Originally Aired: February 2, 2011
Topic: Discussing Pittsburgh’s Finances with Controller Michael Lamb
The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney
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- Introduction of Deborah L. Jacobs, Journalist, Attorney and Estate Planner
- Estate Tax Exemption Now Is $5 Million, and $10 Million for Couples
- You Must File an Estate Tax Return to Use Available Exclusion Amount
- A Bypass Trust Provides Great Flexibility to a Sweetheart Will
- Leave Everything to Surviving Spouse, With an Option to Disclaim
- Take Care to Properly Fill Out IRA Beneficiary Forms
- Create a Separate Minor’s Trust for Each Set of Children
- Women Today Do Not Need Someone to Handle Their Money
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.
1. Introduction of Deborah L. Jacobs, Journalist, Attorney and Estate Planner
Nicole DeMartino: Hello, and welcome to The Lange Money Hour. This is Nicole DeMartino, your host. Today, I’m here with Jim Lange, Pittsburgh-based CPA-attorney and best-selling author of Retire Secure! and The Roth Revolution. We are joined by Deborah Jacobs. Deborah’s an attorney, an award-winning journalist and the author of Estate Planning Smarts, which was just published. Deborah, is that the second edition of that book?
Deborah Jacobs: The first edition was published in 2009, and I am hard at work on the second edition, which will be out in March.
Nicole DeMartino: OK, excellent, excellent.
Jim Lange: And I will say that one of the very interesting things that I’ve found with your book, Deborah, is that there are women out there writing with, let’s say, a woman’s slant, and I think that that’s going to be what our show is. We advertised it as “What every woman needs to know about estate planning,” and there’s a number of people, and we’ve had them on our show, for example, Kim Kiyosaki, and she talked about women’s issues, and then there are very competent estate attorneys who spend a lifetime thinking and writing about maybe even traditional issues, but you don’t very often get those two things in the same person, that is, somebody who is very sensitive to women’s issues, and somebody who is technically excellent writing books at the highest level that are endorsed by the top estate attorneys. So, we were just so pleased to have you come aboard, so thank you for agreeing to speak with us.
Nicole DeMartino: Absolutely.
Deborah Jacobs: Well, it’s a pleasure to be with you today.
Jim Lange: The way I thought we would start off is by talking about what is brand new. We have a new tax law that was passed in December 2010, and it has an enormous impact on not only very wealthy people, for which, presumably, it was written but also for even middle-class people and people that are just making it. So, I thought we could start with the implications of the new tax law and then take it from there. Could you tell our listeners what was passed and what you think the impact of that is, and what a lot of our listeners should be doing?
2. Estate Tax Exemption Now Is $5 Million, and $10 Million for Couples
Deborah Jacobs: Sure, Jim. Well, the most important thing about the law, it’s two important things, it raises the amount that people can pass tax-free now to $5 million per person, or $10 million per couple. If the law had not been passed, this tax-free amount was scheduled to go down to $1 million in 2011. So that was very drastic. It also lowered the tax rate on any amount that doesn’t fit within this exclusion to 35 percent. The rate was scheduled to go up to 55 percent if Congress didn’t act, and the other thing that’s totally radical is that it introduces a concept that tax geeks are calling “portability,” although this word does not appear in the law, and what portability means is that a widow or widower can add any part of this unused amount of the spouse who just died to his or her own to use at any point during life or through her estate plan.
Now, before we get into this any further, I would like to point out that under the new law, just as under the old one, you can leave your spouse, provided he or she is a U.S. citizen, an unlimited amount without worrying about estate tax. So, when we talk about using this exclusion amount, we are talking about using it either during life or when you die to pass assets to someone who is not your spouse.
Jim Lange: OK, so let’s do a real quick review. That means that if I die, and as long as I have less than $5 million, I can leave it to whomever I like and there’s no federal estate tax. Is that right?
Deborah Jacobs: Exactly.
Jim Lange: All right, and let’s say that I am married and my wife dies, and let’s say she leaves everything to me, or she leaves some money to the kids or a trust or something else, and then I die after her, I can take my $5 million exclusion and her $5 million exclusion and I could pass up to $10 million.
Deborah Jacobs: Right, but you did mention that perhaps she leaves something to the kids or to a trust, and that’s important to know if she does or she doesn’t because if she leaves something to the kids, like, say, she leaves the kids a million dollars, that gets subtracted from what you can tack on to your own. So, if she leaves the kids a million dollars, then you get to add $4 million of her exclusion amount to your $5 million. So, you have $9 million then to work with, and you can use it either during life or you can use it when you pass away.
Jim Lange: All right, and I’m guessing that most of our listeners are saying, “Ah, geez, I don’t have $5 million or $10 million. I don’t even have $2 million. So, I guess that means that I don’t have to do anything. I don’t have to review my wills and not worry about estate planning.” Would you say that that’s right also?
Deborah Jacobs: I say that’s wrong!
Jim Lange: Oh!
Nicole DeMartino: Wrong! Dead wrong!
3. You Must File an Estate Tax Return to Use Available Exclusion Amount
Deborah Jacobs: And I know, Jim, you know it’s wrong, too! The reason that it’s wrong is, let’s be optimistic, that in order to take advantage of portability, it’s not automatic. So this is another really radical aspect of the law is that everybody now, no matter what they are worth, ought to file an estate tax return for the spouse who dies first because in order to use this unused exclusion amount, you must file an estate tax return. So, this is going to be a very new concept to a lot of people who, first of all, don’t even think they have what’s called an estate. People associate an estate with a big house or a yacht or a lot of lavish living, when, in reality, it’s a term that covers everything that you leave behind when you pass away.
Jim Lange: And that could even just be an IRA of $100,000 or a small house or whatever it might be.
Deborah Jacobs: Absolutely.
Jim Lange: Now, one of the things … now, you said that we’re now allowed to leave up to $5 million, or, with portability, $10 million, and this is the new law. Now, can we rely on this being the law for the next five, 10, 20 years, or do we have some other problems because the law isn’t permanent?
Deborah Jacobs: The law is not permanent. It’s set to expire in 2013. Now, that is causing a lot of debate and confusion in the estate planning community, or, should I say, a lot of debate and disagreement. In 2013, we basically go back to the future, that is, portability goes “poof,” the exemption amount drops to $1 million and the tax rate increases to 55 percent. This is what’s scheduled to happen if Congress does nothing. Now, so, a lot of people in the estate planning community are saying, “Well, we can’t advise our clients to rely on portability because it’s set to expire in 2013.” However, I think that portability is going to stick one way or the other because I think portability is really great tax policy, and it just gives spouses an easy way to do something that, in the past, involved enormous gyrations and the help of complicated legal documents.
I think that there are a few ways that portability could continue. There is, of course, the possibility that it’s going to lapse in 2013 as it’s scheduled to do, but if that happens, I think it will be temporary, and I think that after that, Congress will either make it permanent, or it may become the subject of annual extenders, which are a huge nuisance and a source of some anxiety and will certainly keep this debate amongst lawyers continuing. But I think portability is as American as apple pie. There’s nobody who doesn’t like portability, so why should it not continue?
Jim Lange: Well, Deborah, I would like to agree with you, but let me tell you what my own personal experience is. As recently as 2009, people said, “Hey, in 2010, there’s going to be an unlimited exclusion.” That is, you could leave a billion dollars, a trillion dollars, to anybody that you like, and if somebody would’ve said to me in 2009, “Hey, you know, George Steinbrenner is going to die in the year 2010 with a $1.5 billion interest in the New York Yankees and leave it to his kids and there’s not going to be any federal estate tax. Do you think that’s going to happen?” And I would’ve said, “No! That’s preposterous. That’s ridiculous. Certainly, Congress will do something that makes a little bit of sense and will never allow that situation to happen.” Well, and I think that that’s what most of the estate planners were saying, but that’s not what happened. So, I would agree with you that the chances are some type of portability and some amount higher than a million dollars will happen in 2013, but I am not willing to bet my client’s financial future on it. So, I’m just worried that there’s going to be either an irrational or an uneven or some type of response by Congress or the president or the next president that we can’t count on. So, while I would agree with you, I think that that is probably the most likely event. I’m not sure that people can rely on that in their planning. I don’t know if you think that’s fair, or if you just say, “Hey, no, you know that this is going to happen.”
Deborah Jacobs: Well, you know, there is a middle ground that enables clients to hedge their bets, and I know you and I are eager to talk about that, and we are going to. The big issue is what are clients really going to want in this environment, and it will be a very individual decision for them. I think that a lot of people have been yearning over the years for simplicity in estate planning, and I think this is especially true for us baby boomers, you know? We are living in a time right now where people are very mistrustful of financial complexity, partly because of what we have observed happen in the financial world with all sorts of investments that turned out to go foul or that we didn’t understand and so forth. So, I think that there’s a huge temptation right now to embrace portability, even though it’s officially a temporary thing because it offers the possibility of the simplicity that we haven’t had up until now.
Nicole DeMartino: Alright, this is going to be a great place to take a break. You’re listening to The Lange Money Hour, Where Smart Money Talks.
Nicole DeMartino: Well, welcome back to The Lange Money Hour. We are here with Jim Lange and Deborah Jacobs today and we are talking about the new estate tax laws and what everybody should be doing. All right, I want to also mention, Deborah, your book Estate Planning Smarts, an excellent book, where can people find this book? Where can they order it?
Deborah Jacobs: They can buy the first edition through booksellers, but if they would like to preorder the second edition, they can receive the first edition free now. Download the free update to the first edition from the book’s website, and then as soon as the second edition is out in March, it will arrive in the mail for them.
Nicole DeMartino: OK, so they preorder the book. Where should they go? What’s the website?
Deborah Jacobs: They can preorder the book either at the book website or by calling an 800 number. The book website is www.estateplanningsmarts.com. The 800 number is 800-694-7624.
Jim Lange: And I will mention that it is a wonderful book. Again, I mentioned earlier, you’re a fine combination of somebody who really has some deep technical knowledge and was just quoted in Forbes magazine, and then also writing very well, and I was very impressed. In fact, there were a lot of things that I thought, “Oh darn, I should’ve written something like that!” Because I think a lot of it is compelling information, and the other thing that I liked about it, though, is that it’s not the type of thing that I tend to write about. I tend to be somewhat quantitative and I talk about IRAs and the stretch IRA and some things that sometimes are a little bit more technical, and you talk a little bit more, let’s say, I don’t want to say emotional, but let’s say issues of the heart and issues of the family that I think are very important for people to read and know, and the other thing is, like you had mentioned in some of your material about the book, it is excellent to read either during or before you see an estate attorney to save time and get a better result.
Deborah Jacobs: I don’t know if you know this, Jim, but I also encourage people to read it in a public place.
Nicole DeMartino: That’s a great idea!
Jim Lange: That one I didn’t know.
Deborah Jacobs: Yes, I was at a conference a couple of weeks ago and it was selling very well in one of the booths there and I told everybody they should read it on the airplane going home.
Nicole DeMartino: That’s great advertising, free advertising.
Jim Lange: It is. The other thing that I noticed about both your books and your writing and actually talking with you beforehand is you, unlike some of the other estate attorneys that I have had on recently, and Deborah, I think that what is going on is so important, and I’ve never had a similar type, in this case, a knowledgeable estate attorney, on several shows in a row. I usually vary it. But this is so important and this is so timely, and I’ve had Natalie Choate on, and I’ve had Martin Shenkman on, and I’ve had Bruce Steiner on, and they are all somewhat more traditional than you or I in terms of their approach to estate planning and, in particular, to their approach to women, assuming that the husband dies before the woman.
And I wanted to bring out some of the unique thinking that you have in this area, in terms of flexibility. It’s obviously no accident that I’ve been a big fan of flexibility for literally the last 15 years, but I think that since I have, in effect, kind of showcased the more traditional stand, again, with very fine attorneys, that I would like to talk about flexible estate plans and the advantages of building flexibility in your estate plans. So, I was wondering if you could talk a little bit about flexibility in estate plans, and let’s say, maybe even tie it in to the new law?
Deborah Jacobs: OK. Well, first of all, I know Marty and Natalie and Bruce very well, and I think very highly of all of them.
Jim Lange: They’re all terrific.
4. A Bypass Trust Provides Great Flexibility to a Sweetheart Will
Deborah Jacobs: On the other hand, I’m out there all the time for my journalistic endeavors talking not just to lawyers who do this all day long as they do, but also to people who are consumers, and I’m a consumer myself. I’m married with a 13-year-old child, and these issues concern me hugely, and so one thing that I think that we need to keep in mind is what do happily married couples do most naturally, and the way they tend to think is in terms of, what’s called in the trade, an “I love you” will, or a sweetheart will, which is everything to my darling husband if I die first, and I want him to be able to operate very flexibly and not to be constrained in any way, because it’s going to be bad enough how much he misses me and now he’s going to have to raise our son by himself. Now, one thing that was a huge issue up until we had portability was if I leave everything to my husband in an ‘I love you’ will, then there’s no tax upon my death because, as we said, you can leave everything to a spouse who’s a U.S. citizen without having to pay tax. But until we had portability, leaving everything to my husband in an “I love you” will create a problem, which was that when he died, anything that he didn’t spend taking good care of himself and our child — and perhaps his next wife — would be taxed when he died, if he didn’t leave it to the next wife. And so, there were a couple of ways to deal with this problem. The most popular way was to use something called a bypass trust, and this is sort of a very convoluted device that people might still want to consider, but in a flexible way. So, I’m going to just briefly, if it’s OK with you, Jim, to explain how a bypass trust works. Should I do that?
Jim Lange: I think that would be great, but I’ll also add, because some people are used to hearing this in a different context, that Deborah is talking about, again, it goes by different names: the B trust, the exemption trust, the credit equivalent trust, the unified credit shelter amount trust, the income for spouse, rest to children trust. So, yeah, I think it’s very important because it’s important to know that many people have these in their documents right now, and many people don’t even know it. So, I think that this is very important to discuss what is in these trusts and what is very likely in the wills and revocable trusts of many of our listeners right now.
Deborah Jacobs: Right. Yes, absolutely, and so this trust, by whatever name you call it, has been a preferred estate planning technique up until now, and so the big debate right now is, do we still need it? Now, in Estate Planning Smarts, I have a diagram. It’s sort of a flow chart of how these trusts work, but just to give you a word picture, just to give our listeners a word picture, when the first spouse dies, an amount which can be up to — we’ll say his because, usually, it’s the husband who dies first, but please nobody take offense at this — his exclusion amount goes into this trust, whatever we’re calling it, the B trust, the bypass trust, the credit shelter trust. It goes into a trust, typically say a trust for the kids, but this can be drafted in very flexible ways, to give the surviving spouse — let’s say the wife — access to the trust earnings and perhaps the principle of the trust. But the money is not hers outright. And so it bypasses — that’s why I call it the bypass trust — her estate when she dies. Now, my husband is a very smart man, and I have explained this to him many times, and I have to tell you, Jim, that every time I do, I watch him stifle a yawn, and that’s one of the problems with bypass trusts that they are terrific, but a lot of people find them kind of cumbersome and boring. So, that this method of preserving the exemption amount, or the exclusion amount, of the spouse who died first, does make estate planning a little more complicated. Some people would say a lot more complicated.
So, the big question now, I would call it the $64,000 question, except that when you’re talking about a $5 million exemption amount, $64,000 doesn’t sound like so much money. But anyway, the big question amongst estate planners right now is, should we let clients ditch their bypass trust if they already have them, or if they are using this as the occasion to do estate planning for the first time? Should we let them do without bypass trusts altogether? And Jim, I know that you, as a very forward-thinking guy, have had another way of doing this for years that might work even better now, right?
Jim Lange: Well, that’s right, and I think part of it is, you … it’s interesting, we’re not going to be able to complete this thought, but I’ll finish this and then we’ll complete it after break, is that you used the words whether the attorneys are going to let their clients, and I think that there has been this paternalistic idea that attorneys are going to protect clients from themselves, and we, the attorneys, think that we know what the client needs more than the client needs, more than what the client knows, when, in reality, I find that most surviving spouses do not want the burdens of a trust, do not want to have to go to Mellon or PNC or even their own kids to ask for their own money, and they just prefer simply having access to their own money without the complications, the tax burdens, the filing requirements, the trustee fees and the occasional horror stories along with the trust.
Nicole DeMartino: And actually, Jim, I’m going to let you finish that when we get back, and I also want to share an e-mail that I received from one of our listeners for you and Deborah to answer. You’re listening to The Lange Money Hour with Jim Lange and Deborah Jacobs on The Lange Money Hour, Where Smart Money Talks.
Nicole DeMartino: Welcome back to The Lange Money Hour. You are here with Jim Lange and Deborah Jacobs, and we are in the middle of a conversation about adding flexibility to your estate plan. So, regardless of the laws, you will be ready for anything, and I think, Jim, you may have had a thought there to finish.
Jim Lange: Well, and I would say, actually, particularly because of the laws, one of the things that both I think Deborah and I agree on, which, by the way, is many more things than we don’t, and actually more so than even other estate attorneys is that with the new estate tax law, and with, let’s just say, a history of enormous volatility in the estate tax laws, in other words, going back to 1997, there was a $600,000 exemption and in 2009, a $3.5 million exemption, last year an unlimited exemption, this year $5 million, $10 million with portability, 2013, who knows? But obviously, enormous flexibility and volatility in terms of what the estate tax law is, and then, if you look at our portfolios, you’ve had, let’s say, a stinker of a decade in terms of investments, but you have enormous flexibility and ups and downs with portfolios and the amount of the estates. So I guess the question for our listeners, Deborah, is what in the light of this enormous flexibility in terms of what may or may not happen in the estate tax law, what may or may not happen with their own portfolios, and what may or may not happen with their own individual needs. It’s so hard to predict what the needs of the surviving spouse or the children will be. What do you think are some of the approaches or the general ideas of flexibility that you might like to see more people have?
5. Leave Everything to Surviving Spouse, With an Option to Disclaim
Deborah Jacobs: Well, I think the easiest way to achieve flexibility in light of all of this in a stable, long-term, happy marriage is to leave everything to the surviving spouse and give him or her the option of disclaiming — that means to turn down part or all of the inheritance, then have it go into this bypass trust that we talked about earlier, and the advantage of that sort of flexible approach is it allows the surviving spouse to wait and see, because most of us don’t know when we’re going to die either, which is another wild card. So this way, the surviving spouse could wait and see and make a decision based on tax rates at the time, and based on his or her financial needs at the time, and turn down part of the inheritance and have it go into the trust at that time, not to have to decide now. I think deciding now in light of all of this volatility is extremely difficult, and I guess the other thing we should point out is that Pennsylvania has both its own estate tax, with an exemption amount that’s less than the current federal amount, and Pennsylvania also has a hefty inheritance tax that applies depending on who’s receiving the assets, right Jim?
Jim Lange: Yeah, it is, and there’s no exemption in Pennsylvania, and you’re talking about a 4½ percent to lineal heirs, meaning children and grandchildren and 15 percent to non-lineal heirs. So, you can have some significant state taxes, which, I think, is a factor. I have been smiling the whole time, though, because unlike Natalie, unlike Bruce Steiner and unlike Martin Shenkman, who we both agree are all very fine estate attorneys, but they’re all a little bit more in the traditional, we’re going to have all the plans set ahead of time, we’re not going to give the surviving spouse a lot of flexibility, and what you are advocating now is literally what I have been doing for the last 15 years, and in the literature, you can read the plan that I have described in two ways: one, if you go to the high-brow literature, like the Wall Street Journal or Financial Planning magazine or Kiplinger’s or probably there’s about a hundred other sources, it’s usually known as the Cascading Beneficiary Plan. It’s not what I wanted to call it, which was Lange’s Cascading Beneficiary Plan, but the essence of it is when you have, you said a long-term marriage where people trust each other, I call it the “Leave It to Beaver” marriage: original husband, original wife, same kids, and a high amount of trust. I will typically recommend … and this, by the way, is the subject in-depth of the workshops that we are having, including a discussion of how this works with IRAs and retirement plans, of having the surviving spouse be the primary beneficiary, which is the exact opposite of what the traditional plans say, which leaves the B trust, or the exemption trust, as the primary beneficiary.
Then I’m using the trust as a backup in the event that we want it, either for tax purposes or, more likely now, for non-tax purposes, then typically children equally, and then well-drafted trusts for grandchildren as the fourth beneficiary, and then we have the surviving spouse make the decision of who gets what, not today when we don’t know as much as we need to make this decision, but actually between nine months after the first death. So, the surviving spouse will have more information in which to make a good decision of who gets what. So, is that consistent with what you’re talking about with flexible estate planning?
Deborah Jacobs: Yes, now you give the surviving spouse the decision whether to disclaim the trust at the get go, or you have everything go into the trust and then you have the surviving spouse, the trustee, deciding what to do next?
Jim Lange: No, I start with the spouse in my plans. We’ve drafted over 1,500 wills and trusts, which, to my knowledge, is more than any small firm in Pittsburgh. The vast majority of them, and again, we’re always supposed to let the client decide, but frankly, it’s hard for me not to express my opinion, so Marty and I might both say, “Yes, it’s the client’s decision,” but if you looked at 1,500 wills that he’s done — assuming he’s done that many — I think it would be the opposite; that is, you’d see about 1,400 with the more traditional rigid plan where the B trust is utilized first, where I, on the other hand, would have the surviving spouse first because that’s what I think people want, and I think spouses don’t want to be burdened by the trust. They don’t want to have to go to Mellon Bank or PNC or even their kids to ask for their own money. They just want to be able to take money, if they want to go on vacation, they can go on vacation, if they want to help their grandkids with their education, they could help their grandkids with their education, and I like the flexible approach, not just for wills and the, what I would call after-tax dollars, but I think if you have a flexible approach with other assets. So, for example, IRAs and retirement plans and 401(k)s and 403(b)s and SEPs and KIOs, and other assets, whether they be annuities, or, sometimes we want to keep life insurance out of both estates, but sometimes life insurance. So, I like the flexible approach because I don’t know what’s going to happen, and I think we can make a better decision of who gets what later. So, in my plan, I start with the spouse. If they want it, end of story, they keep it.
Deborah Jacobs: Outright?
Jim Lange: If the spouse disclaims — I’ll just finish quickly, then we’ll get back to your opinion on it — it goes into the trust. If the spouse doesn’t want the income from the trust, then it goes to the kids, and if the kids don’t want it, then their share goes to their kids, that is, the grandchildren, and then we have different trusts for each set of grandchildren.
Deborah Jacobs: Right.
Jim Lange: OK. So that’s what I’m doing. So, I didn’t mean to interrupt you. Go ahead.
Deborah Jacobs: No, I like that approach a lot, and the whole other element to flexibility is that, there are a couple of things. First, you mentioned the bank. Well, estate planning traditionally, still, there are more women who are the surviving spouse than men, drastically more women. That’s just the fact of life. I’m not being sexist. Statistics show that among Americans 65 and older, 42 percent of women, but just 14 percent of men, are left without a spouse at some point. So, the estate planning community has a long tradition of taking care of the “little woman.” Well, you know, just like those ads, “These are not your daughter’s jeans, they’re your mother’s jeans,” or whatever it is, this is not your mother’s estate plan. We are dealing with baby boomer women who’ve had very rich careers, and in some cases, they’ve become very rich because of their careers. And so the assumption that they need a bank to look over them and manage their money, because otherwise they might mess up, is extremely fallacious, and to some of them, offensive, and although it’s one thing to hear from a lawyer all the good reasons to have a trust, I think it’s another thing to be pressured by a lawyer to enter into an arrangement that discounts your intelligence and your fluency in financial matters.
Jim Lange: And I would even go a step further. I have plenty of couples, and to some extent, following the traditional model where sometimes the husband worked and the wife stayed at home, and sometimes the surviving spouse, or the spouse, or the wife in this case, might not have enormous financial expertise, but I’m not sure that they have to. I think that what they really have to do is to know what they want for themselves because instead of being forced into a trust where the bank is the boss, or even your kids are the boss, I think that you can hire out services like tax preparation, like investment counseling and money management, and you can hire out advice from an attorney on a reasonable hourly rate as opposed to a percentage of probate, and that’s another subject that you can still empower somebody that might not have a lot of financial expertise and not tie their hands with a trust.
6. Take Care to Properly Fill Out IRA Beneficiary Forms
Deborah Jacobs: Yes, totally. You know, Jim, you mentioned a few minutes ago also flexibility on those IRA beneficiary designation forms, we should probably point out that people have to be very careful how they fill out those forms if they want to create that sort of flexibility when the first spouse dies, right?
Jim Lange: Well, I make it easy for clients. I don’t let them fill it out because … by the way, I’m serious because, to me, and this might sound a little bit arrogant, but I think that my estate plans are kind of like mini masterpieces and I really like the thinking and the concepts behind them, and, to me, I never fear a conceptual mistake. I never think, “Oh, I should’ve done the whole estate plan differently.” I fear a mechanical mistake with somebody not having the right words on those beneficiaries, IRAs and retirement plans, which, by the way, Pittsburgh is a working town. A lot of times, the majority of the estate for a lot of Pittsburghers is their IRAs and their retirement plans, and it’s the beneficiary designation of that IRA and retirement plan that controls the disposition of money at death. So, at our office, we fill it out ourselves.
Nicole DeMartino: All right, we’re going to take the last break of the show here, and when we come back, I’m actually going to pose … Jim and Deborah, I want to tell you about a listener’s email because this is very important. You’re talking a lot about putting flexibility in, but what if you didn’t? We have a woman who wrote in and said that recently her husband passed away, and she realized that she had one of these old trusts that controlled the family money. So, her question was, is there any way she can get out of it now? Is there any way to undo that? And I’ll let you answer that for our listeners when we come back. We’re on The Lange Money Hour, Where Smart Money Talks.
Nicole DeMartino: Well, welcome back to The Lange Money Hour. I think before we go on to the listener’s email that I talked about before the break, Deborah, did you want to say something? I think you wanted to add something about when you were talking about completing the IRA beneficiary forms.
Deborah Jacobs: Oh, yeah. Jim was saying that he doesn’t let clients fill them out themselves, and I was so happy to hear that because so many lawyers actually don’t want to get involved in helping with the beneficiary designation forms because they don’t understand the complex rules that apply to them, number one, and number two, it’s not a profit center for them. They’re really, for the most part, not drafting any custom documents. They’re working with the forms that the financial institutions supply, and there is a strategy to filling out those forms and lawyers just don’t want to go there, and that puts clients in the position of messing them up. So, I was delighted to hear that this is a service that Jim offers.
Nicole DeMartino: Good.
Jim Lange: And by the way, particularly for a lot of people in Pittsburgh, a lot of my clients, the majority of their assets are in their IRA or their retirement plan. So, I sometimes have new clients come in with 30- and 40-page wills, and I say, “Well, that’s very nice. Where’s all of your money?” Or “Where’s most of your money?” And they say, “Well, it’s in my IRA.” And when I ask to see their IRA beneficiary form, which they usually don’t have, but what they remember it as is their spouse first and children equally. So that might control a million dollars or more, but this 30-page document might not control very much. So I think filling that out is really important, and the other thing that you have to do when you fill that out is if there is a trust as a beneficiary, which there often is as a contingent beneficiary, for example, for grandchildren, I love to leave grandchildren some money in a Roth IRA. The trust not only has to do the normal things that a trust does, like health, maintenance, support, education, et cetera, but there’s five specific rules that that trust must meet in order to preserve the stretch IRA. So, I think that that is important.
Nicole DeMartino: OK, thanks.
Deborah Jacobs: Yes, and Jim, let me just ask you, you make one trust per beneficiary, or how do you set it up? Because I know that’s another tricky issue when you’re making the trust the beneficiary of an IRA.
7. Create a Separate Minor’s Trust for Each Set of Children
Jim Lange: Well, again, in order for the money to get into a trust, in my typical setup, you would typically have the surviving spouse first. Let’s say that they don’t want it and they don’t want the income from it. Then it goes to children equally, and for our sake, let’s assume that there’s two children, and let’s assume that each of those two children have two children themselves. I would give each child the right to decide what to do with their half, and they could either keep it themselves — assuming that they are a responsible adult child — or they could disclaim it into a trust for the benefit of their children. But, let’s say, for discussion’s sake, that you have one sibling and your parents die leaving both of you money, it’s possible that you might say, “Hey, it will be terrific for your son, who is now 13, or my daughter, who is now 16, to have some money in a Roth IRA and have it grow income tax-free and have a much smaller minimum required distribution, and you might be willing to give up some of your money for that, but you’re less likely to want to give it up for a niece or a nephew.” So, I would have a separate minor’s trust for every set of children. So, if there’s three adult children and they all have children themselves, or they all have the possibility of having children, I would literally have three different sets of minor’s trusts because I don’t want somebody to be in the position of either keeping everything themselves or having money go to their nieces or nephews. I would rather give them the choice of keeping it themselves or having it go to their children, or, what we have found in practice, is a little bit of both, that is, sometimes the surviving spouse keeps a certain amount, they have a certain amount going to the B trust, they have a certain amount going to the kids and a certain amount going to the grandkids. It’s not an all-or-nothing idea.
Deborah Jacobs: Uh-huh.
Nicole DeMartino: All right, before the break, I mentioned an email that I received from a listener, and it goes well with what you were saying earlier. She says that recently, her husband passed away, and after she started to do some of the paperwork, she realized that she had one of those old trusts that controlled the family money, what Jim calls ‘the cruelest trap of all.’ So, she was caught in that, and her question is simply, if that is your situation, can you get out of it? Is there anything you can do at that point?
Jim Lange: And if you could answer, Deborah, and maybe even put a slant assuming it is the husband who dies first? Because I think that we want to bring in some of the issues for women in the show.
Deborah Jacobs: Yeah, well, everything, of course, depends on what the trust says. A lot depends on what the trust says, and then there are issues in terms of what the state law allows you to do in a situation like this, and then who the trustee is that the powers that you give the trustee and for what purposes the trust money can be distributed, and this is another reason why, going forward, we want trusts that are very, very flexibly drafted, both in terms of the trustee’s discretion to make distributions and the purposes for which money can be used. For example, one of the things that people are now talking about with portability is well, maybe, we have a disclaimer into a bypass trust, but we have an independent trustee with extremely broad powers who can, if necessary, distribute out everything to the surviving spouse at some point if that’s advantageous for tax reasons, for example. So, if you’re living with an old trust, the short answer is you must read very carefully what the trust allows and using this as an historical lesson. Going forward, if you’re redoing your estate plan, ask your lawyer to make the trust extremely broad so it will maximize your flexibility.
Jim Lange: And Nicole, I would agree with everything that Deborah said. I think as a practical matter that, if the woman fits the traditional mold and that she’s not a huge spender, I don’t think that she’s going to starve or be broke or not have a roof over her head. But what she’s not going to have is her own money that she can do whatever she wants with, regardless of what any banker or her children or anybody else says they think is appropriate for her. Most of my clients are not wild, crazy people who are going to be completely inappropriate or do something way off the cuff, and I think that one of the problems that this woman has, in addition to the actual limitations, is the psychological limitations that result when she doesn’t have control of her money. Maybe, Deborah, you could comment on some of these issues, particularly if the end beneficiary is the surviving spouse that is a woman?
Deborah Jacobs: Yes, well, this goes right to my point of …
Jim Lange: And by the way, you have about four minutes.
Nicole DeMartino: You have about four minutes. I’m giving Jim the sign.
8. Women Today Do Not Need Someone to Handle Their Money
Deborah Jacobs: This goes to my point of the sort of paternalistic attitude that women need somebody to take care of their money, and for an increasing number of women, especially us baby boomers, this just isn’t true. I mean, for me, personally, the idea of at some point having to negotiate with a bank or a trust officer to get money out of a trust is just awful, and the other element of this right now is that nobody setting up an estate plan knows what the future is going to hold, and that doesn’t just apply to taxes, it applies to our own financial situation and the financial situation of adult children. You know, there’s a lot of talk in the estate planning community of, “Oh, we don’t want to spoil the kids and make them too rich and they won’t have an incentive to work.” Well, you know, there’s a lot of very hard-working young people now who have kids who are losing their jobs, or they suddenly have a family expense that they can’t afford, and the parents are helping them during life with financial burdens, and it’s not because they’re spoiling the kids or that the kids have no incentive to work. And so, when you lock up all the money in the trust to “protect” the surviving spouse, you have to keep in mind that you’re also tying her hands in terms of how she might adapt to changing circumstances of the family, that she’s not necessarily going to go out and spend it all on fur coats and frivolous purchases, that she is going forward with her life and that this is something she may need for a wide variety of purposes, spending on good causes and people besides herself.
Jim Lange: And this is where I, and some of the other attorneys that we mentioned, differ a little bit, in that I would err on leaving the choice to the surviving spouse — in this case, we’re talking about the woman — and not tying her hands with a trust.
Deborah Jacobs: I totally agree with you. I mean, I don’t think you can go wrong taking care of your aggrieved spouse by leaving her too much money to manage herself.
Jim Lange: Right, and at the same time, still have all the other options, like we have the trust in reserve, we have money going to children, we have money going into trusts for grandchildren, depending on what seems appropriate, not today, but within nine months after the first death.
Nicole DeMartino: All righty, unfortunately, I know we can talk to you all day, Deborah, but we’re going to have to start to close the show here. I want to thank you for joining us today.
Deborah Jacobs: It’s my pleasure. This has been so much fun.
Nicole DeMartino: Well, I’m sure we’re going to definitely have you back, so we will definitely do this again, and again, I want to just mention the book, Deborah’s book, Deborah Jacobs, www.estateplanningsmarts.com, if you go on there, order the book, you’ll get the update, download it on your computer. You can also call 1-800-694-7624 for Deborah’s book, and again, if you do want to hear this show, the show will be replayed on Sunday, we’re on every Sunday morning now at 9:00 Eastern standard time, but we do put these shows on our website, www.paytaxeslater.com. With that, I’m going to say goodbye, Jim, and have a great day. Deborah, thank you so much.
Deborah Jacobs: My pleasure. Keep up the good work!
Nicole DeMartino: We will; you, too. You’ve been listening to The Lange Money Hour, Where Smart Money Talks.