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.

Thank you.

Changing Beneficiary Designations for Retirement Plans: Why A One-size-fits-all Approach is Definitely Not Appropriate.

retirement-plans-james-lange-pittsburgh-paI had some reservations about writing Chapter 16. Chapter 15 discusses the perils of filling out your own beneficiary forms, and Chapter 16 talks about filling out beneficiary forms. It sounds counter-intuitive, but there is a method to my madness!

The reason I wrote Chapter 16 was because I thought that my readers probably wouldn’t find it very helpful to have me tell them, “Don’t do the wrong thing!” without also offering a very clear explanation of what the wrong thing is. Some folks might be disappointed that Chapter 16 is not a step-by-step guide about the “right” way to prepare your beneficiary designations. Unfortunately, that would have been an impossible task because it is one area of estate planning where a one-size-fits-all approach is definitely not appropriate. Chapter 16 is intended to offer general guidance only, and I hope you’ll consult with a professional about your own situation.

As it is becoming more common to see trusts as part of estate plans, I thought it would be helpful to go over some of the finer points of naming trusts as beneficiaries of your IRA or retirement plans. Frequently, trusts are used to “protect” assets – whether it be from taxes, creditors, or whatever the case may be. If the beneficiary designations of your trust are not precisely accurate, the trust cannot be funded. That means that the money will stay in the retirement plan, and not go in to the trust. Your heirs can try to explain to the IRS that you made a minor mistake when filling out your beneficiary form, and your intentions were really something other than what you wrote. The cost of asking the IRS to agree to your executor’s interpretation of what a beneficiary designation was supposed to be (also called a private letter ruling) is, as of this writing, about $18,000 – and there’s no guarantee that they’re going to agree with your executor anyway. If they don’t agree, then all of the work you went through to establish the trust was for nothing. So why risk the protection that you had hoped to offer by setting up the trust?   Please consider using a competent professional to help you with your beneficiary forms!

Chapter 17 continues this discussion by reviewing the different types of trusts you can use as a beneficiary of your retirement plan. Check back soon!

-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.

Thank you.

Life Insurance: Is It Right for Your Estate Plan?

life-insurance-retire-secure-james-lange-pittsburghInsurance salesmen are often maligned and are frequently the butt of some pretty bad jokes. At the risk of being categorized with those poor men and women, I’ll tell you that I don’t hesitate to recommend life insurance to many of my own clients after evaluating their estate planning needs. Why? Because when it is appropriate and structured properly, life insurance has a number of benefits that make it an excellent and possibly the best wealth transfer strategy.

If you read the earlier chapters, you learned that legislative changes since 2009 mean that federal estate tax is an issue for far fewer taxpayers than in the past. The IRS wasn’t feeling guilty about charging estate tax on your assets, they just gave more people a reason to worry about a completely different problem called federal income tax. Chapter 12 of Retire Secure! delves into some techniques that show how life insurance can be used to help minimize the damage to the estate caused by income taxes at death. It also discusses how life insurance can be used to provide liquidity for a number of estate settlement needs, and also how it can be used to benefit the estate if there is a disabled beneficiary. While life insurance can be extremely beneficial it is important to remember that in situations where taxes and other estate needs aren’t a concern, the cost of the life insurance – especially for a senior citizen – might not be worth it.

In earlier chapters, there are several references to the possibility that Congress may eliminate the benefits of the Stretch IRA. Chapter 12 introduces some new ideas regarding the inclusion of a Charitable Remainder Unitrust (CRUT) in certain estate plans. How do you think your children would react if you named a charitable trust as the sole beneficiary of your retirement plan? They might react very favorably when they find out that, in the long run, they could end up with a lot more money.

This is a very complicated estate planning technique that is not appropriate for everyone. Under the right set of circumstances, though, life insurance can be a very effective addition to an estate plan – especially if the owner of the IRA has always supported charities. Would you like to endow a chair at your local university or symphony orchestra, or perhaps provide financial support for your favorite hospital or religious organization long after your death? Read Chapter 12 to learn the basics of this strategy, and how life insurance can play a key role.

Stop back soon for an update on some really big news about the possible death of the Stretch IRA.

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.

Thank you.

The Clear Advantage of IRA and Retirement Plan Savings during the Accumulation Stage

If you are working or self-employed, to the extent you can afford to, please contribute the maximum to your retirement plans.

Mr. Pay Taxes Later and Mr. Pay Taxes Now had identical salaries, investment choices, and spending patterns, but there was one big difference. Mr. Pay Taxes Later invested as much as he could afford in his tax-deferred retirement plans—even though his employer did not match his contributions. Mr. Pay Taxes Now contributed nothing to his retirement account at work but invested his “savings” in an account outside of his retirement plan.

Please look at Figure 1. Mr. Pay Taxes Later’s investment is represented by the black curve, and Mr. Pay Taxes Now’s, by the gray curve. Look at the dramatic difference in the accumulations over time—nearly $2 million.

There you have it. Two people in the same tax bracket who earn and spend an identical amount of money and have identical investment rates of return. But, based on the simple application of the “Pay Taxes Later” rule, the difference is poverty in old age versus affluence and a $2 million estate.

Can't see this image - go to http://www.paytaxeslater.com/ and download the book!

Retirement Assests, IRAs vs. After-Tax Accumulations

Retire Secure! Pay Taxes Later – The Key to Making Your Money Last, 2nd Edition, James Lange, page. xxxi  http://www.paytaxeslater.com/

Have you done your year-end tax planning?

“Year-end tax planning is always complicated by the uncertainty that the following year may bring and 2012 is no exception. Indeed, year-end tax planning in 2012 is one of the most challenging in recent memory.

A combination of events – including possible expiration of some or all of the Bush-era tax cuts after 2012, the imposition of new so-called Medicare taxes on investments and wages, doubts about renewal of many tax extenders, and the threat of massive across-the-board federal spending cuts – have many taxpayers asking how can they prepare for 2013 and beyond … and what to do before then.

The short answer is to quickly become familiar with the expiring tax incentives and what may replace them after 2012 … and to plan accordingly. Year-end planning for 2012 requires a combination of multi-layered strategies, taking into account a variety of possible scenarios and outcomes(CCH tax briefing 2013).”

If you have questions or concerns about your tax situation in 2013 and beyond, speak to your advisor and start your planning now.

If we can help, call our office at 412.521.2732.

Take the 10-second test!

Please take the next 10 seconds to complete this survey about your financial future. . . you might rediscover some opportunities for financial growth.

Are you concerned about outliving your income?

Would you like to reduce (possibly eliminate) your quarterly estimated tax payments?

Would you like to see your grandchildren go to college?

Are you concerned about going into a nursing home?

Would you like to earn more competitive interest and preserve the safety of your nest egg?

Are you concerned about the stock market going down?

Would you like to find out how to take money out of your IRA tax free?

Is your house still titled as joint tenancy? (If yes, you are probably making a serious mistake!)

Are you concerned about which option to make regarding your minimum distribution requirements from your IRA at age 70 1/2?

Do you want to get more information on the Inherited IRA that can possibly continue your IRA for 30, 40, 50 years or longer even after you pass away?

Are you concerned about the likelihood that the government will get over 50% of your retirement accounts after you pass away?

If you have answered, Yes, to 3 or more of these questions, you should come in for a complimentary review!  Call 412.521.2732 and ask for Alice.

Remember, what you don’t know can hurt you!

 

Life Insurance Awareness Month

Life insurance isn’t a big part of what we do here at Lange Financial, but it is an important part. As September is Life Insurance Awareness Month, we want to share some important life insurance facts with you all.

Did you know that depending on the size of your estate, your heirs could be hit with a large estate tax payment after you die. The proceeds of a life insurance policy are payable immediately, allowing heirs to take care of estate taxes, funeral costs, and other debts without having to hastily liquidate other assets. And life insurance proceeds are generally income tax free and can be arranged to avoid probate. Finally, if your insurance program is properly structured, the proceeds from your life insurance policy won’t add to your estate tax liability.

Think it over. If you are one of the 35 million American households that are uninsured, you might want to consider what a life insurance policy could mean for your heirs.

2011 Changes in Tax Law

The recently enacted “Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010″ (the “2010 Tax Act”), signed by President Barack Obama on December 17, 2010, makes important changes to the taxation of estates and gifts, which will affect many grandparents. This Act significantly increases the prior exemptions for estates and gifts. It will affect many existing wills and estate plans, so it would be wise for grandparents to review their estate-planning documents with their attorneys to determine if changes are appropriate.

The 2010 Tax Act reinstates the federal estate tax at rates of 35 percent (as opposed to 45 percent under prior law) and provides for a federal exemption of $5 million for individuals and $10 million for a husband and wife for 2011 and 2012. It also keeps the tax rate at 35 percent for gifts made in 2010 through 2012. The lifetime gift-tax exemption amount is reunified with the $5 million estate-tax exemption, providing for a unified gift and estate tax exemption of $5 million for decedents in 2011 and 2012. This makes lifetime gifts much more attractive as an estate-planning vehicle.

Keep in mind that even though federal estate taxes have been eliminated on estates of less than $5 million (or $10 million, in the case of a surviving spouse), there may still be significant state estate taxes on estates of less than $5 million. New York State, for example, has not changed its $1 million exemption to conform to increases in the federal estate-tax exemption, and thus, a decedent with a $5 million estate who dies in New York will be subject to state estate tax of approximately $400,000, even though there is no federal estate tax.

Last Minute Tax Strategies for IRAs & Other Retirement Accounts

Make your 2010 IRA contribution as late as April 18, 2011: 

You can contribute up to $5,000 (or $6,000 if you are 50 or older) until the time you file your income tax return, but no later than April 18, 2011.  If you participate in a retirement plan at work, the IRA deduction phases out if you are married and your joint AGI is $89,000 or more, or if you are single and your adjusted gross income is $56,000 or more.  Filing an extension will not buy you additional time.  Non-deductible pay-ins to IRAs and Roth IRAs are also due by April 18, 2011.

Make a deductible contribution to a spousal IRA:

If you do not participate in a workplace-based retirement plan but your spouse does, you can deduct some or all of your IRA contributions on your 2010 income tax return as long as your adjusted gross income does not exceed $177,000. 

Make a contribution to a Roth IRA: 

Contributions to Roth IRAs are not tax deductible, but the earnings on them may be withdrawn totally income tax-free in the future as long as the distributions are qualified.  A Roth IRA distribution is qualified if you’ve had the account for at least five years, the distribution is made after you’ve reached age 59½, you become totally and permanently disabled, in the event of your death, or for first-time homebuyer expenses.  Contribution limits are the same as traditional IRAs, except the maximum contribution for both Roth and traditional IRAs is still limited to $5,000 or $6,000 for persons age 50 or older.

To make a full Roth IRA contribution for 2010, your AGI cannot  exceed $177,000 if you are married or $120,000 if you are single.  You are subject to the same limitations for a non-working spouse.  Subject to some exceptions, I usually prefer Roth IRAs to traditional IRAs or even traditional 401(k)s.

Look into Roth IRA conversions:

The rules for contributions to Roth IRAs are different from the rules for Roth IRA conversions.  Prior to January 1, 2010, you could only convert a traditional IRA to a Roth IRA if your AGI was $100,000 or less (before the conversion).  However, this dollar cap is now removed starting January 1, 2010 and there is no limit to your earnings in order to qualify for a Roth IRA conversion.  Please remember that a conversion to a Roth IRA may place you in a higher tax bracket than you are in now and have other adverse consequences, such as subjecting more of your Social Security to be taxable due to the increase in your AGI.  Please also note that a Roth IRA conversion does not have to be all or nothing. You can elect to do a partial Roth IRA conversion and you can convert any dollar amount you decide is best for your situation.  Our most common set of recommendations after “running the numbers” is usually a series of Roth IRA conversions over a number of years.  Please remember that a Roth IRA conversion may not be appropriate for all investors.

The Best Response to the New Estate Laws

The top estate planners in the country warn IRA and retirement plan owners to develop an appropriate response to the new estate tax laws just passed this December. We are now in a completely different tax environment ripe for the cruelest trap of all: where the standard language of traditional wills and trusts forces too much money (now up to $5,000,000) into a trust limiting the surviving spouse to income and the right to invade principal for health, maintenance and support.  If the trust is overfunded, which is likely under the new law, less discretionary income is available for the surviving spouse.  Furthermore, if this common trust is the beneficiary of an IRA or retirement plan, massive income taxes are also triggered – all this can be avoided with appropriate language in wills and trusts and appropriate beneficiary designations of IRAs, Roth IRAs and retirement plans.

Under the new estate tax laws, older traditional estate plans are not helpful, but harmful, because of the severe restrictions they place on the surviving spouse, something most couples do not want.  Many IRA and retirement plan owners have this detrimental language in their existing wills and trusts and don’t even know it. IRA and retirement plan owners with assets between $600,000 and $5,000,000 are particularly vulnerable. Both spouses have likely become quite accustomed to making expenditure decisions based on desire in addition to need. To lose that control would be devastating. Without a review of their older traditional estate plan they could be  thinking they have left everything under the control of their spouse, but in reality, they have not.

 I encourage you to have your will reviewed and updated to comply with the estate planning law.  In Pittsburgh?  Please join us for one of our FREE workshops entitled, “How to Avoid the Cruelest Trap of All:  Don’t Unknowingly Restrict Your Surviving Spouse’s Independence or Access to the Family Money After the Tax Relief Act of 2010.”   See our location and times on www.paytaxeslater.com.  Not in Pittsburgh, you can purchase this workshop to view in the comfort of your own home for just $97 – to order call our office at 412.521.2732.