How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning

Blog Post 'How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning by Matt Schwartz featured on PayTaxesLater.com

How the For the 99.5 Percent Act Should Get All of Us to Think About Our Estate Planning

On March 25th, Senator Sanders and Senator Whitehouse presented in the Senate Budget Committee an initial draft of the “For the 99.5 Percent Act” which will have a significant impact on estate planning going forward. There are still a lot of specifics to be determined through the political process but understanding the blueprint of the Act is crucial to determining what actions to consider in 2021 before the 2022 effective date of any new estate tax legislation.

Federal Estate Tax Exemption Amount Adjustment:

Currently, the federal estate tax exemption amount is $11,700,000 per person or $23,400,000 per married couple and is adjusted each year for inflation. The proposed federal estate tax exemption would be reduced to $3,500,000 per person or $7,000,000 per married couple adjusted each year for inflation. Policy experts in Washington DC think it is more likely that the exemption will drop by 50% to $5,850,000 with any unused federal estate tax exemption remaining portable from the deceased spouse to the surviving spouse.

Federal Gift and Estate Tax Rates:

The proposed rates under the proposed Act are 45% between $3,500,000 and $10,000,000, 50% from $10,000,000 to $50,000,000, 55% from $50,000,000 to $1,000,000,000 and 65% on any amount above $1,000,000,000.

Federal Gift Tax Exemption Amount Adjustment:

Since 2011, the federal gift tax exemption has been unified with the federal estate tax exemption. The proposed Act would reduce the federal gift tax exemption to $1,000,000. Although policy experts believe that it is likely that the gift tax exemption will remain unified with the federal estate tax exemption, this development is something to watch closely in the proposed legislation.

Annual Exclusion Gift Adjustment:

The proposed Act reduces the annual exclusion from $15,000 per year (adjusted for inflation) to $10,000 per year (to be adjusted for inflation) and reduces the exemption to all restricted gifts in a year to $20,000 per year such as gifts to trusts or other gifts with limitations.

Limitations on Dynasty Trusts:

Multi-generation trusts created after the effective date of the proposed Act (currently, that date would be January 1, 2022, if legislation is passed in 2021) would only be allowed to last fifty years. Pre-existing trusts would have to be terminated fifty years after the enactment of the act.

Limitations on Irrevocable Trusts for Estate Planning Purposes that Qualify for Step up in Basis Treatment:

The proposed Act is seeking to eliminate the opportunity of creating the power to have a step-up in basis on an irrevocable trust for a beneficiary which means that there would be significant capital gain exposure on long-term trust accounts.

Estate Planning Action Steps

  • Make annual exclusion gifts to the beneficiaries of your estate if you have the means to do so. If outright gifts will not be effective, consider gifts in trust that can be controlled by a trusted family member.
  • Consider making credit-consuming gifts above the annual exclusion. Large gifts made now above the future exemption will not be clawed back (taxed again at your death) even if the federal estate tax exemption at the time of your death is less than your lifetime use of the exemption.
  • Develop a flexible estate plan in 2021 without mandatory trusts that have a proactive giving bent to maximize current tax benefits while they still exist.
  • Consider second-to-die life insurance with long-term trusts for family members (if appropriate) to maximize long-term tax-free money to the family while these opportunities still exist.
  • With the additional likelihood of higher income tax rates in 2022 and beyond for some taxpayers, consider Roth IRA conversions and other means to accelerate income in 2021.
  • Have a discussion with your Lange Legal Group attorney in 2021 to put a plan in place now that will maximize your protection against these pending law changes.

  • Although it is likely that the final federal estate tax act that Congress passes will be different than the “For the 99.5 Percent Act”, it is critical not to bury your head in the sand with regard to your estate plan and to act this year. Federal estate tax changes will most likely be in effect for 2022 so now is the time to contact us to revisit or to develop your estate plan and wealth transfer plan.

    Fortunately, there is light at the end of the tunnel for COVID-19 but the light in the tunnel may be dimming for proactive estate planning. We look forward to hearing from you.

    For more information, send an email to Matt by clicking the button below.

    Contact Matt Schwartz, Attorney at the Lange Financial Group for Estate Planning needs including Wills.

    Unhealthy Investment Attachments

    Have you ever made yourself suffer through a bad movie because, having paid for the ticket, you felt you had to get your money’s worth? Some people treat investments the same way.

    Behavioral economists have a name for this tendency of people and organizations to stick with a losing strategy purely on the basis that they have put so much time and money into it already. It’s called the “sunk cost fallacy.”

    Let’s say a couple buys a property next to a freeway, believing that planting trees and double-glazing will block out the noise. Thousands of dollars later, the place is still
    unlivable, but they won’t sell because “that would be a waste of money.”

    This is an example of a sunk cost. Despite the strong likelihood that you’ll never get your money back, regardless of outcomes, you are reluctant to cut your losses and sell
    because that would involve an admission of defeat.

    It works like this in the equity market too. People will often speculate on a particular stock on the basis of newspaper articles about prospects for the company or industry.
    When those forecasts don’t come to pass, they hold on regardless.

    It might be a mining stock that is hyped based on bullish projections for a new tenement. Later, when it becomes clear the prospect is not what its promoters claimed, some
    investors will still hold on, based on the erroneous view that they can make their money back.

    James Lange, Lange Financial Group, Pittsburgh, Investment

    The motivations behind the sunk cost fallacy are understandable. We want our investments to do well, and we don’t want to believe our efforts have been in vain. But there are ways of dealing with this challenge. Here are seven simple rules:

    1. Accept that not every investment will be a winner. Stocks rise and fall based on news and on the markets’ collective view of their prospects. That there is risk around outcomes is why there is the prospect of a return.
    2. While risk and return are related, not every risk is worth taking. Taking big bets on individual stocks or industries leaves you open to idiosyncratic influences like changing technology.
    3. Diversification can help wash away these individual influences. Over time, we know there is a capital market rate of return. But it is not divided equally among stocks or uniformly across time. So spread your risk.
    4. Understand how markets work. If you hear on the news about the great prospects for a particular company or sector, chances are the market already knows that and has priced the security accordingly.
    5. Look to the future, not to the past. The financial news is interesting, but it is about what has already happened, and there is nothing much you can do about that. Investment is about what happens next.
    6. Don’t fall in love with your investments. People often go wrong by sinking emotional capital into a losing stock that they just can’t let go of. It’s easier to maintain discipline if you maintain a little distance from your portfolio. This is one of the huge values a fiduciary advisor can add to your portfolio.
    7. Rebalance regularly. This is another way of staying disciplined. If the equity part of your portfolio has risen in value, you might sell down the winners and put the money into bonds to maintain your desired allocation.

    These are simple rules. But they are all practical ways of taking your ego out of the investment process and avoiding the sunk cost fallacy.

    There is no single perfect portfolio, by the way. There is, in fact, an infinite number of possibilities, but based on the needs and risk profile of each individual, not on “hot tips” or the views of high-profile financial commentators.

    This approach may not be as interesting. But by keeping an emotional distance between yourself and your portfolio, you can avoid some unhealthy attachments.

    Save

    Save

    4 Reasons Why We’re Excited that Retire Secure! is Interactive on the Web!

    If you haven’t made your way to www.langeretirementbook.com yet, now is the time!

    Here at the Lange Financial Group, LLC, we are very excited to bring you an interactive version of Retire Secure! A Guide to Getting the Most Out of What You’ve Got.

    Reason #1 – The entire book is on this website. Yes, all 420 pages of the book, including the front and back covers, all about the best strategies for retirement and estate planning.

    Lange-Retirement-Book-Wesbite1

    Reason #2 – The book is divided into chapters for ease of reading. Meaning, you don’t have to flip through 400-some pages to get to Chapter 11 – The Best Ways to Transfer Wealth and Cut Taxes for the Next Generation.

    Lange-Retirement-Book-Wesbite-2

    Reason #3 – We honestly haven’t seen anything like this before. Granted, I’ve read magazines on viewers where you can flip the pages as you read. But not a website for a book that includes a viewer, as well as a forum where readers can engage with each other.

    The comments are moderated by the Lange Financial Group, LLC staff and myself. One of us will reply to your comment as soon as we can. To leave a comment, all you need to do is connect with your Amazon, Facebook, or LinkedIn account. This measure is for your protection, as well as ours. We don’t want spammers posting comments or incorrect information about such an important topic.

    Lange-Retirement-Book-Wesbite-3

    Reason #4 – We are hoping this interactive website encourages you to purchase the book! Retire Secure! is available from Amazon and JamesLange.com. Once you’ve read the book, feel free to return to LangeRetirementBook.com to ask questions, as well as Amazon and Goodreads to review the book for the benefit of others.

    Save

    The Third Edition of Retire Secure has Finally Arrived!

    The new edition of Retire Secure! A Guide to Getting The Most out Of What You’ve Got is the distilled and concentrated version of the recommendations we have developed over 30 years. It is particularly useful for IRA and retirement plan owners.

    We will soon be sending our clients a copy with a personalized note directing you to what we think will be the most relevant sections for you to read. This personalization has been a huge project, but it’s something that I think will be enormously helpful to you.

    Retire Secure! will be available for purchase in bookstores and on Amazon in October. However, if you absolutely cannot wait, the book is available for Kindle and Amazon pre-order here.

    Amazon Kindle Pre-Order Retire Secure! James Lange

    The core concepts of the current edition are similar to the two previous editions (Wiley, 2006 and 2009). Recent legislative changes, however, have led to important strategy adjustments that are incorporated in the latest edition.

    • In Part 1, The Accumulation Years, we include some new strategies that were not available in 2009.
    • In Part 2, The Distribution Years, we cover how to spend down retirement funds in the right order to manage your assets wisely, but that area is more complicated than ever because of some of the new tax laws. We have also updated recommendations for Roth conversions, and the impact of a potential new law for IRA and retirement plan owners and their families — the death of the stretch IRA. It could be devastating for your children. Though there is no perfect answer, I do address some of the best strategies I know to reduce the pain of the likely changes in the IRA law.
    • In Part 3, we’ve updated the Eddie and Emily Estate Planning case study. Essentially, it incorporates the updated Lange’s Cascading Beneficiary Plan, which many of you already have in your wills and trusts.

    If you’ve read previous versions of Retire Secure!, I hope you’ll find the updates and changes enlightening. To make the new material easier to find, I have included a section that highlights the changes. And if you’re new to the book, I hope you’ll take this as an opportunity to really educate yourself on these principles and sound practices. There’s mathematical proof that optimizing the strategies you use to approach saving, investing, estate planning, and distributing assets could mean a dierence of millions of dollars over your lifetime and for your heirs.

    It’s my fervent wish that Retire Secure! will help you live a happier, healthier, and more secure life!

    Jim

    It’s the 2nd Annual National my Social Security Week!

    National-My-Social-Security-Week-The-Roth-Revoluton-BlogIt’s the 2nd annual National my Social Security Week!

    We encourage you to go to www.socialsecurity.gov and sign up for an account, if you haven’t already. With my account, you can verify your earnings record and get estimates of your future benefits to help you make important financial decisions. If you are already receiving benefits you can get a benefit verification letter, check your benefit options and payment information, change you address or direct deposit information, and get a replacement Medicare card or SSA-1099 for tax season!

    It is a great financial planning and benefit management tool which is secure, convenient, and FREE!

    Learn all about the service and sign up for free at www.socialsecurity.gov/myaccount.

    It’s never too early or too late to plan for retirement!

    Trusts as Beneficiaries of Retirement Plans: A Possible Alternative to the Stretch IRA?

    trusts james langeIf you’ve read my earlier posts, you know that much of the new edition of Retire Secure! addresses the ramifications of the legislation that, if passed, will kill the Stretch IRA. If this potential change is a concern for your family, then Chapter 17 is a “must-read” for you because it offers a possible alternative that will allow them to continue the tax deferral of your retirement plan for many years.

    Trusts may be appropriate in many situations. We use them for young beneficiaries who, by law, cannot inherit money, and for older beneficiaries who can’t be trusted with money. Trusts can also be used to help minimize taxes at death (although this is not as common as in previous years). With more frequency, though, our office is using trusts to replace the benefits of the Stretch IRA. This application started when all of these campaigns to kill the Stretch IRA began, and we began to seek alternatives for our clients. Chapter 17 compares the value of an IRA assuming that the non-spouse beneficiary must withdraw the proceeds within 5 years, to the value of an IRA when it is protected by a specific type of trust. I think you will find the results very surprising.

    The rules governing trusts are very complex, and, if you are interested in incorporating them in to your own estate plan, you will need the assistance of a competent professional.

    Do you donate to charity? If so, my next post will cover the changes in the laws that affect charitable contributions.

    All the best,

    Jim

    Jim Lange, Retirement and Estate Planning A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

    Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

    Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

    If you’d like to be reminded as to when the book is coming out please fill out the form below.

    Save

    Net Unrealized Appreciation (NUA): Don’t Pay More Taxes Than You Need To

    Net Unrealized Appreciation (NUA) Don’t Pay More Taxes Than You Need To, James LangeSome employees have Stock Options, or the option to buy the stock of the company that they work for within their retirement plans. A unanimous Supreme Court decision in 2014 might discourage employers from offering their employees a stake in the business in future years, because they can now be held liable if the value of the stock drops. Employers can now also be held liable under insider trading laws for certain actions they make within the retirement plan, with respects to company stock.

    But what if you do happen to have some company stock in your retirement plan? If you do, be sure to read Chapter 9 for some very important tax planning tips! When you retire and take a lump sum distribution from your retirement plan, the distribution may include employer stock that is (hopefully) worth more than the fair market value at the time it was purchased in your plan. The difference between the value of the company stock at the time you take your lump sum distribution and its value at the time it was purchased is called Net Unrealized Appreciation (NUA).

    If you own company stock within your retirement plans, you should make sure that you understand Net Unrealized Appreciation (NUA) rules outlined in Chapter 9 before you roll over or take distributions from the plan. Many financial advisors don’t understand these rules and, if you don’t, you could end up paying significantly more in taxes than you need to. This is especially true if the company stock in your 401(k) has increased in value!

    Stay tuned for an update on our classic case study of Eddie & Emily from Chapter 10!

    – Jim

    Jim Lange A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

    Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

    Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

    If you’d like to be reminded as to when the book is coming out please fill out the form below.

    Save

    Annuities: Good or Bad?

    Annuities, Retirement Planning, Pittsburgh Pennsylvania, James LangeThe Center for Disease Control annually publishes a document called the National Vital Statistics Report. This report estimates the life expectancy of men and women in the United States. At birth, the life expectancy for a male is 76.7 years and, for a female, 81.4 years. What is interesting about the report, however, is that it shows that, the longer you do live, the more your life expectancy increases. If you’ve already made it to age 65 and are male, you are likely to continue to live until age 83. If you’re a 65-year old female, you can be expected to live until age 85.5. If you’re a male and you’ve already made it to age 80, you can expect to live until age 88.3; an 80-year old female can expect to live until age 89.7. When your life expectancy continues to increase, how can you possibly make sure that the money you’ve saved for retirement lasts for your entire life?

    Financial professionals are sharply divided on the topic of annuities. Some love them, and some hate them.  My goal in the Third Edition of Retire Secure! is to point out the advantages and disadvantages of annuities, and let you make up your own mind as to whether they would be good or bad for your own retirement. There are many different kinds of annuities, but most can be used to provide a guaranteed lifetime income for both you and your spouse. This can provide peace of mind to individuals who are concerned that the Social Security system might go bankrupt after they retire and are no longer able to earn income. As of June 2014, employees are permitted to buy a specific type of annuity called a qualified longevity annuity contract (or QLAC) within their retirement plan. While you can’t avoid taking Required Minimum Distributions completely, this type of annuity allows owners to defer retirement distributions until age 85. This means that owners would receive the maximum pension benefit possible for the rest of their lives. Once distributions are started, the owner receives a guaranteed income for the rest of his or her life. Being able to exempt a portion of retirement income from minimum required distributions from age 70 ½ to age 85 can be a powerful estate planning tool, however, there are rules you have to follow. Those rules are covered in Chapter 8.

    Annuities are also playing a growing role in estate planning for adult children. Many retirees have adult children who have been financially devastated because they were not adequately prepared for the cost of sending their own children to college. Others simply live beyond their means and believe that balancing their budget means robbing Peter to pay Paul. For some, the unexpected loss of a steady income from a job can spell financial disaster. Chapter 8 contains some tips on how you can use annuities to put your spendthrift children on a budget or, if necessary, even protect them from their creditors.   In some cases, annuities can offer the means to provide your children with the highest possible degree of financial security.

    Check back soon for a tip on how to avoid a common and expensive mistake when taking distributions from a retirement plan that includes company stock!

    – Jim

    Jim Lange A nationally recognized IRA, Roth IRA conversion, and 401(k) expert, he is a regular speaker to both consumers and professional organizations. Jim is the creator of the Lange Cascading Beneficiary Plan™, a benchmark in retirement planning with the flexibility and control it offers the surviving spouse, and the founder of The Roth IRA Institute, created to train and educate financial advisors.

    Jim’s strategies have been endorsed by The Wall Street Journal (33 times), Newsweek, Money Magazine, Smart Money, Reader’s Digest, Bottom Line, and Kiplinger’s. His articles have appeared in Bottom Line, Trusts and Estates Magazine, Financial Planning, The Tax Adviser, Journal of Retirement Planning, and The Pennsylvania Lawyer magazine.

    Jim is the best-selling author of Retire Secure! (Wiley, 2006 and 2009), endorsed by Charles Schwab, Larry King, Ed Slott, Jane Bryant Quinn, Roger Ibbotson and The Roth Revolution, Pay Taxes Once and Never Again endorsed by Ed Slott, Natalie Choate and Bob Keebler.

    If you’d like to be reminded as to when the book is coming out please fill out the form below.

    Thank you.

    Save

    IRA Withdrawals: Should you withdraw from your Roth or traditional IRA first?

    IRA Withdrawal
    Those of you who have attended my workshops or read the previous editions of my book may remember a rule of thumb I used to use that said, “Spend your after-tax dollars first, use traditional IRA withdrawals second, and then withdraw your Roth”. Well, guess what? The changes in the tax laws now mean that there are no more rules of thumb! My new advice is, “Spend your after-tax dollars first, and then withdraw traditional and Roth IRA dollars strategically to optimize tax results”.

    Changes in the tax law that affect capital gains and individual tax brackets, as well as new taxes that are aimed specifically at high income taxpayers mean that the advice I used to give in the past is now far too simplistic. Chapter 4 presents detailed information on how capital gains and other taxes should affect your decision to withdraw money from a traditional versus a Roth account. Would you have thought that your marital status could affect your decision too? Is it possible to minimize the tax on your IRA withdrawals? (Hint: oh, yes.) If you have IRA and Roth money left over when you die, is it better to leave one type of account over another to a child at your death?

    Chapter 4 covers many new rules that you did not have to worry about in the past, which should certainly affect these decisions. I’d like to give you one word of caution, though. Each of the scenarios presented in this chapter is based on a specific set of variables. In one scenario, I changed only the account from which the taxpayer made the withdrawal, and the outcome is significantly different. Please don’t assume that your personal circumstances will result in the same outcome shown in these scenarios, but ask us to run the numbers for you!

    Be sure to stop back for my next post, which will cover some ideas for managing your Required Minimum Distributions!

    Save

    Save

    WSJ Article: Jim Lange Examines Proposed New Laws & Financial Planning

    Don't Let Obama Proposals Sidetrack Financial Planning, WSJ, James Lange, Jonathan ClementsJim was recently quoted in the Wall Street Journal (for the 35th time) by Jonathan Clements, a long-respected personal finance journalist. They discussed several topics including many that Jim has included in his new book due out in summer 2015, Retire Secure: A Guide to Getting the Most out of What You’ve Got.

    The article, titled: Don’t Let Obama Proposals Sidetrack Your Financial Planning, mentions several legislative proposals that have been introduced since 2014 that could have a large effect on your personal financial planning. Specifically, Jonathan asked Jim about his thoughts on the proposals and how they might change Social Security and Inherited IRAs and Roth IRAs.

    Jim’s advice? Even if changes are made for allowing Social Security maximization strategies like Apply & Suspend, traditional planning advice will likely remain the same. Hold off on Social Security as long as you can and collect the full delayed retirement credits.

    “Let’s say the husband dies at 70, but the wife lives to 95,” Mr. Lange says. “The extra 32% in survivor benefits could mean the difference between her being in poverty and her being just fine.”

    And what about the potential death of the Stretch IRA? Does it still make sense to do a Roth IRA conversion should a law pass that limits the effectiveness of Inherited IRAs? Jim explains that if a law passes that obligates a beneficiary to drain the account in five years, such an event could push that beneficiary into the highest tax bracket for those years. Because of this:

    “It might still make sense to do the Roth conversion, so the kid won’t have this horrible tax burden,” Mr. Lange says.

    You can read the full article here: http://blogs.wsj.com/totalreturn/2015/03/20/dont-let-obama-proposals-sidetrack-your-financial-planning/

    To learn more about nearly all of the subjects discussed in this article in greater detail, read Jim’s book! Go to www.retiresecurebook.com to receive a free 4 page summary and email reminders for the release of the Third Edition of Retire Secure!.

    Save

    Save