Lange's Cascading Beneficiary Plan

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

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Lange's Cascading Beneficiary Plan
Jim Lange, CPA/Attorney
Episode 5

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TOPICS COVERED:

  1. Alternatives to an “I Love You” Will
  2. What is a B Trust?
  3. Alternatives to the B Trust
  4. How Often Should You Review Your Will?
  5. Beneficiary Designations for IRAs or Other Retirement Plans
  6. Lange’s Cascading Beneficiary Plan

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Welcome to The Lange Money Hour: Where Smart Money Talks, hosted by Beth Bershok, 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. I am Beth Bershok with Jim Lange, CPA attorney and best selling author of not one but two editions of Retire Secure! Pay Taxes Later. We have some excellent information for you tonight. This is what Jim always refers to as the best estate plan for most traditional families. It’s called Lange’s Cascading Beneficiary Plan and we have so many details to cover, but I do want to open the phone lines. So if you have a question at any point during the next hour, you can feel free to call us at 412-333-9385. Now Lange’s Cascading Beneficiary Plan. First of all Jim how long have you been doing this particular type of estate plan?

Jim Lange: We’ve been doing variations of it, not the exact same thing, but we have been doing variations of it for close to 25 years.

Beth Bershok: Wow. When did you start calling it Lange’s Cascading Beneficiary Plan?

Jim Lange: I started calling it Lange’s Cascading Beneficiary Plan in 2001. That was as a result of a change in the tax law and I sent out an e-mail to my then 60,000 e-mail subscribers and that’s when I got all types of media attention from Jane Bryant Quinn, Kiplinger’s, Wall Street Journal, Financial Planning etc., and I wanted to call it something.


1. Alternatives to the "I Love You Will"

Beth Bershok: So it’s very possible that people are already familiar with the basics of this plan because it’s been in so many publications. I do want to say if you have the book, Retire Secure! Pay Taxes Later, this is covered in chapter 15. That was water. That was very heavy water being placed on the table in front of us. Lange’s Cascading Beneficiary Plan is in Chapter 15 of Retire Secure! Pay Taxes Later. We’re going to be going through the details of exactly how this works. I think Jim we should take a step back and talk about wills in general. There’s something that you call the I Love You Will. Explain exactly what that is.

Jim Lange: Alright, let’s say that you are married in what I call the “Leave it to Beaver” marriage. That’s the original husband, the original wife and you have the same kids. So I am not talking about kids from his marriage from his first or second marriage. Or her kids from her first or second marriage. It’s our kids together. So let’s assume that you have, and let’s even assume to make it even more interesting, that you have grandchildren also. So let’s say that you have one of these traditional families and you are planning your estate. I would say the starting point and this is what a lot of people don’t have, but the starting point is what I call an I Love You Will. That’s where the husband says I leave everything to you my wife and the wife says I leave everything to you my husband. In the event that something happens to both of us, it will go to our children equally. That’s actually a reasonable starting point and some of our listeners have that while they can do much better than that. That’s at least much better than nothing.

Beth Bershok: I was going to ask you that, should everyone and I mean everyone, have a will?

Jim Lange: Of course a conservative attorney is going to naturally say that everybody should have a will, but I will go a step further. Not only is there all types of confusion and problems and money going where it’s not supposed to in the event that you don’t have a will, but also wills cover other areas. So just for example, let’s say that you are a young couple and you don’t have a penny to your name and you go against everybody’s advice; you have no life insurance; you don’t have anything except you do have this beautiful child. Then something, God forbid, happens to both of you. Who is going to raise that child? Do you want the state of Pennsylvania to make that decision or do you want to make that decision? So I would say that even over and above money issues wills are very important. Of course I actually like a whole integrated plan that includes wills and trust and beneficiary designations of IRAs, beneficiary designation of life insurance etc. So the answer is yes, everybody should have one.

Beth Bershok: Everybody should. What if you are a single guy and you’re broke?

Jim Lange: Alright, single and you’re broke. Let’s say you are a single guy and you’re broke and you’re walking down the street and you get hit by a car and your life insurance pays up. Well who’s it going to pay? So I would still say that, do you want it to go to your parents, do you want it to go to your brothers, do you want it to go to your nieces and nephews?

Beth Bershok: So you should really make that decision in a will first.

Jim Lange: Yeah that’s right. Now there is a misconception that some people think, oh well if I don’t have a will, the state of Pennsylvania or (if you are in a different state because I know we have a national audience), that the state will get it. You have to have a lot of people die, like your parents and your brothers and sisters and nieces and nephews and first cousins and second cousins and third cousins. So I’m not so worried that the state’s going to get it. I am worried that the people that you might not want to get it will get it.

Beth Bershok: Now if we move onto something that you covered in chapter 11 in the book, the B Trust. Explain what a B Trust is.


2. What is a B Trust?

Jim Lange: Alright, now I am going to explain this, but I want everybody to know that a lot of you guys have it and it is in my opinion completely inappropriate for a lot of people that have it. So if your will has something like this, and it’s usually in a language that people don’t understand. If my wife survives me by more then 60 days in an amount equal to the smallest marital deduction needed to reduce the federal estate tax on my estate to 0 after full use of all other deductions blah, blah, blah, blah, blah.

Beth Bershok: Who interprets that?

Jim Lange: Alright, now let me tell you what that means in English. It means whatever the federal exemption amount is. The federal exemption amount is how much money you’re allowed to pass at death without paying any taxes. This year it happens to be 3.5 million, next year it happens to be unlimited and then in 2011 it goes down to 1 million. So this is a constantly changing amount.

Beth Bershok: So we don’t know in the future what that amount is going to be?

Jim Lange: No we don’t. Now a lot of people say, well I am going to wait. There’s some discussion that 3.5 is going to be permanent. Well even if they pass a law that says 3.5 is going to be the new number, I don’t think it’s going to be permanent. I think every administration and even changes within the administration are going to do whatever the heck they want. We’ve had 3 eliminations of the estate tax. I think that the most honest answer is we really don’t have any idea what its going to be like at the first or second death. I think what we can say is you may or may not be in danger of an estate tax so we have to plan accordingly, but right now it’s 3.5 million. So let’s say for discussions sake that husband and wife have split their assets equally and let’s say even just say for discussions sake there’s a million dollars total including everything. Let’s say half of its in the husbands name and half of its in the wife’s name and you have this B Trust in place. What it means is in an amount up to but not to exceed 3.5 million dollars is going to go into a trust. So let’s say in this case it’s 500,000 or roughly half the marital estate, and it goes into the trust and this trust basically says income to spouse right to invade principal for health, maintenance and support and at the second death, that is after both spouses are gone, it goes to the kids equally. The whole point of this trust is actually to save estate taxes not at the first death, but at the second death. So back in the old days when the exemption amount was $600,000 and people had a one million dollar estate, this might have been a useful tool to avoid estate tax. Because if you didn’t have it and you left everything in the what I call an I Love You Will, so you have $500,000, your wife has $500,000 and you die, you leave everything to your wife. She dies there’s one million dollars in her estate well boom you’re over the $600,000 so there’s estate tax. So attorneys get all excited, oh boy we have to draft a trust.

Beth Bershok: They love trusts.

Jim Lange: We love trusts. This happens to be one of my pet peeves. Attorneys love to draft trusts but a lot of times it’s inappropriate for the client because the clients usually don’t come in and say my first concern is to save estate taxes. They come in and they say, at least most of them, my first concern is making sure that my wife and I are provided for, for the rest of our lives. That’s number one and taxes is number two, kids are number three, but the most important thing is we want to make sure that we provide for each other. Now if you have these traditional wills, and by the way that is the majority will for people who have even more than $500,000 that’s the classic will.

Beth Bershok: With this B Trust?

Jim Lange: This B Trust and there’s millions of people who have these trusts. Now I don’t even think it was a great idea back then, but now it’s a horrible idea for a lot of people because, A: Particularly now assets are down. B: The exemption amount, at least temporarily, is 3.5 and it looks like it’s going to be somewhere in that neighborhood. So if you have these types of wills what’s going to happen is, I call it the cruelest trap of all, what happens is the surviving spouse losses control of a significant portion of the marital estate. Now right now if you are married and you and your husband or you and your wife have full control of all of your assets.

Beth Bershok: And you’ve been working hard for years and years and years to build that up.

Jim Lange: You’ve built this up and right now you probably have a little less then you did a year ago, but whatever you have you have together and you have those resources to use in any way you want. If you die with one of these traditional plans, which I know a lot of our listeners right now have that in place, what’s going to happen is the surviving spouse is going to loose control of a significant portion of the marital assets. So they will actually be worse off than they were when their spouse was alive. If there is an issue of social security reduction or a pension reduction then you really have what could be financially devastating to a family.

Beth Bershok: So we are going to get to how to correct that problem with Lange’s Cascading Beneficiary Plan. We are going to take a quick break. It’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking more smart money. I am Beth Bershok with Jim Lange and we are talking about the best estate plan for most traditional families, Lange’s Cascading Beneficiary Plan. By the way if you have a question it’s 412-333-9385 We are talking about the B Trust in most traditional wills. Jim you were saying how it really can tie the hands of the surviving spouse and you may not be able to invade principal that you used to have control over. But I am guessing so many of these are drafted that there must be some advantages of a B Trust.

Jim Lange: Well in today’s numbers let’s say that you have a 7 million dollar estate. Potentially at the second death there could be a tax on 3.5 million that could have been avoided with this B Trust. So potentially for large estates you can save taxes well over a million dollars, and I will say that the B Trust has its place. The other thing is you know right now we’re getting a little bit comfortable with the 3.5 million, but again it’s going to go to a million or at least that’s the way the law is right now. As I said before, we can’t predict so maybe congress is going to decide, hey we need to collect some more revenue. We’re going to pick on the estate tax and they’re going to lower the exemption and it might be that you’ll be very happy that you have this B Trust, because it could potentially save estate taxes for your children.

Beth Bershok: So there could be some advantages and some disadvantages either way?


3. Alternatives to a B Trust

Jim Lange: That’s right.

Beth Bershok: Advantages for children inheriting money after the first death but we also need to include the grandchildren.

Jim Lange: Well, let’s start with the children. One of the potential alternatives to a B Trust and I actually use this in practice, is sometimes after the first death if there is enough money we sometimes distribute or would like the option to distribute money to the children at the first death. So let’s just say for discussion sake you have a significant estate of a million dollars or even more than a million dollars and you have maybe 2 kids or 3 kids or whatever it might be. The first spouse dies, and you take a look at the finances of the surviving spouse and maybe there’s a pension and maybe there’s social security, maybe there’s some extra money that the surviving spouse just doesn’t need. It might make sense to have some money, at least a portion after the surviving spouse is more than provided for, to go to the children after the first death. So let’s say that the old man dies, there’s a lot of money, more then enough money to take care of his widow and maybe the widow is going to live 20 years, By the way it could go the other way too of course, she could die first and he could be the survivor. Does it really make sense to have the kids wait until they are 60 before they inherit any money? Well in some cases yeah, because in some cases surviving spouse is going to need everything. But in other cases we can reasonably predict, even after a downturn, that some money will be appropriately available to children. So what we could say sometimes is ok, I am going to leave $10,000, $50,000, $100,000 or whatever it might be to each of my children after the first death not the second death, and in certain circumstances that is an appropriate response.

Beth Bershok: Considering that you don’t know necessarily what the portfolio is going to be, can you leave a percentage?

Jim Lange: You can leave a percentage. In either case it is still a little bit risky because rather you do a percentage because to me my big thing is I always want to make sure that both spouses are more than provided for, for the rest of their lives. To me that is paramount and that’s something that I think a lot of attorneys don’t do in particular with the traditional trust. I always want to make sure that the husband and the wife are more then provided for in their lives and then money for children, grandchildren, saving taxes is after that. So if we take that as our base then leaving money to children or grandchildren, even though it might be appropriate it is still a little bit risky. Because what happens if nobody thought of, let’s say a year ago that our portfolios were going to go down by 40%; the other thing is who knows what is going to happen in the future to our portfolios, tax laws, the needs of the kids, and the needs of the surviving spouse, etc.

Beth Bershok: Those are all questions if you have a traditional estate plan you can’t answer in advance.

Jim Lange: Well the traditional answer is to just take your best guess.

Beth Bershok: That’s risky.

Jim Lange: Here’s the other thing about the traditional plan. The traditional plan is, take your best guess, draft accordingly and then if and when the circumstances change, to go back and change your will. Well a lot of times I will meet with a new client and I’ll be reviewing their existing will and it says, if something happens to both of you then little Johnny goes to Aunt Sue as a guardian, by the way how old is little Johnny? Oh, he’s 47.


4. How Often Should You Review Your Will?

Beth Bershok: I know a lot of people in that situation who haven’t updated their will in a long, long time.

Jim Lange: So that happens all the time and rather then fight it, although certainly as a prudent attorney would tell you that they should be updated more often. Rather then fight that I would rather prepare a will that has a long shelf life, so in the event that you don’t get around to reviewing it or changing it, what you did 5, 10, 20 years ago might still hold up. If you are going to do the traditional plan or the fixed in stone or the x-percent to the kids or x-percent to the grandkids or even x-dollars to the kids or the grandkids, it’s a little bit risky because so many things could change.

Beth Bershok: We do have a solution though. We are going to get to that in a minute but before we do that I want to take a quick break, but could you tell us how often you think or when everyone should review their will.

Jim Lange: Well, the traditional answer is probably every three years and I hate to let my clients relax and get off the hook a little bit, but frankly, the plans that we draft literally have a longer shelf life, considerably longer. So some of the plans that we did five, ten, even 15 years ago really are fine and I would say most of my reviews that I have with my existing estate clients, tend to not change the documents. We might change the strategy, we might do a Roth IRA conversion, we might do something in terms of which dollars we spend first, we might do a gift, we might do a number of strategic things and maybe if there’s a change in the family, we would perhaps do an update or a codicil. But we don’t tend to change the base plan which we are going to get to in a few minutes.

Beth Bershok: Which is because you have built the longevity into that plan?

Jim Lange: We’ve built in tremendous flexibility and that’s ultimately going to be the key to the Cascading Beneficiary Plan - flexibility.

Beth Bershok: We’re going to let you in on that secret coming up. It is The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Thank you for joining us tonight I am Beth Bershok along with Jim Lange. We are talking about the best estate plan for most traditional families, Lange’s Cascading Beneficiary Plan. Before we get to the secret with Lange’s Cascading Beneficiary Plan I want to tell you about a couple of seminars we have coming up. You do cover Lange’s Cascading Beneficiary Plan in the seminar so you can here some of this live. We have one coming up next Saturday, May 16, the same workshop is happening twice so you can pick the time, 9:30 to11:30 or 1:00 to 3:00. This is at Four Points Sheridan, Pittsburgh North. This is our first venture up into the Mars area and if you would like to register for that call 1-800-748-1571. Just please tell us which of those you would like to attend. Then we are going to be back at one of our favorite locations, Crown Plaza South which is right across from South Hills Village on Saturday, June 20th again two times 9:30 to 11:30 and 1:00 to 3:00. If you want to register for that please call 412-521-2732 that’s the number to our office. So for the June 20th location at Crown Plaza call 412-521-2732 and if you want to sign up for next Saturday which is May 16th call 1-800-748-1571. This is mostly about the Roth, its Two New Tax Laws Create Shocking Opportunities for Wealth Preservation. We talk about Roth IRAs and Roth IRA conversions but you do get in some of the estate plan using Lange’s Cascading Beneficiary Plan. We’re going to let you in on what that’s all about in just a second but if we could get back to the grandchildren for a second Jim.


5. Beneficiary Designations to IRAs or Other Retirement Plans

Jim Lange: Well up to now we have mainly been talking about wills, but a lot of times the will is not the most important document. Even though the most important document for a lot of my clients is the revocable trust, the most important document is actually the beneficiary designation of the IRA or the retirement plan or the 403b, 401k, 457, SEP, KEOGH, etc. Because remember it isn’t your will that controls what happens to your retirement plan when you die, it’s actually the retirement plan beneficiary designation. So what a lot of people have done is they have 10, 20, 30 page wills that has all kinds of complications but if you actually look at where their money is it’s in their IRA or retirement plan. That’s often a two line designation, my spouse first, my kids equally second. That’s certainly inadequate for a whole bunch of reasons. First I think we have to consider where the money is coming from and we have to cover every single asset whether it be a retirement plan, a life insurance policy, an annuity, whatever it might be and make sure it is either controlled by the will, the revocable trust, or the beneficiary designation. In answer to your question, when considering who to leave money to, there’s some big advantages to leaving money to children or even grandchildren. If you leave money in an IRA to them and we are not going to have time to really thoroughly examine what are called the stretch IRA or inherited IRA rules. But lets just put it this way, most of my clients don’t take money from their IRA or their retirement plan until they are 70-years-old, when they have to; that’s when they have the minimum required distributions. Which by the way are suspended for this year, which is one of the great fabulous opportunities to take advantage of proactively. Don’t just do nothing; consider a Roth IRA conversion, that is a little bit outside the scope of this. If a child or a grandchild inherits an IRA or a Roth IRA, they will be required to take money from that inherited IRA or inherited Roth IRA, but typically at a much slower rate than their parents. So let’s say the old man dies or the spouse dies and the surviving spouse could take everything. Well they might have to take it on a much faster time period than a child or since a grandchild is so much younger and if we are going to over simplify, let’s say a grandchild has a 40-year-life expectancy. Alright, well in that case then they would have to take roughly 2 1/2% of the IRA. So on $100,000 they would have to take a $2,500 distribution. A surviving spouse would have to take a higher distribution; a child would have to take a higher one but not as high as a surviving spouse. So we could defer more money or in the case of a Roth we could get more tax free money by having younger beneficiaries. Sometimes the children or perhaps one child doesn’t need the money. So let’s say for discussions sake you have a situation where you have two children and one of them makes a lot of money and the other one doesn’t make a lot of money. You could have conflicting goals within the family. The one who makes a lot of money might say hey, we have plenty of money what I’d rather do is I’d rather have that money go to my kids, that is the grandchild of the person that died, have low minimum required distributions; have income tax deferred or in the case of a Roth IRA income tax free money growing for the next 40, 60, 80 years. So sometimes leaving money to a grandchild whether it be, and typically, by the way, it’s prudent to leave money to a grandchild or any young minor in some type of trust that might say, health, maintenance, support, education, post graduate education, down payment for a home, seed money for a business, 1/3rd when you are 25, 1/3rd when you are 30, we terminate the trust at 35. It might be something like that. It might be very appropriate to leave some money to a grandchild particularly if there is at least one wealthy child in the family.

Beth Bershok: You are saying you could do that by the beneficiary designation of your IRA. What happens, Jim, if the beneficiary designation that you made for your IRA is not applicable at some point? For instance let’s say you named a beneficiary and then they were deceased and you never updated it.

Jim Lange: Well that’s a real good question. So, let’s say for discussion sake that you have two kids and your two kids have two kids and you just have a very simple beneficiary designation. I leave everything to my spouse and if my spouse isn’t alive I leave everything to my children equally, which is very common. I leave everything to my spouse and if my spouse isn’t alive to my children equally. Let’s say that one of your children die but is survived by grandchildren.

Beth Bershok: Which happens.

Jim Lange: Yeah, do you know how much the grandchildren get? Zero.

Beth Bershok: Are you serious?

Jim Lange: You just effectively cut out your grandchildren. So not only do these poor grandchildren not have a parent but they also are deprived of anything that the child would have inherited.

Beth Bershok: So you have to pay attention.

Jim Lange: You have to really pay attention. I can’t tell you how common that is. People think that they are covered and there does happen to be a quick fix to that. I almost hate to say it because I am afraid somebody is just going to put that down and think they are ok and they are really not. The quick fix, by the way, is to use the word per stirpes. That basically says that the children of the predeceased child would get what the predeceased child gets so in that situation where you had one of the children dies and is survived by children, the surviving grandchildren would get what the deceased child would get.

Beth Bershok: So you really have to pay attention to beneficiary designations. Now when you were talking about traditional estate plans and we were talking about all of the variables that you can not predict, you can’t predict the portfolio amounts or the needs of the family or who will die first. So what is your solution?

Jim Lange: Well here’s the ultimate problem. The ultimate problem and I am getting to the solution. I just want to agitate people a bit and tell you what the problem is. The problem is we don’t know what’s going to happen. We don’t know what the estate tax law is going to be like in one year, two years, 10 years, 20 years. We don’t know what the portfolio is going to be like and we might make a prediction and I will tell you that I have thought a lot of projections in the last 30 years and none of them have come true. Something went awry. The wrong spouse died first. Everybody thought he was going to die and it turned out she died. Everybody thought there was going to be more money and there was less money. Everybody thought there was going to be less money and there is more money. Whatever I thought was going to happen something else happens. So anytime, and I usually discourage this, but anytime I have done a traditional fixed in stone type will it often doesn’t work out well for the family. The other thing is sometimes we don’t know the needs of the surviving spouse. So let’s say that we up to now have mentioned 4 choices. The first choice was we were going to leave everything to the surviving spouse to start in our I Love You Wills. The second choice that we talked about was the B Trust which is, by the way, called the exemption equivalent trust, the Unified Credit Shelter Trust, it goes by a number of different names. But that’s the trust that says income to spouse right to invade principal for health, maintenance, and support and at the second death it goes to the kids equally. Then we also talked about leaving money to grandchildren equally. Then the last thing that we talked about was leaving money to grandchildren. We were even more specific and said if we leave money to a minor we want to leave it in some type of trust because we don’t want the minor to go have a party when they are 18 or 21 depending on what state you live in. So this is the problem, we have all these choices, but we don’t know what we should be doing because we can’t predict the future. The traditional answer is take your best shot, take your best guess, draft accordingly and hope it flies.

Beth Bershok: That sounds kind of risky.

Jim Lange: I think it is risky. Now in order to use my proposed solution to this problem it is imperative that something be established.

Beth Bershok: Ok. Which is what?


6. Lange's Cascading Beneficiary Plan

Jim Lange: Right now I know that a lot of my clients who are listening know exactly what’s coming. This is the point in the meeting when I turn to, and it doesn’t’ matter the order, but I turn to the husband or I turn to the wife and I say, do you trust your spouse?

Beth Bershok: You say that in front of the spouse so there’s really no other answer except yes I do.

Jim Lange: With all due respect there has been other answers.

Beth Bershok: Really, in front of the spouse.

Jim Lange: In front of the spouse. So if there isn’t perfect trust between spouses then what I am going to tell you is probably not applicable. So I need to have the spouses trust each other which is one of the reasons why this doesn’t work well for second spouses with different children. It doesn’t work well with situations where one spouse, typically the wife, wants all the money to go to the kids and grandkids and perhaps the husband thinks a large portion should go to a charity. I have other situations where one spouse wants a lot of the money to go to the grandkids and the other spouse wants it to go to the kids. Or one spouse wants more to go to one kid than another child.

Beth Bershok: So they have to be on the same page.

Jim Lange: With this plan you need people to be on the same page. Usually I get a little joke and oh yeah you know we have been married 40 years and if I can’t trust him now and blah, blah, blah. So let’s assume that we can get by that and I am also going to talk about the weakness in my plan too. But first I am going to talk about the strength. If we can get by that then here is what my decision on what people should have in their wills or what decision they should make right now.

Beth Bershok: Ok, what decision should they make?

Jim Lange: Don’t decide.

Beth Bershok: Well, there you go. There’s got to be some explanation to that though. You eventually have to decide.

Jim Lange: You eventually have to decide, but here’s what I think makes a lot more sense. I think that rather than deciding right now when we don’t know who is going to die first we don’t know what the exemption amount is going to be, we don’t know the needs of the surviving children, grandchildren, spouse, etc. If we trust the surviving spouse to make that decision, presumably with help from counsel whether it be a financial advisor or an attorney or both or whatever, we let the surviving spouse make that decision and we can draft these documents in such a way that the surviving spouse would have 9 months to make that decision after the date of death. So if we have spouses that trust each other, if we have, again to keep it simple, those 4 choices of surviving spouse, B Trust, children, or grandchildren. Now you have to get this set up now. You can’t just say ok I’ll use my existing documents and then we’ll decide later. The documents must be set up properly now. So if you had the traditional documents and you want to implement this plan it would absolutely fail and it would come crashing down miserably. If you get them redrafted using Lange’s Cascading Beneficiary Plan or a very similar type of flexible estate plan then what you could do is, you can have the surviving spouse make that decision of who gets what, not now but within 9 months after the first death.

Beth Bershok: What happens during those 9 months? What if the spouse needs principal to live on during those 9 months?

Jim Lange: The default, let’s say the default of the plan that I recommend is the surviving spouse gets everything.

Beth Bershok: Ok.

Jim Lange: Alright, so let’s say the worst case there’s a death, the surviving spouse goes into a drunken stupor can’t deal with anything can’t deal with attorneys can’t even think about it and 10 months later they wake up and they say ok, now I am ready to take care of business. In that case everything will go to them.

Beth Bershok: Then they could still make other decisions.

Jim Lange: They could make other decisions, but it would be limited. It would be much better if instead of the last day of the eighth month, and actually typically people are doing this, that they are at least starting the process in the first or second month and I never rush people in this decision. Here’s what happens in the real world. Our firm is 30 years old; the law firm is 25 years old which is relatively young. That’s because I didn’t buy the practice and I didn’t inherit the practice, I actually started it on my own. So most of my clients are still kicking but we have had quite a few deaths and here’s what happens in the real world. At some point, maybe within the first month or two, the surviving spouse will come to my office typically accompanied by one of the adult children or sometimes more then one, but typically at least one who provides both technical and emotional support. I would attempt to lay out all the choices. I’ll repeat what was actually drafted. By the way, it’s really good to know what is in your wills and in your trust. In our office we actually write a letter that describes it in English.

Beth Bershok: Which is helpful!

Jim Lange: What your wills and trusts say. The surviving spouse will come in and then we can go over options and then sometimes we run numbers and sometimes you do a little bit of each. That is sometimes you might have a surviving spouse say, well I want x-number dollars or x-percent on my own. I want so much money to go into the B Trust; I want so much going to the kids and I want so much going to the grandkids and, frankly, I sometimes help people with that. I am going to err on over providing for the surviving spouse even if the cost is some taxes down the road. That’s the way if I had to make a mistake or a lack of judgment. I’m going to make that lack of judgment or err in over providing for the surviving spouse. Using this flexible approach we get a much better result because we have a lot more information to make a decision on. We know what the value of the portfolio is, we know what the exemption amount is, we know what the needs of the kids and the grandkids are. In that case we can make a much better decision and, frankly I actually believe that my model, which is this Lange’s Cascading Beneficiary Plan, and by the way in the literature and it’s all over the literature you sometimes see it in two different forms. One you see it as Lange’s Cascading Beneficiary Plan and the other one, shockingly enough, you just see it as plain old Cascading Beneficiary Plan.

Beth Bershok: That is shocking.

Jim Lange: That’s because the snooty Peer Review articles and the Wall Street Journal won’t let me call it Lange’s Cascading Beneficiary Plan.

Beth Bershok: Well we are calling it Lange’s Cascading Beneficiary Plan. It’s in the book Retire Secure! as Lange’s Cascading Beneficiary Plan.

Jim Lange: I’m the first guy who put it in publication and this goes all the way back to an article I published in 1998.

Beth Bershok: We are going to give you some more details on exactly how this works coming up. It’s The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: We are talking specifically tonight about Lange’s Cascading Beneficiary Plan which if you have the book Retire Secure! Pay Taxes Later, you can get the whole big description in chapter 15. It is what Jim calls the best estate plan for most traditional families. I am Beth Bershok with Jim Lange. If you have a question about Lange’s Cascading Beneficiary Plan, we are on for about another 15 minutes, 412-333-9385. Jim you said that you’ve been using a version of Lange’s Cascading Beneficiary Plan in your private practice for about 25 years or so. How has this actually worked practically in real life - Lange’s Cascading Beneficiary Plan?

Jim Lange: In real life it has worked exceedingly well in terms of getting money to where the surviving spouse wants it. In the vast majority of cases it has proven to be a wise choice. Now there was one and this is a potential weakness to the plan. I am going to tell you one other weakness later on. There was one situation where, I am going to over simplify, the husband had $3 million in his retirement plan and he said you know, I am going to do this flexible plan. As soon as he died, it’s a funny thing, but I remember what people have like if I see somebody on the street I’ll say oh yeah that’s the guy with 1.6 million dollars.

Beth Bershok: Are you serious?

Jim Lange: Yeah.

Beth Bershok: This just hit you.

Jim Lange: Well yeah, I’ll say oh yeah that’s the guy with 1.6 million dollars and the no good son-in-law that doesn’t get one red cent of his money. So, I remember these things. I heard the client died and of course it is always sad when a client dies. One thing I like about my practice is I like doing long term planning and then when there is an event like a death or a retirement or some kind of life changing event, it’s really satisfying to me to have set it up properly in the first place and then go through the process with people. Well I already knew what I was going to do; this was back in the days when the exemption was one million. Two million dollars for the surviving spouse was going to be way more then she was ever going to spend because she was not a spender she was a saver, like frankly, a lot of my clients. Between her social security and her pension and the two million dollars was way more then she needed. So my plan was, I was going to have 1 million dollars go to her children and grandchildren and she was going to get everything else and we were going to end up saving a million dollars from a combination of income taxes on the inherited IRA and inherited Roth IRA and the estate taxes when she died. I go through my analysis when I finally met her and I thought for sure she would take my advice and she said, no, I want the whole three million. I went what, what, what. I said, oh no, no Mrs. X, you don’t understand I really think it would be better, and I went through the explanation again. She said, No, I think I want the whole thing and I went, but Mrs. X ,no bluh bluh bluh, and she said, No you don’t understand it’s my choice. I want it all.

Beth Bershok: Which, frankly, is true. It was her choice. That’s what happens with your plan. The surviving spouse does get to decide and if they decide they want all of the money then they get all of the money.

Jim Lange: That’s right so it’s a double-edged sword. Now I’ve had situations where the surviving spouse has taken all the money and perhaps the husband might not have intended that, given the amount of money that was left. So I’ve had surviving spouses who all of a sudden upgraded their life style a little bit. That’s what they wanted and that’s part of the deal.

Beth Bershok: Then at that point do you restructure another plan? Let’s say that in that particular example the surviving spouse said I’m taking this all do you restructure another plan for her death?

Jim Lange: Well, there really isn’t all that, most of the planning, you know really if she now has 3 million dollars other then gifting, yes of course she’s going to leave it to her kids and grandkids in most cases, but she’s going to be more resistant to gifts and things like that with that type of mentality. So sometimes you are playing, in effect, catch up if you try to do something at that point rather than at the first point. Now on the other hand, the vast majority of these where we have set up flexible accounts have been very favorable and we get the result. We provide or over provide for the surviving spouse which is goal number one, we save taxes if necessary which is between that and getting money to children and grandchildren; we safe guard money for grandchildren and we don’t have these kids have a party when they are 21. We also set up things that are not anticipated in traditional plans. So for example let’s say you have a wealthy child and the child doesn’t want or need all the money. With my plan you could actually have the parent be the trustee for the grandkids, where most plans anticipate the only way the grandkids are going to get the money is if the child predeceases. So there’s a lot of flexibility and it has worked out very well in practice. Now the traditional plan sometimes has not. I had an engineer and of course they always are smarter than I am. Not all of them, that’s not fair.

Beth Bershok: There are probably many engineers listening this evening.

Jim Lange: I have a lot of engineers and quantitative types as clients. Anyway this guy did his own investments and of course he thought he was an investment genius and he did the traditional plan. Fguring, well I am going to die with x-amount of money and if my surviving spouse gets the income from that, that should be more then enough. Well, they did their own investments, the investments went way down, then he died and instead of the money going to the surviving spouse outright, it ended up going into this trust. Did the surviving spouse have health maintenance and support? Sure. But sometimes the surviving spouse wants more than health maintenance and support.

Beth Bershok: Who determines health maintenance and support?

Jim Lange: Well that’s the trustee, which is another problem with the traditional plan. Depending on who the trustee is, which a lot of times it’s a bank. I tend to use family members as trustees. I’m not sure I want my fate determined by a trustee even if it is a family member. So I would say in general the results have been very favorable in terms of adding flexibility for the surviving spouse and for the family after a first death.

Beth Bershok: I want to get back to the Cascade for a second. Let’s just say, here’s an example, does the Cascade continue on… Say for instance the surviving spouse says I don’t really need all this money I want to pass this on to my children. What if the children then say I don’t really need this money? Can they pass it on?

Jim Lange: Yes they can.

Beth Bershok: The Cascade can actually continue.

Jim Lange: Right. Ultimately, the surviving spouse is the boss but you could have money going to the surviving spouse, you could have money going to the B Trust, you could have money going to children equally or you could have money going to grandchildren or some combination. You could also have money going to let’s say grandchildren in one situation of one family but to the children of another family. So let’s say one is very wealthy and they are more interested in the security of their children or the grandchildren of the person who died first; they can do that. Let’s say the other one is a struggling single parent and they say, I would love to have some money for my kids, but right now I need the money for myself. So you have that flexibility built in which I think is so important because I hate trying to predict the future; being wrong and getting a bad result. I would much rather say, I don’t know what’s going to happen so I am going to put all the good options in the wills and the trusts and the IRA beneficiary designation, insurance beneficiary designation, etc. Then when the event comes, I am set up to do whatever seems appropriate at that time.

Beth Bershok: Its Lange’s Cascading Beneficiary Plan. We are going to wrap it up in a few minutes. It is The Lange Money Hour: Where Smart Money Talks.

Beth Bershok: Talking more smart money, I am Beth Bershok with Jim Lange. We just have a few minutes left and we’ve been talking about Lange’s Cascading Beneficiary Plan, which Jim calls the best estate plan for most traditional families. If you have the book, Retire Secure! Pay Taxes Later, you can get all the info in chapter 15 and actually there’s a real cool flow chart in there that shows you Lange’s Cascading Beneficiary Plan. Jim what if you are dealing with someone who is already a widow or widower? How would that work in practice?

Jim Lange: Well even then you still want to allow flexibility. A B Trust is not going to be appropriate for a widow or widower because there is no surviving spouse to leave money to in that situation. You would presumably be leaving money to children or grandchildren. Even with Lange’s Cascading Beneficiary Plan what you could do as opposed to let’s say a traditional plan, is you could let each child decide whether they want to keep their share. So let’s say you have a simple situation - two kids and each of the two kids have two kids. You could have each kid decide whether they want to keep their share of what they inherit or whether they wanted to, the legal word is disclaim or say I don’t want, and you have the paper work flow so the money goes into a trust for the grandchildren. By the way each child is going to want their money or the money that would have gone to them to go to them, to their kids, but not their nieces or nephews. So you still have what is called a variation of Lange’s Cascading Beneficiary Plan and I am a big fan of that. Now interestingly enough even after a death, if you had the original Lange’s Cascading Beneficiary Plan you probably don’t even have to redo your documents; they are probably just fine.

Beth Bershok: In this case or in the example that you just gave there is more then 1 survivor making the decision. You make the decision for you, I make the decision for me, but it’s all under the same flexible plan.

Jim Lange: Right. So let’s say you have 10 kids and 5 of them are rich and 5 of them are broke. The 5 that are rich can say ok, I want my portion to go to my kids. The other thing that is really important that I didn’t mention is that you could have a partial so you could have, let’s say some money going to the grandkids and some money going to each kid.

Beth Bershok: If you decide you want to keep part of it.

Jim Lange: Right.

Beth Bershok: So you are saying I am going to keep part of this but I also want my kids to have some of this.

Jim Lange: Right.

Beth Bershok: That’s all part of the plan.

Jim Lange: Yes it is.

Beth Bershok: It’s whatever you want to do.

Jim Lange: It’s very flexible.

Beth Bershok: It is very flexible.

Jim Lange: Now to be fair is has to be set up ahead of time.

Beth Bershok: Ok, you can’t do this after the death. You can’t suddenly jump in there and say we want to do Lange’s Cascading Beneficiary Plan. It has to be set up.

Jim Lange: It has to be set up. Now I am not going to say that I am the only attorney that can do it because obviously other people can. I will also say that there was an article, this was first published in the Wall Street Journal I think back around 2001 and then subsequently they did another article saying that flexibility and estate planning has dramatically increased in the United States. Now I would like to be so vain as to think that I am the cause of it.

Beth Bershok: That’s ok, take credit.

Jim Lange: Well no, maybe I will take a little contribution. There’s other variations and there’s obviously other attorneys that are building in some flexibility and it just makes sense.

Beth Bershok: I do want to say though, if you have questions about this and you want to contact the office its 412-521-2732 in Squirrel Hill. Two workshops coming up we want to make sure you know about these. One is next Saturday May 16th. We do cover Lange’s Cascading Beneficiary Plan in the workshop. It also deals with the Two New Tax Laws Creating Shocking Opportunities for Wealth Preservation. Two times next Saturday 9:30 to 11:30 in the morning 1:00 to 3:00 in the afternoon. This is at Four Points Sheridan Pittsburgh North. If you want to RSVP for that I would do it soon, its 1-800-748-1571, and it answers 24 hours a day. The one on June 20th which is also a Saturday at Crown Plaza South, which is right across from South Hills Village. Jim you wanted to make an offer we have about 1 minute left. Five free books, is that what we want to do. Five free books?

Jim Lange: Five, sure.

Beth Bershok: This is Retire Secure! Pay Taxes Later. Everything that you heard tonight is in the book. So how are we going to do it? This is for 5 people, the first 5 people that contact us.

Jim Lange: First 5 people that would either call our office, and by the way, you could even just leave it on the answering machine as long as you give us all your contact information at 412-521-2732. We will include a copy of the book and we will also include a special article called, The Ideal Beneficiary Designation of Your Retirement Plan.

Beth Bershok: I am going to give the website and the e-mail too. How about that? It’s the first 5 people. You can either do admin@paytaxeslater.com or call 412-521-2732. If you want to leave a voice mail you can do it at extension 219 and we will take care of that and the first 5 people will get a free copy of the book. At the workshops, you also get a free copy of the book. That’s another reason to attend the workshop, in addition to all the great information. Back in 2 weeks and we are going to be joined by Bob Keebler who is really one of the country’s top IRA experts. He is going to be our guest. 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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