Ep 23 - Estate Planning Roadmap for Retirement Accounts

Welcome to the Good Steward Law and Wealth Podcast, where host Ledly Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment, and wealth management. Tune in for the knowledge and tools for financial success and security.

Welcome back to the Good Steward Law and Wealth Podcast, and today we are continuing our series in retirement accounts in your estate plan. And this is the last episode, at least for a while, on retirement accounts that I'll do because this one will kind of wrap up everything and, you know, tell you how your beneficiaries should be listed in accordance with your estate plan on your retirement accounts. So recapping, we started out with IRAs and talked about what the SECURE Act did. The SECURE Act was a new act I believe 2019 when it was enacted and has been revised since then, but it changed the way we inherit retirement accounts. So if you'll remember that inheriting an IRA is typically a bad thing for anyone that is not a spouse because it is subject to a 10-year stretch. Um, that means your beneficiary has to withdraw everything within 10 years of inheriting it, meaning they will take a pretty big tax hit and will likely be bumped up to the higher tax bracket. Meaning what you leave them is now worth at least 30% less than what you actually left them. Because it's not about what you leave them, it's about what they take home. That's what I always say when planning for my tax situation, you know, while I'm living, but it also applies to your beneficiaries. And then we talked about how you can still leave IRAs to trust and why you would do that. And then we talked about the best account there is to inherit, which is a Roth IRA. So now that we've kind of laid out all that information, I wanted to summarize it in a roadmap for your family about where you should start thinking about planning. So we'll start with, let's say you're my situation where you, you know, 35 years old, have a young family, good job right now. So we're making money. Where am I contributing and what are my beneficiaries like? Well, most of what I'm doing is to a Roth IRA because I believe that I will be in a higher tax bracket in the future. And I also believe that due to other factors beyond just my income and the higher tax bracket, we may be making more money in retirement because of how much we're saving, because of Social Security, because of inheritances, whatever it may be. I think we'll be making more money in retirement. So I'm contributing to a Roth IRA because I like the benefit and the sovereignty of being in a 0% tax bracket. That's how you fully protect yourself and can ensure that you're putting yourself in the best situation because you're not relying on the government or income or other things to dictate, you know, what your take-home is. You are locking it in at that 0% tax rate in the future. So if that's the case, how do I make my beneficiaries? And my kids are very young. So right now, my spouse and I, each other are our main beneficiaries, but then our trust is the secondary beneficiary to the Roth account. Why we're doing this is because they're so young. If something happened to us today, I don't want to hand my 18-year-old son, you know, a ton of money that he can blow. So it goes to him in a protected manner managed by other people. And a Roth is okay to leave to a trust because it is income tax-free. So it's not subject to the high trust tax rate. So young families, that is typically what I'm advising is primary beneficiary spouse, secondary beneficiary your trust. Now that changes if you have blended families, you know, different situations, then you may want to leave your primary beneficiary a trust. But for most families, same kids, happily married, you want to make your spouse the primary beneficiary. Now let's talk about, let's say you're a 60-year-old parent, or, you know, a lot of times I work with the young families and then they bring their parents in to meet with us. Because we need to plan for their inheritance and how they inherit things in the best way. Because most kids don't want to inherit a mess. So sometimes the relationship happens that way. Sometimes the parents come to me first, but let's just say there's a 60-year-old couple. They've saved money, have a good bit of money in, say, an IRA. They're getting ready to retire. They're trying to plan for how they leave things. So if their money is sitting in an IRA right now, for their beneficiary plan, the only time I really advise keeping it in an IRA is for a few instances. One is if they want to leave things to charity. So, um, you can take a QCD, qualified charitable, um, distribution from an IRA, meaning you can leave your IRA to a charity and it's tax-free. Charities don't pay taxes. So an IRA makes sense to do that because you got the tax benefit up front and you're still getting it on the way out. It's just like a Roth in that situation. The other reason I do it is if they are planning their IRA to be a source to pay for their long-term care, an IRA is a good method to do that. I talked previously about how an HSA is a great account for long-term care. An IRA is actually better, uh, depending on your situation. For me, since I'm contributing to a Roth, my HSA is a source for my long-term care. But if you have it already in an IRA, then that should be the source to pay for your long-term care, assuming you don't have insurance or different things like that. The reason is because when you can then take a deduction for your medical expenses when you use your IRA for long-term care, so net-net, it's positive tax benefit to use an IRA to pay for long-term care. So those two instances are proactive measures why I would keep an IRA. Now, the other reason is kind of on the negative side is why you would keep an IRA is one is if you don't have the cash to pay the taxes up front. So if those first two mentions, charity and long-term care, if you're not interested in those, then usually we start talking about converting your IRA to a Roth. But it may not make sense if you don't have the cash to pay the taxes or if your time frame is little. So if you're 60 and in good health, you have a long time frame. You have at least, you know, 20 years, you know, till you're 80. So the time frame makes sense to convert to a Roth, but say you're in very poor health or, um, you come to me and you're 75, then it usually doesn't make sense to convert to a Roth. So If you don't have the cash and no timeframe, then we won't convert. But if you do have the cash and you have a long time horizon, then usually we talk about converting to a Roth. But let's say that you had neither one of those and you have an IRA and that's what we're sticking with. Then how do you name your beneficiaries? Well, primary is almost always the spouse because the spouse gets a lifetime stretch. They're not subject to that 10-year rule and they have a lot of flexibility. So I say primary beneficiary of your IRA is your spouse. Contingent beneficiary is your kids. Um, most of the time, sometimes we make the contingent beneficiary your trust so it can go to your kids in a protected manner. And if that's the case, that's when you, we really need to sit down and make sure your trust that's existing is drafted a certain way. Um, because if you leave your IRA to a trust, it has to meet certain standards that we talked about in a previous episode. Go back and listen to that. All my trusts will meet that standard if we are planning for it. Um, and the reasons, to refresh your memory, that you want to leave an IRA to a trust is if your kids are bad with money, um, you have divorce concerns, um, if they are disabled, you know, anything like that. You don't want them managing the money, then it needs to be left to a trust that can be managed by someone else, um, especially if they're underage. That's always a big one. Um, so most of the time, if your kids are over 18 or really over whatever age you deem appropriate and have no financial hardships or intellectual disabilities, then we leave it to them outright. But if they have any of those hardships or they're underage, then we leave it to a trust. So IRA beneficiaries: primary, your spouse; secondary, kids or trust, typically. Um, And again, we can leave it to your spouse if there's second marriage or blended family concerns, and you want to make sure your IRA is protected and ultimately goes to your kids, then we can leave it to your spouse in a trust as well. But those trusts do need to meet certain standards and they lose some of the benefits as versus leaving it to them outright. So that is kind of the beneficiary plan for an IRA if you have to keep an IRA. Now, if you don't have to keep an IRA, let's say you have at least 20 years until you plan on dying. I know you can't predict death, but let's say you were underage or under, you know, I'd say usually if you're under 65, it makes sense. So really under 70, I would even do it because typically you have a good time horizon there. So under 70, And you have the cash to pay the taxes and you have that long time horizon, then I would consider converting to a Roth IRA. The thought being is you have enough cash that there's probably going to be an inheritance left for your kids. So you want to do it in a responsible manner. You don't want to hurt them from a tax perspective, and you don't want to see your estate dwindled away, you know, 30% just because of a bad choice you made. And this, because I always say your kids are going to pay the tax or you're going to pay the tax. If you don't pay it now and take, you know, the tax pill of paying it up front, then your kids are going to pay it. And it could be worse for them because it could not only affect your inheritance, but it could bump them in a higher tax bracket throughout their income. So it could mean that they are making less just because of that. Typically we convert to a Roth IRA because it goes to your kids in an income tax-free manner, 0% tax rate, and you can leave it to a trust. So if you leave your Roth IRA, or really if you leave any account to a trust, typically it's taxed at a trust rate, but because Roth IRAs are income tax-free, it can skirt around that and you can still get the protections if your trust is drafted appropriately. The other thing it avoids that we mentioned last episode is the widow rule. So converting to a Roth protects your widow. We talked about this a little bit, but you know, your spouse may lose some income when you pass away because they lose your Social Security and, you know, maybe your actual income you were making. But generally they also lose because now they are filing singly, meaning they will pay more tax on less income. But if you converted to a Roth, That is not the case because it's income tax-free. So it usually makes sense to make your beneficiaries of a Roth. Well, let me, let me take a step back there. It usually makes sense to convert your IRA to a Roth if you're going to leave an inheritance for your kids. That was the point I wanted to make. And when you decide how to make your beneficiaries of the Roth, typically the same as an IRA, we make, you know, the surviving spouse the primary beneficiary. And, you know, a trust, the secondary beneficiary, or kids outright as secondary beneficiaries. To refresh, why you would want to leave a retirement account to a trust is if you have concerns about divorce, concerns about asset protection, or your kids' ability to manage money, then we typically want to leave retirement accounts to a trust. So all that to say is your estate plan goes way more in depth than just the trust or the will or anything like that. It actually matters about who your beneficiaries are. I wanted to make sure that we know with the kind of a horror story that I've had recently is you have to name a beneficiary. So if you have any of these retirement accounts, get with your advisor and make sure you name a beneficiary. 'Cause if you do not name a beneficiary, then instead of that 10-year stretch period, this applies to IRA and Roth, then it's subject to 5 years. So it could have a big impact on a Roth if you do not name a beneficiary. But also one thing I've seen lately, we had an IRA account that was left no beneficiary. So it didn't have a beneficiary. The person provided in their will how they wanted their IRAs to go, um, which is okay. And normally, if you don't have a beneficiary, then you would look to their estate plan. In this case, it was just a will. So we probate the will and the will says, I want my IRA to go to these 3 kids, but not a 4th kid. So if the will says that, then we follow what the will says and the IRA goes to the 3 kids. Um, let's just say there's only 4 kids, no surviving spouse. By law, everything would go 4 ways between each of the 4 kids. But if their will says something different, then we go by the will. So the will said he wanted to leave it just to 3 kids. So that's what we were following. But at this certain, um, financial advising company, one of the bigger box ones, they did not have a beneficiary, but that IRA had a private contract that said, if you do not name a beneficiary, You are hereby saying that our IRAs are distributed according to the statutory law, meaning because you didn't list a beneficiary, they listed one for you. So in that case, this man's IRA would go to his 4 kids because of that private contract that they had when he clearly had a will that said he wanted it to go to his 3 kids, not the 4 kids, but the private contract is overriding that. So it's important that you pay attention to your beneficiaries or something like this could happen because any private contract overrides a will and a trust. So if you have a beneficiary designation, it doesn't matter what your will or trust says, that account goes via your beneficiary designation. But if you don't have one, if you don't have one listed, we need to verify with your company, do they have one listed for you even if you do not? Um, but the real takeaway here is make sure you list a beneficiary because you want your accounts to go to who you want it to go to. And I usually say, do not rely on a will to leave an investment account because why would you? Because it goes through probate if you do that. So make sure you have a beneficiary on your account. Um, and those beneficiaries in most instances are your primary as your spouse, secondary as whoever else you want it to go to. That's how you typically get the most benefits, especially with an IRA. Um, with a Roth, you can have a little more flexibility, but just make sure you have two levels of a beneficiary listed on all of your retirement accounts. And this has been the Good Steward Law and Wealth Podcast, where we believe that everything we have is a gift and it is our job to manage that gift to the best of our abilities. Thank you for listening.

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