general rules for whether somebody should avoid probate or not?

Matt Schwartz:  Sure.  It’s a question that comes up so often.  People think that by avoiding probate, you’re saving taxes, and that’s really not true.  If you consider court fees taxes, then perhaps that is true.

David Bear:  Umm-hmm.

Matt Schwartz:  But you’re not saving estate taxes or inheritance taxes.  People have different types of assets.  They have assets that are in their own name with no beneficiary designations, and that’s what’s known as ‘probate assets.’

David Bear:  Umm-hmm.

Matt Schwartz:  But if you’re very heavy in IRAs and life insurance and joint assets, then very little of that’s probate.

David Bear:  There’s a beneficiary designated on those instruments.

Matt Schwartz:  Correct.  So, in that case, to cause someone to avoid probate, they’re already avoiding probate.  So, you’re just making a fee by telling them they have to avoid probate…

David Bear:  Umm-hmm.

Matt Schwartz:  …and they’ve already avoided probate.  Having said that, a lot of the IRA custodians are getting more restrictive in what they will permit as a beneficiary designation when you want to incorporate more complicated ideas into your beneficiary designation, other than just naming individuals.  And then, a trust can be an effective distribution vehicle, even when you don’t have a lot of probate assets.

David Bear:  Umm-hmm.

Matt Schwartz:  So, that’s one situation where you might initially think, “Gee, someone’s just trying to sell me something by telling me to avoid probate,” but there could be a legitimate planning reason to actually have that trust in place.

4. Trusts as Beneficiaries

Jim Lange:  Yeah.  So, even some of the big companies like Westinghouse, for example, if you die with money in an IRA, and you have some of the sophisticated IRA beneficiary designations that we often recommend, if you do not have that money in a revocable trust, then Westinghouse is going to give you problems, aren’t they?

Matt Schwartz:  Designated to a revocable trust, correct.

Jim Lange:  Yeah, yeah, yeah, fair enough, obviously.

Matt Schwartz:  Correct, correct.

Jim Lange:  So, it’s not an easy yes/no situation.  It’s, like, the way every lawyer likes to answer every question, it depends.

David Bear:  One answer doesn’t fit all, so…

Jim Lange:  Yeah, it really doesn’t.  It really doesn’t.

Matt Schwartz:  Right, and you’re generally going to name…if you’re married and it’s a happy marriage, you’re generally going to be naming your spouse as your primary beneficiary most of the time, and this is really to cover contingent beneficiaries, and some plans will not allow you to do what we lawyers call “per stirpes”, which means “by representation.”  I have not met a grandparent yet who wants to disinherit their grandchildren.  So, if the child is not alive, they generally want that child’s share to pass to that child’s children, and some companies do not allow you that option, and you have to name a trust as your backup beneficiary if you’re married, or your primary beneficiary if you’re single, to cover that possibility.

Jim Lange:  Yeah.  That brings up, like, a whole host of areas where, with all due respect, a lot of attorneys really botch it because somebody has a significant IRA, or the majority of their assets are in their IRA or retirement plan, which frankly is very, very common in our practice.  It’s actually the beneficiary designation of the IRA or the retirement plan that controls the disposition of what happens to that money when you die, and it really takes special care to fill this beneficiary designation form out, and I see it routinely botched, and you have to be very, very careful about it.  What are some of the things that you do in your practice to make sure that this thing really gets the attention, and do you get the result that you actually hope for and intend?

Matt Schwartz:  Well, Jim, I think we’re a little bit non-traditional, that at the attorney level in our office, we’re actually reviewing these forms and completing them.  I think, in a lot of offices, they leave it to clerical staff…

David Bear:  Umm-hmm.

Matt Schwartz:  …and they don’t recognize the different options that are available, and often, the forms can be filled out incorrectly, so…

David Bear:  And what are the consequences of doing that?  What can happen?

Matt Schwartz:  Well, you fill it out incorrectly, and one, maybe the beneficiary distribution that mom and dad planned for doesn’t happen because it’s not filled out correctly.  Maybe the tax consequences are draconian because people didn’t think through the options.

David Bear:  Umm-hmm.

Jim Lange:  And sometimes, you have people disinherited, and Matt just mentioned that some of the firms don’t accept per stirpes.  So, let’s just say, you say, “Oh, okay.  I’m just going to fill this out real simply,” or the law clerk at the XYZ law firm says, “Okay, I name my spouse number one, my children equally number two.”  And then, one of your children predeceases you, leaving children of their own, those grandchildren are disinherited because that beneficiary form wasn’t filled out.

Matt Schwartz:  Correct, and I find the most common culprits of this are the financial advisors, because they’ve been so focused on closing a deal with a client that the very last thing is, “Oh, yeah.  Just fill out the beneficiary.  Hurry up, we’re done.”

David Bear:  Right.

Matt Schwartz:  And they’ve lost their motivation to be helpful.

David Bear:  And you don’t find out about it until years later.

Matt Schwartz:  Exactly.

Jim Lange:  Well, yeah.  Hopefully, you find out about it while both people are still kicking.

David Bear:  You can make changes, yeah.

Jim Lange:  But if you find out afterwards, sometimes, it severely limits the options that you can do.

5. Attorneys and Financial Advisors Working Together for You

Matt Schwartz:  And that’s why it’s important to have a collaboration between your attorney team and your financial advisory team…

Jim Lange:  Yeah.

Matt Schwartz:  …to coordinate those details.

Jim Lange:  Yeah.  Now, by the way, that was a slightly self-serving comment because we actually fulfill both roles.  That is, we, along with our active money manager and our passive money manager, do provide those money management services using either active or low-cost index funds.  So…but that’s okay to have a little self-serving comment in there!

David Bear:  Well, people should know!

Jim Lange:  But actually, people should, and that’s one of the things that a lot of people really like about our firm is that you don’t have, you know, one firm failing to communicate with another firm failing to communicate with another firm, is that you’re getting somebody who’s overseeing the entire picture, whether it’s investments, or wills, or tax returns, or insurance.  And for the other people here who are not going to use our services, it really is critical that there be a coordination between that team, and sometimes I think it’s good, and sometimes law firms have associations with financial planners or insurance people, and that’s probably a good thing if there is truly a collaboration and it’s not just a referral cross match.

Matt Schwartz:  And everyone should be on the client’s side, ultimately.  So, when you have competing advisors…

David Bear:  Right.

Matt Schwartz:  …it’s just defeating helping the client.

David Bear:  Well, and also, these documents have a long life, and someone has to be managing and monitoring the changes that happen over that period of time, and…

Jim Lange:  Yeah, they do.  Matt actually just brought up a really important point, though.  Matt said that all the advisors should be concerned with the client’s best interest.  Now, it’s easy for us to say that because we are fiduciary advisors.  Fiduciary advisors means not only do we have the moral obligation, which I believe we all have, all financial advisors, attorneys, CPAs, insurance people, etc., but we also have the legal obligation to do what we believe is in your best interest.  So, if we don’t believe an annuity that pays a 10% commission is in your best interest, then we can’t recommend it, which is one of the reasons we’ve never recommended a tax-deferred annuity to somebody.  But it really is important that your whole team be a fiduciary advisor.  All right.

So, Matt, another one of the techniques that I love that, frankly, I had nothing to do with, and you introduced this technique, is unfortunately, many of our listeners have children, or even grandchildren, with special needs.  And nobody wants to disinherit a child with special needs.  On the other hand, nobody wants to leave money to a child with special needs, knowing that that money is going to be confiscated by the IRS.  Could you tell me a little bit about the special needs trusts that you have drafted, and a little bit about the technique that you call a ‘toggle,’ which I just think is the coolest thing?

6. Special Needs Trusts

Matt Schwartz:  Sure.  I mean, I guess, first and foremost, when you have a mix of retirement assets and after-tax assets, and you have the flexibility to use after-tax assets or life insurance to fund a special needs trust, you’re in a much better place to start with.  Now, there’s not always that flexibility, but the idea being that when you have a special needs trust, you can’t just distribute the income out to the beneficiary, because then you could disqualify the beneficiary from the public assistance that they’re receiving.

David Bear:  Umm-hmm.

Matt Schwartz:  So, you want to be very careful about what types of assets you have in a special needs trust.  If you have a normal tax-deferred IRA, you could have a situation where you’re paying taxes at a much higher rate than you would if you had the ability to distribute that IRA out to a beneficiary.  So, to add insult to injury, you have this poor beneficiary who’s limited in what they can do, and then the family’s paying these huge taxes…

David Bear:  On top of it.

Matt Schwartz:  …on top of it.  Now, there are some situations where it’s unclear, Jim, whether a beneficiary’s necessarily going to need special needs.  And then, you have the flexibility to be able to say, “I want this trust to be a special needs trust if the beneficiary’s receiving government assistance, but otherwise, I might want it to be a traditional spendthrift or discretionary trust.”

Jim Lange:  Well, I don’t know if everybody caught the wisdom of those two pieces of advice because just thinking it out, and again, having different types of assets go to different beneficiaries could literally have a difference of tens or even hundreds of thousands of dollars in taxes, and what Matt is saying is with a traditional trust, where the income must be distributed to the beneficiary, and that could really be a terrible situation for a special needs trust, and if you retain the income in the trust, under the new rates, it’s going to be taxed to kingdom come.  So, what Matt is doing by changing assets of which assets go to which beneficiaries, he’s saving, literally, tens, sometimes hundreds of thousands of dollars in taxes down the road.

David Bear:  Well, at this point, let’s take a quick break, and listeners, if you have a question or comment for Jim or Matt, call the KQV studios at (412) 333-9385.


David Bear:  And welcome back to The Lange Money Hour, with Jim Lange and attorney Matt Schwartz.

Jim Lange:  One of the things that I really like about the way you are so thorough is you always tell…or, let’s say virtually always, if they will allow you, tell clients whose name which asset should be in, and sometimes, for a particular reason that might not make sense to you or me, clients might want assets in joint name, or, in the old days, we often wanted to separate the assets to save estate taxes but that isn’t such a worry now.  Could you talk a little bit about why it’s important to have assets in the right name, and particularly, if you are talking about any depreciable property or highly appreciated assets or rental real estate or anything like that?

7. The Importance of Having Assets in the Right Name

Matt Schwartz:  Sure, Jim.  Commonly, people think now that the estate tax exemption’s so high that all of their assets can be joined, and they don’t have to be concerned anymore about asset ownership.  So, if you bought Microsoft stock for ten dollars in the eighties, and it’s worth a hundred dollars today (I have no idea what the real values are, but assume it just exploded in value)…

Jim Lange:  Close to a thousand, I think.

Matt Schwartz:  Okay.  I rely on Jim for those details, so…

David Bear:  Let me check my stock here…

Matt Schwartz:  All right!  But anyways, if you keep that in your own name, and then you pass away, and your spouse takes it over and sells it, there’s really no capital gain if she sells it immediately because there’s a concept called ‘step-up in basis,’ which means that if it’s worth a hundred dollars when you pass away and she sells it for a hundred dollars, there’s no gain.  If the husband tried to sell it during his lifetime, there’d be a ninety-dollar gain in my example.  Well, if you take a highly appreciated asset or depreciable real property (and we had this happen, not on our watch, but we saw it on the back end), that the assets got transferred all into joint name, and then the first spouse dies and you lose that full step-up in basis, and with the depreciable real property, you’re not able to start re-depreciating the property and you’ve lost out on significant tax breaks.

Jim Lange:  Yeah.  So, sometimes, it is a penny wise and a pound foolish to, let’s say, sometimes avoid a small PA inheritance tax of what might be four-and-a-half percent, and instead, you end up paying depreciation recapture that might be, depending on your tax rate, thirty percent or more.

Matt Schwartz:  Yeah, and it wasn’t so much the…what we’re talking about here really is the probate cost, not the inheritance tax, because generally, you’re doing it between husband and wife, when you’re transferring it from husband’s name to husband and wife.  So, you might be saving a thousand bucks in probate costs, but you may have cost yourself tens of thousands of dollars of tax breaks.

8. Naming Trustees and Executors

Jim Lange:  Yeah.  One of the other issues that a lot of people wrestle with is who do you name as trustees for trusts, and who do you name as executors, and if you have more than one child, should you name…let’s just keep it simple, you have two children, should you name them as co-executors because you don’t want to offend anybody?

Matt Schwartz:  Jim, that’s a hard question, and it comes up pretty often.  Probably half to two-thirds of parents don’t want to offend anybody if they have two kids that they trust and they feel comfortable with, and they will name co-executors or co-trustees.  And I really try to pry into how strong that relationship really is with the children or the co-executors or co-trustees and what influences their spouses may have if they’re married and their overall decision-making process.  So, we generally prefer on financial decisions to have one decision maker, and just have that decision maker keep the other person informed as to what’s going on, and we have found that works much better if you don’t have to have two people sign all the paperwork, and the process is much more smooth that way.

David Bear:  Does it create a burden on the person you designate?

Matt Schwartz:  Well, most people…there’s always the joke that goes around that the person who’s not named pretty much takes the one out to dinner and gives all types of gifts to the person who’s named, because mom and dad worry so much about who to name, but the person who’s not named is jumping for joy because they realize that this is a lot of work.

David Bear:  Right.

Jim Lange:  Yeah.  I actually have a rule of thumb on that.  I usually like to name the child that I like the least.  Now, it’s a little bit tongue in cheek here, but the idea is it is not an honor to be an executor or a trustee.  It is a burden, and a lot of times, if the other beneficiaries or other family members, a lot of times, we see executors and trustee-waived fees, so they’re not getting paid for it very often.  It’s a substantial commitment of time and energy and dealing with attorneys and accountants and CPAs.  So, you’re not really doing anybody a favor by naming them trustee or executor.

David Bear:  Does it carry a fiduciary responsibility?

Jim Lange:  It sure does.

Matt Schwartz:  Absolutely.  As an executor or trustee, you have an obligation not to act in your own best interest, but to act in the best interest of the beneficiary, and I think where Jim and I really see this become a challenge is when mom and dad have two children, and one child is not very responsible with money, and the other child is responsible with money.  And often, the parents want to name the responsible child as the trustee for the less responsible child.

Jim Lange:  Right, and frankly, I think we often end up with that choice not because it’s a good choice, because there’s going to be some tensions and issues and everything else, but it’s because it’s the best of the bad choices, other possibilities being have the spendthrift blow the money, be under a bridge, and then they go back to their brother or sister and say, “Hey, can you help me out?”  Or naming a bank if there’s enough money that the bank will even take it, and then the family loses control of the money.

Matt Schwartz:  And in addition to the family losing control of the money when you name the bank, there’s a concern that the bank’s going to be thinking about themselves first, and they’re not going to have that human element of, well, this might not be the most prudent financial thing to do, but this is what this child really needs.

David Bear:  And not necessarily have the continuity of a manager handling it over a long period of time.

Matt Schwartz:  And we generally recommend, in that situation, to maybe have a co-trustee who’s an individual, who can at least be the link or the liaison between the beneficiary and the bank.

Jim Lange:  But that doesn’t get me so excited because the bank still collects the full fee.  It’s not like the bank says, “Oh, well, since I’m the co-trustee, I’ll just cut my fee in half.”  That doesn’t happen.

David Bear:  Are those fees significant?

Matt Schwartz:  Oh, absolutely.  I mean, the banks have different rate schedules, but it’s not uncommon to be well above a percentage, and sometimes maybe even a couple percentage points.  Now, there’re certain situations where there’s so much tension between the people, a bank may be a viable option, but it is generally an expensive option.

9. Money Saving Strategies:  For You and Your Livelihood

Jim Lange:  So, some of the things that we’ve been talking about up to now have been some of the things that you can do in the planning stages that end up saving money years later.  But sometimes, people want to say, “Hey, well, that’s nice, but I’m a little bit more interested in saving money now for me, right now while I am alive.”  Could we talk about some of the strategies that we are using in the office and that you are recommending to people where they can save some money?  But at the same time, it does have long-term financial, legal and estate planning consequences.

Matt Schwartz:  Well, I guess just as an interplay into some decisions that we make during our lifetimes that then impact the long-term, it’s not uncommon now to have discussions because of the change in the federal estate tax law related to portability, and you might say, “What is portability?”  Well, Jim alluded earlier in our discussion that it used to be very important for a husband to have enough assets in his name to use the federal estate tax exemption, or the wife to have enough assets in her name…

David Bear:  Umm-hmm.

Matt Schwartz:  …and it used to be the husband would have the retirement assets and the wife would have everything else to try to equalize the estates.  Well, nowadays, there’s a concept called ‘portability,’ which, if you file a federal estate tax return when the first spouse dies, even if that estate’s below $5,340,000 (the federal estate tax exemption for 2014), if everything goes to the spouse, the spouse, if they were to die later in 2014, would have $10,680,000 that they could protect from federal estate tax.  So, it has made it less important that the assets be titled in the husband’s name or wife’s name for federal estate tax purposes.  So, asset protection, or creditor protection, for many people who are professionals in particular, they’ve been leaning towards putting a lot of their after-tax assets in joint name, rather than having some in the husband’s name and some in the wife’s name.

Jim Lange:  And that works in some situations, but in some situations like you had alluded to earlier, you might miss a step-up in basis.

Matt Schwartz:  Correct.

Jim Lange:  So, again, we’re going to give a lawyerly answer on who is the best person to own your assets, and the lawyerly answer is ‘It depends.’

Matt Schwartz:  Correct.

Jim Lange:  But one of the things that I really like about one of the things that you do just routinely for an estate planning engagement is you make recommendations of who should own what assets, that sometimes, people don’t even really realize how much potential value that can add to the estate plan.  Many, many times for me, what’s really fun, is if we save people way more, even, I love it when we save people ten times or even a hundred times what our fees are because of some of these strategies that we’re implementing.

Matt Schwartz:  I agree, and there’re so many times where I’m talking with people (and Jim, I’m sure you’ve experienced this too), and they say, “We’ve never really had an advisor really give us a recommendation.  They say, ‘Well, you can do this, or you can do that,’ but no one’s really had the confidence to say, ‘This is what I think you should do, and why.’”

Jim Lange:  Yeah, and I know that you do that.  Some of the other strategies that we have been working on, we have been doing a lot of work in the Roth IRA conversion area for years and years, but one of the things that we have been working on much more lately is Social Security, and we are trying to help people determine the ultimate, or how to maximize their Social Security, and it turns out that when you actually run numbers for Social Security and you run numbers for Roth, I would say that it’s not two separate, independent decisions.  That is, there is a synergy between doing the appropriate Roth IRA conversion strategy and the appropriate Social Security strategy.  Have you seen some of this for some of our clients, and what are some of the strategies that you have seen people use to save, literally…well, I’ll tell you the number: $219,000?

Matt Schwartz:  You must be writing a book on this, Jim!  So, often, what happens is people come in and, sometimes, it’s too late.  Like, for example, sometimes they take their Social Security early, and then they’re in a situation, they’ve retired before they’re seventy-and-a-half, and it could’ve been a great time for them to do Roth IRA conversions, but they’ve used up…they’re making…otherwise, maybe their Social Security is not very taxable, but then if they tried to do a Roth IRA conversion, their tax rate goes way up on the conversion.

David Bear:  Umm-hmm.

Matt Schwartz:  So, you really have to be strategic about…I think Jim has said this before, that the idea is to think of Social Security more like an economist rather than as an actuary, and look at it as a long-term benefit rather than how much money you’re getting right now.

Jim Lange:  If you’re dead, you’re dead.  You don’t have any more financial decisions.  But if the goal is to never run out of money, then sometimes holding up on Social Security, then doing apply and suspend, and then doing a series of Roth IRA conversions will make you $219,000 better off, and your heirs over $500,000 better off, and those, by the way, are in today’s dollars, not future dollars.

David Bear:  Well, you know, that’s a good note to take a break on, and let’s do that right now.


David Bear:  And welcome back to The Lange Money Hour, with Matt Schwartz and Jim Lange.

Jim Lange:  Well, Matt, about a minute ago, you actually alluded to say, “You must be writing a book!”  And actually, the truth is, I am, and frankly, getting some significant help from Vicky Walker, who is a paralegal in our office.  And the book is…we don’t know exactly what the subtitle will be, but probably the title is Retire Secure for Same-Sex Couples, and we have found some very interesting strategies for same-sex couples that have come after the Windsor decision.  Without getting into too great a detail, because it’s only going to concern maybe roughly five percent of our audience, we have determined some strategies that can literally save hundreds of thousands, sometimes millions and even more, for same-sex couples.  But one of the interesting strategies is to actually go to a state that recognizes same-sex marriages, such as New York or Maryland, then come back here, do the appropriate things like redrafting wills, estate plans, beneficiary designations of IRAs, also applying for Social Security, and the laws regarding Social Security and spousal benefits that we believe are coming with almost certainty, can literally…that alone in the Social Security area can be the difference of perhaps a million dollars, and we actually have some numbers to back this up.  The other area that it’s critical for same-sex couples to get married is in the event that one of them dies, the treatment of IRAs is just radically different if they are married and if they are not married, and there is a threat of a new law that would be particularly draconian for a same-sex couple if one left their IRA to the other.  Could we talk about this threat that sometimes we call the ‘death of the Roth IRA,’ and what the impact of that is, and what even our same- or opposite-sex couples should be thinking about in the future because of that?

10. The Threat of the Death of the Stretch IRA

Matt Schwartz:  Sure.  I think, for clarification, we’ve been referring to it as ‘the death of the stretch IRA.’

Jim Lange:  Oh, I’m sorry if I didn’t say that.

Matt Schwartz:  That’s okay.  But there was a proposal last year in Congress that barely failed to pass (it was one vote short of passing) that would have caused all IRA distributions for non-spouse beneficiaries to be distributed five years after death, with some minor exceptions.  But right now, you’re able to name a non-spouse beneficiary, and the non-spouse beneficiary can take the money out of the IRA during his or her lifetime, which, for a young beneficiary, could be seventy or eighty years.

Jim Lange:  And if this death of the stretch IRA does occur, and for whatever it’s worth, we had Ed Slott on this show, we had Sy Goldberg on this show (these are two of the top IRA experts in the country), both say that they believe it’s going to happen.  What would be some of the consequences of, let’s say, people who are not married who leave IRAs to each other, and how would that differ if they were to get married?

Matt Schwartz:  Well, if they stay not married, in addition to having this horrible income tax result of having to take the money out within five years of death…

Jim Lange:  Throwing them into perhaps the highest tax bracket.

Matt Schwartz:  Depending on how much is there, absolutely.  The other concern becomes, here in Pennsylvania, we have an inheritance tax of fifteen percent on partners who are not married.

Jim Lange:  Which is just awful.  What are some of the things that, let’s even just assume traditional or same-sex couples, what are some of the things that they can do to protect themselves from the likelihood that the IRA, or the stretch IRA, will go away?  And if you leave IRA money to your children or grandchildren or anybody other than your spouse, rather than the beneficiary being able to stretch it or to continue to defer taxes for the rest of their life, they’re going to have to potentially pay income taxes on the entire amount within five years.  What are some of the strategies that you are seeing in the literature that people should consider?

Matt Schwartz:  Well, two immediately come to mind.  One is only attractive if you’re very charitably inclined, is to consider to the extent you are charitably inclined using your IRAs towards charitable giving…

David Bear:  As you said earlier.

Matt Schwartz:  Exactly.  I think what’s more attractive to most families is to see if you can get some life insurance if you’re insurable, and have some after-tax assets replace those pre-tax assets.  Maybe pre-spend down some of those pre-tax assets and convert them into something that’s more tax-favorable for your family.

Jim Lange:  Yeah.  This is actually a very old concept that people used to call ‘pension rescue.’  And I was never a big fan of pension rescue because I always didn’t like the assumptions that were in the models, and the models basically said it was good to take money from your retirement plan, pay income taxes on it, use that money to buy life insurance, and then the models showed that the family was way, way better off by doing that.  But I never liked that because they only measured right at the death of the IRA owner, assuming the beneficiary was going to have to pay income taxes all at once.  So, I said, because that assumption isn’t accurate, the analysis isn’t accurate.  But now, with the death of the stretch IRA, some of those old analyses are accurate, and the benefits of life insurance become much more real and much more quantifiably justified.  When you take into consideration the higher income taxes that we have today, it actually becomes a great deal for the family.

Matt Schwartz:  And it’s a diversification of your asset classes, and you have to keep in mind as well that Congress is now saying that an IRA was meant for retirement.  An IRA wasn’t meant for long-term wealth accumulation.  We have a colleague in our office who will cite IRS regulations disagreeing with that position that an IRA was set up to provide beyond your own life, to the extent there was money left for the benefit of your beneficiaries.

Jim Lange:  Yeah, and this isn’t really just a pure theoretical discussion.  This is enormously important to your children and grandchildren, particularly if the idea is not for them to get a whole big chunk of money after you die, but have it come out slowly over their entire lives.  So, in effect, instead of funding their Maserati after you die, you’re funding their retirement plan.

Matt Schwartz:  And through the stretch IRA, we really, Jim, to the extent we can educate families, have created an indirect trust…

David Bear:  Umm-hmm.

Matt Schwartz:  …through the minimum required distributions that people just take out what they need to for tax purposes, and that’s how it gets doled out.  It may lead to more people wanting to hold money in trust for their family members, which is going to lead to more cost than you have with the stretch IRA option.

11. Disclaimers

Jim Lange:  Yeah.  Matt, we’re rapidly running out of time, but there’s one technique…

Matt Schwartz:  Sure.

Jim Lange:  …that we have been using in our office, even as early as the nineties, and even the early nineties, that I believe you have become a master at, both in the planning stages and in the estate administration stages, and I would maintain that you need to get it right in both stages for this thing to happen, and that is the concept of ‘disclaimer.’  And even very notable financial advisors and estate attorneys don’t really understand the concept of disclaimer.  Could you talk for a minute about disclaimers and what they mean and what some of the benefits of including disclaiming language in the wills and trusts and beneficiaries of IRAs versus the more traditional fixed-in-stone estate plans that we see all the time?

Matt Schwartz:  Sure.  The concept of a disclaimer is if you receive an inheritance as a beneficiary, and you’re in a tax situation or a financial situation where you don’t need part or all of the inheritance, you have nine months after the person’s death to say you don’t want that inheritance.  A disclaimer’s a fancy word for saying, “I don’t want it.”

David Bear:  Umm-hmm.

Matt Schwartz:  And commonly, a letter is all you need to give up a non-probate asset, and a short filing to the court is all you need to give up your interest in a probate asset.  And really, the power behind it is if you have an estate situation where you already have a taxable estate, and adding the assets to your estate is going to increase taxes by forty percent on every dollar you put into your estate, you can pass those assets onto a child beneficiary who may need it more, because there’re more and more cases where it’s not about the federal estate tax, it’s about getting wealth to the people who need it.

David Bear:  Right.

Matt Schwartz:  And the only downside here in Pennsylvania is when you have children, it’s going to be a four-and-a-half percent upfront tax, but Jim and his team, we’ve run the numbers over the years, and it’s much more valuable to have those assets in the younger generation, particularly if they’re retirement assets and you still have the stretch.

Jim Lange:  And what about several levels of disclaimer?  So, right now, what you were talking about, or referring to, as I understood it, was having a surviving spouse disclaim all or a portion of an IRA or after-tax dollars to a child.  What about giving the child the right to further disclaim to their children?

Matt Schwartz:  Well, that’s a strategy that’s often not considered, and unfortunately, there aren’t many children who are in the position where they don’t need the money, and would like to pass it onto their children, particularly in a trust, Jim, that they can control, and we’ll design our plans that the children can be the trustees for the grandchildren.

Jim Lange:  Right, where the traditional plan would just say, “If my child dies, I leave whatever’s left to my grandchildren,” where our plan says, “In the event that my child is alive and doesn’t want or need all the money, he can disclaim all or a portion of that money.  It can go to the grandchildren who are often in a lower tax bracket, and then they could stretch or defer income taxes over, maybe, sixty or seventy years, instead of, maybe, thirty years.”

Matt Schwartz:  And just one important caveat (and we’ll keep this short because we’re running out of time) is it’s very important that you trust the people that you’re giving that disclaimer decision to.  Sometimes, people will not be comfortable with a disclaimer and really should make a disclaimer, and you miss out on a tax opportunity because they don’t make a disclaimer, and you have to be very wary of a second marriage plan with children from prior marriages, though we have successfully incorporated the disclaimer concept into those types of plans when both spouses were onboard.

Jim Lange:  And I will take the liberty of saying that some of the issues that we’re talking about are exactly what we’re going to be covering on Saturday, January 25th, and if you are interested in attending that workshop, I would urge you to go to www.paytaxeslater.com, or to call our office at (412) 521-2732.

David Bear:  Well, at this point, we’ll say thanks to Dan Weinberg, our in-studio producer, and Lange Financial Group program coordinator, Amanda Cassady-Schweinsberg.  As always, you can hear an encore broadcast of this show at 9:05 this Sunday morning, here on KQV, and you can access the audio archive of past programs, including written transcripts, on the Lange Financial Group website, www.paytaxeslater.com, under ‘Radio Show.’  You can also call the Lange offices directly at (412) 521-2732.  Finally, please join us next Wednesday, January 22nd at 7:05, for the next edition of The Lange Money Hour, when Jim’s guest will be Rod Kamps, president of Financial Advisors Network.




jim_photo_smJames Lange, CPA

Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania.  He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again.  He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans.  His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans.  Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA).  Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.