It's Not About Numbers. It's About Family.

 

Investment Management · Estate Planning · Financial Planning

 

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When the heart is heavy, any decision can feel overwhelming.

Inheriting money from a loved one and planning your estate are major financial events that require special attention. Often times you only get one chance to make the right decision. And the decisions you make will not only impact you for the rest of your life but those of your beneficiaries as well.

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Case Studies

Real People. Real Situations. How We Made A Difference.

Jim & Kathy - Estate Planning

 

Jim and Kathy have done a great job of saving but now they’re about to pass a ticking tax time bomb to their daughter.  Learn how we defused the situation.

Jim and Kathy have done a wonderful job of saving. They are both retired now and have most of their savings in 401(k)s and Traditional IRAs. They live within their means and it’s unlikely they’ll need or spend much of what they’ve saved in these accounts. Their only child, Sarah, will inherit them some day.

In December of 2019, Congress passed the SECURE Act. The new laws contained in the bill have had a profound impact on IRA owners and their beneficiaries. As a non-spouse beneficiary, upon the passing of the last survivor, Sarah will have to draw down the inherited accounts. According to the law, she’ll have to take all the money out of the accounts by December 31st of the 10th year following the account owner’s death. She can take it all out at once, equal withdrawals annually, random withdrawals or take it all out at the last second. Frankly, the IRS doesn’t care how she does it as long as there is nothing left in the accounts in 10 years. While Sarah is certainly fortunate to be receiving such a nice inheritance, this new law poses problems. It’s important to know that the IRS doesn’t decipher between inherited IRA and 401(k) money and money you earn through work. To them, it’s all the same. Sadly, because every penny she withdrawals is fully taxable and counted as ordinary income, it’s possible that over 40% of her inheritance could be lost to taxes.

By working with Jim and Kathy as well as their tax preparer, one possible solution was to put together a plan to systematically convert the 401(k) and Traditional IRA over to a Roth IRA. This could have several benefits to Jim, Kathy and Sarah. By converting the money over to a Roth IRA, Jim and Kathy would be paying taxes on the converted dollars now at a lower rate than Sarah would when she’s forced to withdraw the money. And by understanding Jim and Kathy’s current tax situation, we may be able to convert parts of these accounts without sending them into a higher tax bracket. We’re also potentially reducing their future taxes by reducing the amount of their Required Minimum Distributions. (Traditional IRA and 401(k) owners are required by the IRS to begin taking withdrawals at age 72. These RMDs are fully taxable as ordinary income. There are no RMDs for Roth IRAs). The money, once in the Roth IRA, could be be invested and continue to grow tax-deferred. For Sarah, when the time comes for her to receive the accounts, as mentioned earlier, she’ll have to draw them down to $0.00 within 10 years however, every withdrawal from the Roth IRA will be 100% tax-free! And because the money in the Roth IRA will be tax-free, she can delay taking withdrawals right up until the last second, giving her time to maximize growth. In other words, after the last owner’s passing, the Roth IRA will have almost a full 10 years to continue growing. (Of course, if at any time she wants or needs to take a withdrawal, she can.)

In summary, by following this strategy, Jim and Kathy put themselves in a better position to potentially reduce their future taxes by lowering their RMDs and reduced the chance of passing a ticking tax time bomb to their daughter. For Sarah, she receives an inheritance that can continue to grow and not only will not create new taxes for her family but in fact, will be received 100% tax-free.

There are other possible solutions and outcomes to consider. Only after a complete examination of your financial situation should a course of action be determined.

This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.


Joe & Shelly - Estate Planning

 

Joe wants to make sure that his wife will be able to maintain her lifestyle after he’s gone.  And they both want to make sure their children don’t blow through their inheritance.

Joe and Shelly were both retired and in their 60s when Joe became ill. While they both had worked and saved throughout their careers, it was Joe who primarily handled their investments while Shelly focused more on the day-to-day finances of running the house. They had two grown children and were taking care of their grandson, who was enrolled in college. The mother of their grandson, Joe’s daughter from a previous relationship, is a recovering addict and is trying to put her life back together. Their other daughter is married and lives out of state. In talking to Joe and Shelly, one of their biggest financial concerns was making sure that the money they’ve saved could be used so that Shelly would be able to continue the lifestyle she’d become accustomed to. Their other longer-term financial concern was leaving their savings to their two children and grandson. Most of their savings were in IRA and non-IRA investment accounts. They weren’t necessarily concerned with leaving a large sum to their one daughter. However, they felt that if they left a large sum of money to their daughter who’s struggled with addiction, it could cause her to relapse. And although they felt their college-aged grandson has always been quite responsible for his age, he nonetheless was still very young. In short, they feared that when it came time to pass their savings onto their beneficiaries, one could handle it while the other two may not make good decisions.

Through our financial planning process, we were able to determine how to properly invest the money not only for the income that Shelly would need in Joe’s absence but also for growth. Determining the best way to pass the money on to the beneficiaries following Shelly’s passing was a bit trickier.

Between Joe and Shelly, they had about $1,500,000 saved in Traditional IRAs and retirement plans in addition to other investments. Per IRS rules, when non-spouse beneficiaries inherit these accounts, they must draw them down to $0 by December 31st of the 10th year following the owner’s passing. For the three beneficiaries, this means each would receive $500,000. This concerned Joe and Shelly. Not only would their beneficiaries lose a significant amount of this money to taxes, they worried about how their daughter and grandson would handle the temptations that come with new found wealth.

By working with an estate planning attorney, we determined that it would be prudent for Joe and Shelly to establish two trusts. One trust would receive the non-IRA assets while the other, a Charitable Remainder Unit Trust or CRUT for short, would receive the IRA assets.

By making the CRUT the beneficiary of the IRA assets, the $500,000 each of the beneficiaries would receive will be paid out to them in increments over their lifetimes, not in a lump sum or even over the 10-year period. In essence, by using a CRUT to receive and distribute the IRA money, we’ve recreated the Stretch option that was eliminated when Congress passed the SECURE Act in late 2019. The trust we established for the non-IRA assets will do the same.

In summary, when Joe passed, we were able to help Shelly maintain the lifestyle she wanted by positioning their savings in a manner to not only address the income she needed but also provide for liquidity and growth. Additionally, we were able to develop a plan that allows for the money to pass to their beneficiaries in a way that minimizes taxes, protects it from creditors and predators as well as encourages good spending habits.

This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.


Mary - Estate Planning

 

Mary wants to leave money to her children and her favorite charity but Mary has it all mixed up.

Mary is at a stage in her life where she’s begun thinking about passing her savings on to her beneficiaries someday. She has two accounts. Each are of equal value. One is an IRA and the other a non-IRA brokerage account. She wants to leave money to her two sons, Jeff and Mark and her favorite non-profit, the Animal Protective League. Upon reviewing her accounts, we notice that only Jeff is named as beneficiary of her IRA. The APL is named as the beneficiary of her non-IRA brokerage account. When asked why she’s named just one of her sons as beneficiary of the IRA when she’s made it clear she wants to split the money 50-50 between both of her sons, she explains, “Jeff seems to have a pretty good handle on things like this and he’ll take care of it for both of them.”

Naming one beneficiary to “take care of it” for others is one of the most common mistakes we see. It’s especially problematic when just one beneficiary is listed on an IRA when there’s actually more than one you’d like to inherit the money. Certainly, there are situations where it makes sense to name one person responsible for making financial decisions on behalf of others. However, if you have multiple beneficiaries and you are comfortable with each making their own financial decisions, each beneficiary should be listed on the account.

Mary needs to consider making some changes. If she insists on her sons inheriting the IRA equally, she should name both of them as beneficiaries. If left the way it is, Jeff will have to pay all the taxes on the money. He’ll not only have to pay taxes on his half but he’ll also be on the hook for the taxes owed on his brother’s half as well! Withdrawals from IRAs, including inherited IRAs, are considered income (no different than income earned through employment) and taxed as such. Per IRS rules, non-spouse beneficiaries such as Jeff and Mark have until the end of the 10th year following an IRA owner’s death to close out the account. What if Mark wants his half now and Jeff doesn’t? Jeff will have to withdraw Mark’s half to give to him and Jeff, not Mark, will have to pay any taxes owed on the withdrawal. Maybe you’re thinking, “O.k. All things considered, this isn’t that big of a problem. Jeff and Mark have a great relationship and Mark will just repay Jeff whatever he had to pay in taxes for the withdrawal”. This is still a problem because the withdrawal Jeff took for Mark will get recorded as income for Jeff and as a result may bump him into a higher tax bracket. What if Jeff wants to take his half now but Mark would rather take smaller withdrawals over the course of the next 10 years? Every time Jeff takes a withdrawal on behalf of Mark, once again, Jeff will be responsible for paying the taxes on the withdrawal. I think you can see what a mess this can become. What a nightmare!

Here’s a better solution. Mary should name the APL as the beneficiary of the IRA and her two sons as beneficiaries of the non-IRA brokerage account. As a qualified non-profit, unlike Jeff and Mark, the APL won’t have to pay any taxes on the IRA money. As beneficiaries as the non-IRA brokerage account, Jeff and Mark can take advantage of what’s known as a cost basis step-up at the time of Mary’s passing. Here’s how it works. Let’s say that at the time of death, the non-IRA brokerage account is worth $200,000. This is the value that will become Jeff’s and Mark’s new cost basis for the purpose of determining taxes. Another way to think of it is as their starting point or initial investment (even though Mary may have started the account with a much smaller amount). For Jeff and Matt, as far as taxes on the account are concerned, it doesn’t matter what Mary had started with. It only matters what the value of the account is at the time of her passing and the value when Jeff and Matt decide to liquidate or close the account. So, even if Mary had started the account with $100,000 years ago and now at the time of her death it’s worth $200,000, Jeff and Mark will not owe any taxes assuming that the account hasn’t grown from the time of her passing to the time they close the account. If it has grown between the date of Mary’s death and the date Jeff and Mark close the account, then they each would be responsible for capital gains taxes on 50% of whatever the account had grown by.

In summary, be reviewing the beneficiary documents of Mary’s accounts, we were able to identify a common mistake that would’ve added the IRS as an unintended beneficiary and could’ve cost her sons up to 40% in taxes on their inheritance. With a simple switch, Mary is still able to give part of her savings to help her four-legged friends at the APL and save her sons from lots of headaches, hassles and unnecessary taxes.

This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.


Linda - Inheritance

 

Linda lost her husband unexpectedly. She’s not sure what to do with his retirement savings. If she’s not careful, she could end up losing a lot of money to unnecessary taxes.

Meet Linda. She had been married for several years, had built a family and was enjoying a nice life when she suddenly lost her husband. Keith was just 55 years old. Both Linda (50) and Keith were working at the time of his passing. Not only is Linda dealing with the emotions of losing her husband, she now also worries about her ability to keep their house and continue to help their son pay for his college education. She knows her income alone won’t be enough. Fortunately, Keith had done a great job of saving in his 401(k). In order to keep up on the house payments and continue to help with her son’s tuition, she’ll have to tap into Keith’s retirement savings. In addition to providing income, she wants to make the money last as long as possible. She’ll have to be very careful with what she decides to do with the account.

Simply closing the account and taking the cash is one of the most common mistakes we see happen and can be very costly. It’s certainly understandable to be overwhelmed with emotion following the loss of a loved one. Not to mention, suddenly there are many other tasks that are consuming your time. Closing the account just seems like the simplest and quickest thing to do. For some, this may be the right thing to do. In our example however, it would be the worst. Doing so could cost Linda a lot of money in taxes.

Another option would be to roll over the 401(k) into an IRA in her name. The money would transfer over tax and penalty free. She could then invest it in a manner to provide for growth and income. We would set up a flexible monthly withdrawal program to help with her income needs. While each withdrawal would be subject to tax, most of the would stay inside the IRA and continue to grow. This certainly would give her a better chance of making the money last. However, there’s a problem with this strategy. Because Linda rolled the 401(k) into an IRA she opened in her name, the IRS will treat it as if the money was hers all along. The same would be true if she rolls it into an IRA she already has established. Linda is 55 years old and therefore each withdrawal will incur a 10% early withdrawal penalty. This option, while better than closing the account, will still cost her a significant amount of money in the form of penalties.

The third and most beneficial option for Linda will be to set up an Inherited IRA. This will allow her to take withdrawals systematically or as she needs them WITHOUT incurring the 10% early withdrawal penalty. Furthermore, she can control the account as if it were her own.

In summary, remaining a named beneficiary of an Inherited IRA was the best option for Linda. It allows her to generate the income she needs and avoid the early withdrawal penalties. The money can also be invested, giving her an opportunity to make it last. This strategy also helps to keep taxes at a minimum. It’s important to note that this is the best strategy for this case study. If the spouses in our example had been other ages, other strategies would be more appropriate. Only after a complete understanding of your situation can we determine the plan that’s right for you.

This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.


Ed & Diane - Inheritance

 

Meet Ed and Diane.  Diane loves her church and gives regularly.  Ed hates paying taxes more than he hates the Steelers.  Learn how we helped Ed reduce his taxes and continue his wife’s legacy of gifting to the church. 

Ed and Diane are married. Ed is 72 and Diane is 68. They both have IRAs and together have a jointly owned brokerage account. Ed began taking RMDs (Required Minimum Distributions) from his IRA this year. He doesn’t like the idea of having to take the withdrawals because he and Diane don’t really need the money and on top of that, each year’s RMD will be taxable. Ed would actually like to reduce their reportable income for tax purposes. When Diane passed away, she left her IRA to Ed. Ed wasn’t fully confident he understood his options as the primary beneficiary of Diane’s IRA. He was worried about the tax ramifications of inheriting the account and furthermore, wanted to make sure that their children would receive the accounts upon his passing someday. Diane had been taking withdrawals from their jointly owned brokerage account occasionally to make gifts to their church. This is something Ed wanted to continue to do in her memory.

In reviewing the accounts with Ed, we determined that it would be best for Ed not to roll Diane’s IRA into his own. Doing so would have significantly increased the value of Ed’s IRA and therefore increased the amount of his annual RMD. Remember, one of Ed’s pet peeves when it comes to his IRA is that he has to take a taxable RMD each year. By moving Diane’s IRA into an Inherited IRA or otherwise called a Beneficiary IRA, Ed is able to treat the IRA as if it were his own but because Diane hadn’t yet turned age 72 (the beginning age for RMDs), he won’t have to take an RMD from the account for another four years.

Additionally, in an effort to reduce Ed’s taxes and continue Diane’s gifting to their church, we decided to give the RMDs from Ed’s IRA to the church each year. This is what’s known as a Qualified Charitable Distribution or QCD for short. Because the church is considered a charitable organization (specifically, they are a 501(c)3 organization), Ed will not have to pay taxes on the RMDs.

Furthermore, because they both want to pass whatever money is left onto their children, we decided to discontinue the withdrawals Diane was taking from their non-IRA brokerage account. The children will receive very favorable tax treatment on the money they inherit from this account. I’ll explain. Let’s say Ed and Diane had invested a total of $50,000 over the years and now the account was worth $150,000. Upon Ed’s passing, each child will receive $75,000 tax-free. This is because of what’s known as a cost basis step-up. Had Ed liquidated the account before his passing and gifted the money to his two children, he would’ve been on the hook for $100,000 of long term capital gains which is taxable. But because of the cost basis step up, each child has a new cost basis (or you can think of it as a new starting point) of $75,000. Assuming the account hasn’t grown between the time of Ed’s passing and when they claim the account, there’s nothing to be taxed.

Lastly, we made sure to add Ed and Diane’s children as primary beneficiaries to the IRAs and the brokerage account.

In summary, by establishing an Inherited IRA for Diane’s IRA following her passing, Ed was able to avoid increasing the size of his RMDs (and consequently the amount of tax he’d owe) had he just rolled her IRA into his. We also reduced Ed’s taxable income and continued his wife’s legacy of gifting to their church by turning the RMDs from Ed’s IRA into Qualified Charitable Distributions. And finally, by discontinuing withdrawals from the brokerage account, we preserved the value of the account that by way of the cost basis step-up, may be passed on to their beneficiaries tax-free.

This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.


Al - Inheritance

 

Al kept all his mother’s statements in a shoebox. When she passed, he knew he had some work to do but didn’t like the thought of spending hours on the phone getting bounced around from department to department. We did it for him. And learn how we were able to use the money he inherited to help Al retire early and avoid a bunch of unnecessary taxes.

Al is 62 years old and about to retire. While Al is a talented mechanic, organization isn’t his strong suit and he doesn’t know much about investments outside his 401(k). When his mother passed away a few months ago, it was up to him to settle her estate. Al came into the office with a shoebox full of statements and forms. He knew his Mother had investments in various places but didn’t have the first clue of what they were, how to claim them and what to do with them. More or less, Al was asking me to organize his disheveled shoebox, help him claim the assets and give him some direction moving forward.

It turns out Al’s mother had a Traditional IRA and a Roth IRA at one institution and a fixed annuity at another. Initially, Al wanted to close all three and collect the cash. He didn’t really need the money however. To him, it was just the simplest thing to do.

What Al wasn’t aware of is that distributions or withdrawals from Traditional IRAs, even when inherited, are fully taxable to the beneficiary. This means that if Al were to close out the Traditional IRA, he’d end up generating A LOT of taxes for himself. The interest that had built up in the annuity would be taxable as well.

In accordance with IRS laws, IRAs must be drawn down to $0 by the end of the 10th year following the owner’s death. With an inherited annuity, non-spouse beneficiaries such as Al can either take a complete lump sum distribution or elect to take monthly payments over either a five-year period or for the remainder of their life.

After examining Al’s financial situation, we decided that upon his retirement, he would begin taking monthly withdrawals from the Traditional IRA for the next 10 years. We elected a five-year monthly withdrawal plan from the annuity. By electing to take monthly withdrawals instead of the lump sum distributions, we’re able to minimize taxes and create income he could use in retirement. If at any time he needs additional income or if there’s an emergency, he can tap into the Roth IRA which also has to be closed out in ten years but unlike the Traditional IRA and the annuity, is 100% tax-free. Furthermore, this strategy allows him to delay taking social security which is important because one of Al’s concerns is having income that will last him his lifetime. His mother lived into her 90s and longevity runs in his family. Why is it beneficial to delay taking social security? Simply put, the longer you wait, the more you’ll get paid! If you elect to begin social security at age 62 instead of your full retirement age (66 to 67), you’re settling for up to a 30% reduction in monthly benefits. And for each year you delay taking social security past your full retirement age, your benefit increases 8%!

In summary, although simply closing accounts you’re inheriting from a friend or family member may seem like the most hassle-free thing to do, it may not be the best use of the money and can end up costing you a lot of money in unnecessary taxes. After piecing together the mess in the shoebox, we were able to better understand what his Mom had. Also, we were able to fill out all the forms in order to claim the assets and develop a strategy so Al could retire at 62, while minimizing taxes and maximizing his Social Security benefits.

This case study is hypothetical and for illustrative purposes only. Any rates of return do not represent an actual investment and cannot be guaranteed. Any investment involves potential loss of principal. Before taking any action please consult your financial professional regarding your unique situation.