The Lange Money Hour: Where Smart Money Talks
James Lange, CPA/Attorney

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Taking a Closer Look at Q-Tip, Revocable, Minor & Charitable Trusts
Jim Lange, CPA/Attorney
Guest: Tom Crowley, Senior Wealth Planner & VP,
PNC Wealth Management
Episode 7

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TOPICS COVERED:

  1. Q-Tip Trusts
  2. Revocable Living Trusts
  3. The Importance of Transferring Assets Into a Trust
  4. Trusts for Minors
  5. Charitable Trusts

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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.

Beth Bershok: We are talking smart money thank you for joining us this evening. I’m Beth Bershok, Jim Lange CPA, attorney, author of two best selling books edition one and edition two of Retire Secure! Pay Taxes Later. We also have a guest with us for the first section of the show tonight. Before we get rolling here I do want to give the studio line which is 412-333-9385. Anytime you have a question you can check in tonight, 412-333-9385. Let me introduce the guest and do a quick synopsis of how he ended up on the show tonight. Tom Crowley who is a Senior Wealth Planner and VP at PNC Wealth Management. First of all thank you so much for joining us at the last minute tonight, Tom, it’s nice to have you here. How this got started was a couple of weeks ago we were planning this show and we decided that we would talk about trusts. A lot of misconceptions about trusts and so we thought, great Jim can set the record straight and then Jim caught an article in the Post Gazette on Friday, May 29th about family finances, it was called “Family finances equal complex puzzle, divorce, remarriage can make estate planning especially challenging”. And the scenario that was set up in the article this was the set up, after 15 years in their second marriage the husband was getting ready to retire he had $1 million in his IRA and the wife who had been a stay at home mom who was shocked to learn she had no ownership rights to the account. And one of the plans that was brought forth was something called a Q-tip trust and Jim thought he doesn’t like the idea because of tax issues and so we invited Tom on to discuss the issue tonight. First of all I need you to clarify what a Q-tip is because that’s not a term that’s just on the tip of everybody’s tongue. So Tom do you want to explain what that is?


1. Q-Tip Trusts

Tom Crowley: Sure a Q-tip trust is a qualified turn, no interest property trust and that definition actually isn’t very helpful to describe what it is, but it’s really a creature of the tax code and it refers specifically to the estate tax area. The roles have been for years and years that Uncle Sam has always said if a spouse leaves all of their assets outright to the surviving spouse at death then they’ll postpone tax, no tax due it’s called the marital deduction. And everybody generally wants that to happen, a tax postponed is a tax saved. But as with anything there’s exceptions to all kinds of rules and over time people said well I don’t really want to leave it outright to my spouse, but I want my spouse to benefit maybe it was a second marriage situation. So over time the IRS recognized the fact that there should be some exception to that rule and that’s how this trust came about it qualified for the marital deduction. It wouldn’t have otherwise done so, but because people wanted their spouse to enjoy income or enjoy the asset, but not actually inherit it outright but they ultimately wanted to control it so they had some changes.

Jim Lange: If I was going to simplify things for our listeners I would say at the death of the IRA owner the money will go into a trust. The income from the trust will go to his wife. When his wife dies the money will go to some combination of surviving children.

Beth Bershok: Okay now Jim doesn’t like Q-tip as a beneficiary of an IRA for tax issues and can you explain what would be happening there?

Jim Lange: Well, first this isn’t something that I thought up recently. In fact back in 2006 and again in 2009 when I wrote a chapter about trusts and Q-tips as beneficiaries of retirement plans and one of the benefits of writing a book is you’re allowed to quote yourself.

Beth Bershok: Oh perfect.

Jim Lange: So, I am going to quote myself. I hate Q-tips as beneficiaries of IRAs and retirement plans.

Beth Bershok: Okay, that’s strong that is strong wording. And honestly explain what happens with the tax issues there.

Jim Lange: What happens with the tax issues I consider it a tax travesty because the whole idea of having IRAs and retirement plans if possible is to put off or postpone paying income taxes. We sometimes call it the stretch IRA and the idea is unless there’s an absolute need for the money now there’s no other money available that we continue to get what’s called a stretch IRA which is putting the required distributions off as far as we can. If you leave money to a Q-tip trust right the year after the IRA owner dies the surviving spouse must start taking distributions from that trust, and then after the surviving spouse dies the children must take distributions out of the IRA at a much faster rate then if we did the alternative which we can get into, the alternative by the way is forget this trust business just leave a certain amount of the surviving spouse and the certain amount to the kids.

Beth Bershok: Okay we can go through that in just a minute but you’re saying that’s what happens when a Q-tip trust is beneficiary of your IRA, these are the tax issues that you’re going to be facing.

Jim Lange: Right we’ll quantify those in a few minutes.

Beth Bershok: Right, but Tom and Tom again is from PNC Wealth Management, Tom Crowley, joining us this evening. Tom are you on the same page with the tax issues?

Tom Crowley: I am and because I didn’t write the book I can’t quote myself, but I agree with Jim to the extent that it is purely a tax issue. I couldn’t agree more and so in my business when we sit down and we talk with clients we’re also talking about issues beyond the tax issue and in this case and specifically a Q-tip trust another issue is control. And so with all things when you want maybe you want more control you may give up some tax benefits and Jim’s absolutely right you may give up substantial tax benefits so you always want to think about what you’re giving up and try to quantify that in some way and Jim does a great job of doing that and running calculations to see what is it that you how do you benefit from the stretch from that slowing down of distributions coming out of IRAs because the Q-tip kind of throws that on its head but it’s more a control issue than it is a tax issue.

Beth Bershok: So, are you saying in some instances you would use it just for control?

Tom Crowley: Correct.

Beth Bershok: Okay and Jim would you agree?

Jim Lange: I would never use it even for control as beneficiary of an IRA. It’s one thing to say yeah control is nice and sometimes control is more important than the tax issues. Before I want to go there though I think we ought to quantify the tax issues. Now I’m not the first person to quantify the tax detriment of naming the Q-tip as a beneficiary of an IRA. The first person that I know who has a wonderful reputation in the area she’s just a terrific writer… her name is Natalie Choate. She actually quantified the difference between naming a $1.8 million IRA to a Q-tip versus doing what I’m recommending which is naming a certain percentage and in her case two thirds or $1.2 million directly to the surviving spouse without a trust and the other $600,000 directly to children without a trust. She ran numbers and came to the conclusion that over time the family would be better off by $4.3 million dollars.

Beth Bershok: And how much time are we talking?

Jim Lange: I think that’s over 30 years. Now to be fair, I actually had Steve Kohman, who’s just a wonderful number-runner in our office go through her calculations and he recreated her calculations, but he said you know some of her assumptions were not really right on point for today’s tax law and he wanted to be much more conservative. And when he ran the calculations and he accounted for the different in the value of the IRA he came to the conclusion that the IRA owner’s family which is a combination of the surviving spouse and the remaining children that there would be a $750,000 advantage to them.

Beth Bershok: This was Steve?

Jim Lange: That was Steve’s analysis.

Beth Bershok: And I’ll have to tell you Steve is really nitpicky when he does these calculations when he does these projections so that’s the calculation that he came up with.

Jim Lange: Right that’s fantastically conservative. Now even took it a step further he said no to be fair, and by the way that $756,000 is on a million. Now he said to be fair that is over time and if you want to translate that into today’s dollars you have to factor in inflation and then the number he came up with was still over $300,000. Now if you’re talking about a million dollars in an IRA to give up $300,000 in value to me I have a very hard time doing that I would say even under the best of circumstances.

Beth Bershok: But if we get back to what Tom was saying which was an issue of control what if you have a client and that is really what concerns them more?

Jim Lange: Alright Tom is it fair to say the control issue what a client really wants to do in that situation so picture a second marriage typically children from a first marriage and you want to be fair to your spouse, you want to be fair to your kids from the first marriage and normally with a Q-tip trust what you’re saying is the spouse can get the income and then when the spouse dies it goes to the kids. And that way you do have that way the person who is dying or preparing their will or their trust or the beneficiary of their IRA has “control” of that. I would maintain if you’re giving up in the best circumstances $300,000 in tax savings that then there are much better alternatives and I do want to give Tom a chance to talk about control a little bit and then I’d like to talk about I will also be happy I will also be happy to talk about some of the non tax reasons why I don’t like Q-tips as beneficiaries of IRAs.

Beth Bershok: Okay let’s let Tom address the control issue.

Tom Crowley: Sure, well I think the answer to the control issue is that you present findings like you have Jim to your client and talk to them about how that might effect their decision non control. Some clients will say that’s great that’s very helpful and now I understand why I would rather use the tax advantage then the control, but some clients may say you know what I want to make sure that my surviving spouse is taken care of for the rest of her life. If I divide now and give her the IRA, give her part of an IRA and the rest of the IRA goes to my children I’ve made a decision that we can never turn back from and whatever she gets she’s got and she’s free to do with it what she pleases, maybe she isn’t comfortable managing money, there can be lots of reasons but that’s what’s great about the business that we’re in if we do a good job with our clients we have the in depth discussion that you have on the IRA distributions and the taxes and I also have the same kinds of discussions with clients on their intentions and what they want to do and we both have both sides of those discussions.

Beth Bershok: And typically in this example in the article this is a situation where you have a second wife maybe even a third wife, you have step children, you have children from your first marriage and you’re trying to deal with a whole ball of wax.

Tom Crowley: Yeah, you have a lot of obligations.

Beth Bershok: Do you ever run into a situation, I’m imagining, where nobody can agree on anything?

Tom Crowley: We do and I’ll say this and I think Jim would agree with this as well, we rarely run into this exact scenario where the only asset is an IRA, the only issue is a Q-tip, there’s no other way to say skin a cat, there’s no other way to deal with the issue. But we do we run into situations where a client simply sees both sides and can’t decide on either and it’s a difficult situation to be in.

Beth Bershok: And the family is arguing probably.

Tom Crowley: And the family is taking positions sometimes, but clients they work through that if you continue the discussion with them they generally work through that and make a decision that’s best for them.

Beth Bershok: And Jim other non-tax issues that you see as a problem?

Jim Lange: Well, one issue and this is almost a philosophical issue and in general I do like explaining the differences and the alternatives and the advantages and disadvantages to a client and ultimately having a client decide. In reality this might sound a little bit arrogant but sometimes I just know better than the client what is best for the client. So rather than give them an option that in my opinion makes no sense like this one where we give up 30% of the value for the control benefit I might even mention that I would just really dismiss it. But let’s even assume that somebody was rational understood the 30% or $300,000 issue and was even willing to live with that. I have some non-tax issues with the Q-tip trust a lot of times what will happen is the surviving children won’t get additional money for the attorneys to draft the thing…

Tom Crowley: You get a good understanding of what the client wants to do. Estate planning issues are difficult issues.

Jim Lange: Tom has been a very good guy and is here defending or discussing, but partially defending what I think is a tough stance. So I’m going to be the bad guy here and throw out one other alternative and this is what people might may or may not want to hear, but this is often the answer to the issue and that is get some life insurance. If we end up with getting a life insurance policy typically owned and made payable to children of a prior marriage, we save estate taxes, we save income taxes and we give a chunk of money to the children at the time of dad’s death without having to wait for mom to die, without having to split up the IRA, without having to enter some of the complications that we’ve done.

Beth Bershok: And is that something that make sense to you Tom?

Tom Crowley: It’s something we talk to our clients about so it does make sense. IRAs are incredibly efficient during your life time, they are incredibly tax inefficient at death. Life insurance is a very good substitute to bring in when someone dies because it doesn’t carry all that baggage along with it but that is another discussion you need to have with a client and it can be a solution.

Beth Bershok: There can be a lot of complex issues involving kids from a couple of different marriages, a second wife, a third wife, so a lot of things to deal with and I do want to thank Tom for his time because we said he would be doing the first, oh Tom Jim has one more thing he wants to get in.

Jim Lange: Now I want you to recognize I’ve gone 20 minutes without talking about Roth IRA conversions, but another problem with doing the Q-tip trust is the beneficiary of the IRA is that we kill the opportunity to do a Roth IRA conversion for either the spouse or the children of the first marriage.

Beth Bershok: I have no doubt that’s one of the reasons you really don’t like it right because it’s all about the Roth. Hey Tom thank you so much for taking the time we really appreciate it. Tom Crowley Senior Wealth Planner and VP at PNC Wealth Management who joined us at the very last minute today I really appreciate you coming in. We’re going to take a quick break it is the Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking smart money - I’m Beth Bershok with Jim Lange and the studio line if you have a question tonight is 412-333-9385. Just a second ago we mentioned another workshop coming up that we have and I want to give the phone number again because we already have half of the room filled. So if you would like to attend this it’s coming up on June 20th Crown Plaza South which is right across from South Hills Village, we have two sessions one is going to be form 9:30 to 11:30 in the morning and then we have 1to 3 in the afternoon and the phone number RSVPs we already have quite a few this is absolutely going to fill up. So call 1800-748-1571 you can call it tonight this line answers 24 hours. 1800-748-1571 the workshop is called Two New Tax Laws Create Shocking Opportunities for Wealth Preservation. You’re going to find a lot of information about Roth IRAs, Roth IRA conversions and a tax law change coming up in 2010 so please join us for that. Now we are going to get back to trusts and Jim this is an area I think that really confuses a lot of people and I think there are a lot of misconceptions about trusts in general. You hear one person say one thing another person say another thing, let’s start with revocable living trusts, revocable living trusts, explain exactly what the purpose of that trust is first.


2. Revocable Living Trusts

Jim Lange: The ultimate benefit of a revocable trust though there are side benefits is that the revocable trust avoids probate. It becomes a will substitute. So let’s say you have a normal situation where Joe wants to leave money and now we’re going outside the IRA which is an important point by the way, the beneficiary designation of the IRA controls who gets the IRA at death not the will or the revocable trust. But let’s say that Joe wants to leave some money to his family members whether it be his wife or his children or his aunt or uncles or a charity or whomever. In the old days Joe would draft a will, he would go to an attorney and the attorney would draft a will and at Joe’s death money would go through a process called probate and that’s still the process and that is a court supervised process to make sure everybody is getting what they were supposed to get to make sure that attorneys are not over charging to make sure that the terms of the trust which do become a matter, I’m sorry the terms of the will which becomes a matter of public record are carried out. And that’s what a lot of people probably the vast majority of people do. And then there has been an outcry that says boy you know it is expensive to go through probate. First there’s a lot of fees that the court charges and then some attorneys are charging a percentage of the estate of what’s known as the probate estate as their fee. Unfortunately we don’t do that because unfortunately I say that we’d make a lot more money if we did. I happen to think it’s ethical to charge a fair hourly rate for state administration but there are a lot of people who are interested in saving money on fees.

Beth Bershok: We do have to go to the phone for one quick second here because we have a phone call coming in this is from Baltimore. Checking in from Baltimore, Maryland we have Charles on the line? Charles?

Charles: Uh huh.

Beth Bershok: Hi how are you?

Charles: Yes hi.

Beth Bershok: Hi you have a question for Jim tonight?

Charles: Yes I do.

Beth Bershok: Okay what’s your question?

Charles: He talks of the value of converting a traditional IRA to a Roth IRA, but at the same time he talks about paying taxes later. Two questions, one why would I want to pay taxes now by doing a conversion, and two if I’m going to live off of the money in my IRA I’ve seen calculations that show that there’s really no difference between converting now and paying taxes now or keeping the money in the traditional IRA and paying taxes later. In the end the net amount of wealth that you create is the same.

Jim Lange: Well, I would question those calculations first of all. I have written peer-reviewed analysis, measured in purchasing power that will show if you make a $100,000 Roth IRA conversion that you yourself during your lifetime will be $40,000 better off. If you then die and leave it to your kids they might be $700,000 better off or even more. If you leave it to your grandkids even more. So I’m not sure which calculations that you have seen, mine happen to be peer-reviewed by the American Institute of Certified Public Accountants. The reason ultimately though even if you’re going to try to get away from the math and by the way I’d be happy to have a math discussion with anybody because my analysis is just I believe so rock solid. But here’s the way I would think of it conceptually. With the Roth IRA conversion you are paying income taxes up front which is kind of like paying taxes on the seed. Then the seed is planted, the money’s invested, hopefully it will grow over time unlike the last ten years but hopefully it will grow over time and you get all that growth income tax free. So what you’re doing allegorically is you’re paying income taxes on the seed and you’re reaping the harvest tax free. I’m not sure what numbers or where you’re quoting but I could show you the analysis that I do that you will be significantly better off. Now will that apply to everybody? No. Will that mean that you should convert your entire IRA in one year? No. but for most people who have the money to pay the tax on the conversion from outside of their IRA and particularly if that’s not going to throw them into a higher income tax bracket I can show you mathematically how you’ll be better off measuring in purchasing power.

Charles: I think you may have just hit the nail on the head and maybe that’s where I have not understood. Are you talking about paying those taxes from the IRA or are you talking about moneys that are separate from that IRA withdrawal that you’re converting?

Jim Lange: I am talking about money that you have to pay the tax from outside the IRA. If you’re saying gee the only money I have is my IRA should I make a Roth IRA conversion? I would be very hesitant to make a Roth IRA conversion if you have to go to the IRA to pay the taxes on the Roth IRA conversion. In that case I would agree with you that mathematically theoretically depending on your assumptions you might end up with a break even situation and since there isn’t any great benefit I would probably I’d rather error on the side of being conservative and not do it. I only want to do a Roth IRA conversion when I can show many thousands perhaps hundreds of thousands of dollars to the client.

Charles: I think you’ve explained something that a lot of us are confused about because it seems that that calculation you’re referring to doesn’t take into account the lost opportunity cost of using other moneys to pay the taxes.

Jim Lange: Well, mine does take into account the lost opportunity but it’s the lost opportunity of the money that you would have outside of the IRA that I’m taking into consideration.

Charles: Very good - thank you very much sir.

Beth Bershok: You know what it sounds like Charles needs to check out Retire Secure! Pay Taxes Later.

Jim Lange: Well, we do have a whole chapter on that.

Beth Bershok: And Jim’s calculations are in graph form, graphs and charts in the book and it really helps to take a look at that and you can see it in black and white and you can see exactly where he’s going with the calculations.

Charles: I will do that.

Beth Bershok: Okay thanks Charles.

Jim Lange: And the other thing is you can do what the guy from Washington, DC did which was he was so interested in knowing this he actually came to our seminar.

Beth Bershok: There you go Charles mark this date down. June 20th Pittsburgh okay - you can drive up from Baltimore. You see Jim Lange we went 25 minutes without talking about Roth IRAs and that’s it that’s all we could get. We had a question and that’s fine if you have a question 412-333-9385. 412-333-9385. Let’s get back to the trusts because this was the whole idea behind living trust you’re saying may be not the entire idea, but one thing it does do is it avoids probate upon death.

Jim Lange: Right which simplifies the process for the heirs, it normally reduces the amount of time it takes to distribute the assets, it does reduce attorney fees, even ethical attorney fees like us who charge on an hourly basis. It takes us less time to do a state administration for irrevocable trusts then a will. The other benefit is it has benefits while the client is alive. So let’s say for discussion’s sake that you’re getting a little bit older and that you might be coming incompetent. If you have all your money and all your property already transferred to a trust, and by the way the terms of this trust is basically I can do whatever I want with the money, can invest it, I can spend it, I can burn it. The trust more or less allows you while you are alive or sometimes we do joint trusts for husbands and wife’s sometimes separate, but in either case the trust basically says I can do whatever I want while I’m alive and then at my death, then this is what’s going to happen and then you put in all the provisions. One of the benefits of revocable trust is we typically name the client the trustee the initial trustee but then we will name a subsequent trustee. So even today somebody was in my office and it was a child of an older gentleman and the child as the trustee was able to help their older parent who either couldn’t or didn’t want to deal with some of the paperwork. So that’s an extra added benefit.

Beth Bershok: Of this particular type of trust?


3. The Importance of Transferring Assets into a Trust

Jim Lange: Of this trust. Now one thing that’s really important is if you’re going to go to the trouble of creating this trust this is where a lot of attorneys and clients have a disconnect. Typically it is going to cost some money to create this trust. If you’re going to go to the time and trouble of creating it, I would say go to the time and trouble of actually making it effective which means that you actually have to transfer your assets into it. So let’s say for discussions sake that you have an investment account wherever it might happen to be and right now it’s in your name and you create one of these trusts. If you want to avoid probate then you need to take that investment and re-title it in the name of the trust.

Beth Bershok: So you’re saying if you had the trust and you never transferred your assets then you still have to go through probate?

Jim Lange: That’s right it would be controlled by the will. Now typically in that situation you get what’s called a pour over will which more or less says I leave everything to the trust. But now you have a probate situation because that will then must be probated. So you’ve kind of lost some of the benefit of creating a trust in the first place.

Beth Bershok: What do you think is going on there is that an oversight or is it just that somebody doesn’t want to transfer all of the assets?

Jim Lange: Well, I hate to knock fellow professionals, but sometimes I think that attorneys and advisors are a little bit sloppy about who’s name accounts are on and taking care of the details. I know personally my own philosophy is I never fear, and this almost might sound arrogant, I never fear making a conceptual mistake, I fear making a mechanical mistake. So, I actually like to hold the client’s hand through the process. Sometimes even doing the work myself in terms of maybe filling up beneficiary forms or making sure that the asset is transferred. But just to have a real quick note to the client oh by the way you might want to transfer everything to the trust I don’t think is sufficient, I think that clients do better if they are kind of guided through the process of avoiding probate. And then you get what you want which is avoiding the cost and aggravation and time of probate and you have control within the family.

Beth Bershok: Is there any benefit at all if you set this trust up, but then you didn’t transfer the assets are you left with any benefit to having one of these trusts?

Jim Lange: Well, if you don’t transfer any assets to the trust then really there really isn’t any benefit.

Beth Bershok: So you went to all of that trouble for nothing?

Jim Lange: Right. What is typically let’s say the half way solution is when some of the assets are transferred and some aren’t.

Beth Bershok: What’s the purpose there?

Jim Lange: Well, then you really don’t get much benefit. So I sometimes counsel clients when we’re deciding on what kind of estate plan we should do, do we want to go all in effect will and beneficiary designation in which is fine. Or do we want to transfer all the assets that can and should be transferred to the trust to the trust, but I don’t like the middle ground I like to go kind of one way or the other and usually when I talk with clients if clients are more cost conscious the trust takes additional time to both draft and more importantly to transfer the assets into. So for a very cost conscious client and particularly someone who doesn’t have a very large probates state we might do older wills. For an older client who has a lot of money outside of the IRA then I might lean a little bit towards avoiding probate and doing irrevocable trust.

Beth Bershok: That is just one type of trust, there are many we’re going to be talking about some more of those coming up next. A quick break first, it is the Lange Money Hour where smart money talks.

Beth Bershok: Thank you for joining us this evening I’m Beth Bershok along with Jim Lange. We are talking about trusts this evening. Jim has been practicing in Squirrel Hill for what is it now Jim 30 Years?

Jim Lange: 30 years.

Beth Bershok: Wow. We did a question off the air for the office phone number so I wanted to share that with you. It’s 412-521-2732. We’re going through a lot of strategic information tonight so if you do want to check in with the office 412-521-2732. We’re actually really easy to get to people ask me that all of the time, it’s literally off the Squirrel Hill exit. If you’re on the parkway you come of the exit you go up one block it’s right on the corner there of Murray and Phillips right it’s Murray and Phillips. So 412-521-2732 if you would like to check in with the office. Now we were just talking a few minutes ago about living trusts. One thing that is a big, big concern of parents and that is taking care of minor beneficiaries so that’s a whole different issue, trusts for minors. And I’m sure we see this all the time but what is the main concern with setting up trusts for minors?


4. Trusts for Minors

Jim Lange: The main concern for setting up trusts for minors is to make sure that junior doesn’t blow dad’s inheritance on sex drugs and rock and roll and he’s 21 years old.

Beth Bershok: Well, that’s a concern that really is a concern because some people could you know you’re young, you get a big old lump sum, you’re out at a big part until the money runs out.

Jim Lange: I have seen in my own life situations where people got too much money too early and it literally devastated them.

Beth Bershok: Well, you have I mean honestly you have no perspective at a really young age you just think this money is going to keep on coming, and when it runs out that’s it.

Jim Lange: The other thing is sometimes it will actually not only would you run out of money but it might change your motivation substantially. I know I have a personal situation where I kind of growing up in high school I was with a group of let’s call it high achievers you know we ended up being doctors and lawyers. Well all of us didn’t turn out to well, doctors and lawyers and engineers and people who went to at least undergraduate usually multiple degrees and are doing relatively well professionally. But one of us their parent’s died when they were still young and they never went back to college and…

Beth Bershok: Oh they got the money while they were in college.

Jim Lange: And they never finished and they’re on let’s call it a radically different career path, I’m not saying it’s better or worse but I guess I’m inferring it’s a little bit worse. I think it’s more than just running out of money I think when you reduce the motivation to work and go to school and to make something of yourself that you’re not just changing somebody’s finances you’re actually changing their lives.

Beth Bershok: You know and the thing is I’m sure that a lot of parents when they set that up think they are doing their kids a favor.

Jim Lange: Well, I think so and far too often I see these trusts even for minor beneficiaries and it says well you know if I die and I leave my money to children, and by the way I would say in my circumstance just based on the age of my average client it’s more often a discussion of the grandchildren then the children. But it might say something like health, maintenance, support, education, post-graduate education, down payment for a home, seed money for a business, and if you’re a real sport one summer in Europe. But then if you say then when the child is 21 years old they get the entire amount. In most cases I would say that that’s just too early.

Beth Bershok: Do you also think that you talked about motivation a moment ago do you think that when the child knows that, that when they do when they turn 21 they get this big lump of money it changes their motivation a lot earlier?

Jim Lange: I think it does and the other thing is and I’m not exactly sure if I can even say this with compliance, I don’t even like to tell kids that they have money in a trust fund.

Beth Bershok: But surely they have to know.

Jim Lange: Maybe not, maybe not, I have a lot of clients who are putting away money for their children and grandchildren and the children and grandchildren don’t know about it. And I kind of like that.

Beth Bershok: So it’s a sneak attack later hey guess what? Well what is the solution to that then?

Jim Lange: The solution to that would be to have any money that is geared towards a minor beneficiary or even somebody who will obviously make it past 21 to have a type of trust where you don’t distribute everything at 21 and again health, maintenance, support, post graduate education etc. but then rather than terminating the trust at 21 and saying here you can have it all, you might go to age 25 at which case you don’t give it all to them you give them maybe 1/3, then maybe a third at 30 then maybe a third at 35. I know these are somewhat arbitrary ages and sometimes you can adjust that if the child is old enough and you have a sense of whether they would be responsible or not, but I would rather protect the child from themselves and maintain the motivation and make sure that money’s there for the right purposes.

Beth Bershok: Have you ever seen one or have you ever put one together that is so extremely strict and it might say something like they can pay for their college education that’s it no more until they’re 25 or 30?

Jim Lange: I’ve seen some pretty strict ones and I’ve seen some ones where they don’t get anything until 60.

Beth Bershok: Are you serious 60?

Jim Lange: 60.

Beth Bershok: They’re virtually retired by then.

Jim Lange: Right and obviously I’m not going to name the client’s name, but I’m thinking about him right now. Very smart guy that you call somebody like that a control freak I don’t know, but I have seen what I think is too much. Now the other thing is there are a lot of attorneys drafting IRA trusts that rather than giving even adult minors, or I’m sorry adult beneficiaries the ability of taking money whenever they want they limit the amount to the required minimum distribution of the inherited IRA or even the inherited here’s that word again Roth IRA. I’m not so sure that I want to do that for people who are old enough and mature enough to handle the money. I’m not sure that it makes a lot of sense to put gobs of money in trusts when there isn’t really an appropriate need for it. But if I had to err I think I would rather err on kids not given the chance to blow the money and to lose their motivation rather than giving it to them too early.

Beth Bershok: And as a parent would you want to set this up really upon the birth of your child?

Jim Lange: Yes you really want to do that. Of course the big issue for young couples interestingly enough is the most important thing for young couples is actually not the terms of the trust although that certainly is but for younger couples the issue is actually guardianship provisions, who is going to take care of the child if something should happen to both parents.

Beth Bershok: Let’s say you drafted one of these trusts for minors on the birth of the first child would you make it broad enough to include future children or would you have to keep adjusting that?

Jim Lange: No it’s only fair to say of all the kids who are living at my death they get and then whatever it is in trust and there’s some variations you can divide the money into the number of children left and everybody gets an equal share. You can say well there’s going to be one trust and the trustees going to decide based on the needs of the children which might not be the same who gets what. So there’s variations but in all cases it is appropriate to assume that there is at least a possibility of additional children and nobody wants to come in and say guess what I had a second child or another grandchild now I need to change my will again.

Beth Bershok: Right or they accidently just don’t do it and then somebody’s left out. I want to give the office number too again. If you have a question and you want to address this later at the office it’s 412-531-4732 in Squirrel Hill. Jim something along the lines of trusts for minors is what we call spend thrift trusts and this is sort of a similar situation in as much as you are trying to take care of somebody but protect themselves at the same time.

Jim Lange: Well, this seems like it’s becoming more and more popular. It seems like we’re having more and more irresponsible adults who would not be appropriate with inherited money. And it’s a real problem and that’s another situation where I would rather error on creating a trust even if it puts some restrictions on the child after mom or dad dies so the money is held in a trust rather than risking the child blowing the money. So let’s say for discussions sake that your child or grandchild in either case let’s even just assume a child and maybe the child’s 40 or even 50 years old but has always been irresponsible with money. They get money boom they spend it the minute they get it to the point that you have to bail them out time and time again and if they had a lot of money some people are actually very generous. I’ve seen clients leave money to their children, their children make massive charitable contributions way more than they could afford. Or sometimes it’s you know again things the parent might not think is appropriate like sex, drugs and rock and roll. But in either case if you have that kind of situation I would do what we often call a spend thrift trust which will protect the child from themselves because no matter what you think of your kids and even if you think your kids don’t have the appropriate spending discipline and mindset that you do, you love your kids and you don’t want to see them under a bridge when they’re 70.

Beth Bershok: Well that’s right and it’s a fine line you don’t want to see them under a bridge but you don’t want to see them blow that money so how do you walk that line?

Jim Lange: Well I think a lot of time clients have an idea of whether their children will be responsible or not. I would rather err on putting the trust in, by the way if the situation changes let’s say the child matures and mom and dad now think that it would be okay to leave the adult child money directly, it’s easy enough to make a quick addendum or a quick codicil to the will or the revocable trust that says well the money that was going to go into that, we call it a spend thrift trust, can go to the child outright. But I don’t want to see the child under the bridge so I would rather err on that, by the way a close relative of that is when you don’t trust the child’s choice of spouse.

Beth Bershok: Oh that’s touchy.

Jim Lange: Right and this is a true story usually when clients come in they say is oh the first thing I want to do is take care of my spouse if they’re married. Somebody came in the first thing out of his mouth is I don’t want my good son of a you know what son in law to get one red cent of my money.

Beth Bershok: Well there may be good reason for that I’m just pointing out it could be a situation where he knows that he would get a hold of the money and blow it all and he wants to make sure his daughter is taken care of.

Jim Lange: So we actually did a trust, we call it the my no good son in law doesn’t get one red cent of my money trust.

Beth Bershok: That’s the official name of the trust.

Jim Lange: It more or less is, but it’s kind of comparable and is related to a thrift trust.

Beth Bershok: Now if you have two children, one extremely responsible great with money, and the other somebody you know is going to blow through the money you need two different trusts.

Jim Lange: Or the other possibility is let’s assume that they’re both in their 40s or they’re a little bit older, the tough thing is parents typically want to treat children equally and what might be appropriate is to leave the responsible one the money outright and then leave the irresponsible ones money in a trust and the irresponsible one won’t like it at the time.

Beth Bershok: Well, I was going to say that’s a complex issue and when they find out after the death of their parents what happened.

Jim Lange: Well, I’ll tell you what will make it worse if you want to make is miserable and try and burrow in on what’s the real pain in the situation. Who you can name as the trustee alright? Now the gentleman from PNC would certainly say name us name us. I’m a little bit leery of giving up control and I’m a little bit leery of some of the fees that some of the institutions charge but a lot of times people end up with a choice of maybe there’s a relative that can do it, maybe you name one of the banks or one of the trust companies.

Beth Bershok: It seems like if you named a relative that relative would be caught between a rock and a hard place. They’re the ones that have to execute it.

Jim Lange: And if this thing is going to have to last for a 40 year olds life it can’t be an old relative. So what we often end up with is naming the responsible sibling.

Beth Bershok: Oh that’s really tricky.

Jim Lange: Right if the banker were here now he would be having a conniption fit.

Beth Bershok: Oh, I can see some arguments over thanksgiving dinner over that one.

Jim Lange: See that’s the fears that you’re going to break up the family because Thanksgiving and Christmas dinner might not be the same if the two brothers are fighting about one wants a new Mercedes and the appropriate responsible trustee is saying no I think I’d rather use that money as a down payment for a home or for rent. So that’s sometimes one of the big problems is who’s going to be the trustee of that trust. I will tell you in practice even though there’s a lot of good reasons not to name the other one of the siblings that’s who often ends up being named the trustee.

Beth Bershok: When someone is named the trustee they have to agree to it obviously first?

Jim Lange: Well sometimes it’s a surprise.

Beth Bershok: Is it really?

Jim Lange: It’s not appropriate you should always tell somebody that you want to name them as the trustee and is that okay with them. Then you should also supply them a copy of the trust and say would you be willing to serve.

Beth Bershok: We need to take a quick break, when we come back can we touch a couple minutes on charitable trust?

Jim Lange: Sure.

Beth Bershok: Okay we’re going to take a quick break. It’s the Lange Money Hour where smart money talks.

Beth Bershok: Talking smart money I’m Beth Bershok with Jim Lange we are down to our last five minutes. We’ll take a quick break and do charitable trusts for just a couple of minutes but we are going to make an offer again for the free book Retire Secure Pay Taxes Later. We’ve done this for the past couple of shows and we do it for the first few people so I’ll tell you about that in just a minute. But the book is awesome we’ve had so many great testimonials from people including Charles Schwab who wrote a road map for tax efficient retirement and estate planning that’s what Charles Schwab has to say about the book. Jane Bryant Quinn says this book requires two areas particularly well, Roth IRA conversions and estate planning for IRA owners. Larry King did the foreword. Ed Slot did the introduction and I’ll tell you how you can get a free copy in just a minute. But Jim I didn’t want to close out the hour without mentioning charitable trusts because a lot of people this is one of the top things on their mind when they’re putting together their estate planning.


5. Charitable Trusts

Jim Lange: I think that for most people I’m not sure that a chartable trust is appropriate. Sometimes again just like earlier I preferred just leaving a certain amount of money or a percentage of your estate or preferably I actually like a percentage of the IRA or retirement plan to charity that’s sometimes the simplest and most common, and in many cases the most effective method of charitable giving for people who only want a relatively small amount of their estate to go to charity. But if you are interested in a higher amount then getting into the charitable trust are pretty interesting and there’s two different basic types of trust. One is upon your death a family member whether it be a spouse or a child, sometimes a grandchild, usually more so a child or a spouse or some combination thereof will get the income and there’s special ways to define income called a total return trust but they will get the income from the trust and then when they die then it goes to the charity of your choice that way you’re providing an income source for your loved ones but at their death it goes to a charity of your choice. Now another way to go is you can give the income to the charity and the charity gets the income for a certain period of time and then at the end of that period then the money goes back to the family that’s called a charitable lead trust. And actually now because of a low interest rate not necessarily by the banks but the low government rates now’s a very favorable time to do a charitable lead trust but that’s not going to be the that’s not your meat and potatoes estate planning for the average person who has $1 million and wants to leave $5-10-50,000 or even $100,000 to a charity.

Beth Bershok: I’m going to give the office number if you want to talk to Jim about any of these type of trusts that we’ve talked about tonight. 412-521-2732. I do want to invite you to our next workshop which is Saturday June 20th Crown Plaza South. We already have numerous reservations so I would not wait because when we say space is limited we mean it. We’re in a room we can only fit so many people so call 1800-748-1571. 9:30 to 11:30 that morning 1to 3 in the afternoon we have two sessions. 1-800-748-1571 and we do want to give away copies of the book the second edition of Retire Secure! Pay Taxes Later. Many of the things that we’ve talked about tonight the strategies are in this book now the next thing is how many copies.

Jim Lange: I think six copies. The first six callers.

Beth Bershok: The first six okay.

Jim Lange: Right and that would apply to each show, both the live show on Wednesday night and the Sunday show.

Beth Bershok: Oh, that’s excellent. So this is what you do if you want a free copy you can either email admin@paytaxeslater.com or call the office again that number was 412-521-2732 and you can leave me a message at extension 219. So we will be back in two weeks also checkout our website if you want details on the workshop or the next show, that is retiresecure.com. It’s the Lange Money Hour: Where Smart Money Talks.


 

 

James Lange, CPA/Attorney

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

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