Castle Wealth Group

October 19, 2020

Retirement and Legacy Blueprint Webinar – Episode #5

Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1 pm www.wisdomwebinar.com to register or give our office a call at 844-885-4200.

Castle Wealth Group and Christopher Berry help families with estate planning, elder law, retirement planning, and tax planning from their offices in Brighton, Ann Arbor, Livonia, Bloomfield Hills, and Novi.

On this week’s webinar, attorney and advisor Chris Berry of www.castlewealthlegal.com answers questions regarding refinance, trust administration, medicare, and the best investment tool.

In this episode, you’ll learn…

• Refinance issues and low rate mortgage
• How do refinance issues affect if I have a trust or ladybird deed?
• Castle Trust and trust protection
• The legal standpoint of refinance
• The process of trust administration
• Estate administration
• Beneficiary design and joint ownership
• Best options for Medicare and the advantage plan for you 
• Determining the best investment tool
• Task risk and tax planning
• Steps to make for managing taxes
• How much to convert from tax and what to do with it
• Tax-deferred accounts and benefits
• Distributing fund for trust administration

Episode Transcript:

So again, this is Chris Berry with Castle Wealth Group, and we’re going to do our weekly Wednesday webinar. It’s all about answering questions that people submit specifically for this or any common questions that really pop up throughout the week.

I have four questions right off the bat that I have from people and if you do have any questions, feel free to submit those in the question and answer section, but let me share my screen and we’ll get into … select what I want to share.

All right. Again, if you want to see how any of this information applies to you, if you have questions on anything, feel free to just go ahead and set up a phone call with me and we can problem solve or troubleshoot what we need to do. Therese, maybe give me a little more on that question, but let me gather this in with the rest of them.

Okay, so the first issue is refinancing. So this is interesting because of the lowering of interest rates so that a lot of the clients attempting to refinance and there are some issues that go along with refinancing because the interest rates are pretty darn low right now. That’s a good thing and a bad thing. The positive of low-interest rates is that you can get a low rate on your mortgage. So right now, I see clients getting less than 3% for a mortgage, which anything below 4%, I’ve always said is a good idea. Then some people are in a … do we pay off the house first? Or do we have a mortgage at a really, really low-interest rate? There are pros and cons to both. The advantage of carrying a mortgage at a low-interest rate is let’s say that your mortgage rate is 2.5%, if we can earn 4% somewhere else then you’re just using arbitrage. On top of that, you’re getting what’s called compounding interest, where you’re the one that’s gaining on that interest first, so the bank is gaining on interest. So from a numbers perspective, a lot of times if you can handle that low-interest rate mortgage from a financial standpoint, it makes sense to maintain that mortgage.

If on the other hand, we look at it from a psychology standpoint, a lot of times they have this dream of moving into retirement and having their home paid off. That just feels good to be “debt-free”. There’s no right or wrong answer. My background was actually in finance as well as psychology in undergrad. So I understand both and both are valid, but as people are moving towards these refinancing issues, we’re running into questions with regards to how does this affects whether I have a trust or a Lady Bird deed.

So how is that real estate owned or how has the real estate titled? Really, typically what we see is either it’s what’s called a Lady Bird deed … because we don’t want a home just in your name. If a home is in your name and you pass away, it ends up going into probate and we know that we want to try to avoid that. So really when we’re planning for the home from a legacy or estate planning perspective, we’re doing what’s called a Lady Bird deed where it’s in your name while you’re alive, and then upon death, it avoids probate and goes to whoever’s listed on the deed. It’s kind of like a beneficiary designation for your home, or we might have the trust as the owner of the deed. So typically, this would be if we’re doing a Castle Trust, like an asset protection trust because the advantage of that is you can sell it inside of the trust and the home’s protected from Medicaid and that type of thing. So that’s why sometimes we have the trust as the owner.

So when you go about refinancing, it’s really between you and a mortgage company and each mortgage company can create their own rules of how they want to handle things and we’ve had a lot of different mortgage companies that we’ve been working with clients. So let me give you the legal answer and then we’ll talk about the real world answer. So if you are thinking about refinancing and if it’s a Lady Bird deed, which says it’s in your name while you’re alive, then you can do whatever you want. In fact, the deed will say you can mortgage it, refinance it, sell it, et cetera. You have complete control, but some refinance companies won’t accept a Lady Bird deed, and we’ve had to go back and forth.

From a legal standpoint, the home is in your name so you can do whatever you want, you can refinance it. So it shouldn’t be a problem but that said, these mortgage companies are private institutions and they can create their own rules. So if you’re having trouble at one company, you could always look to another company because depending on who you talk to that day at the same company, you might get different answers on some of these things, which can be really frustrating. But from a legal standpoint, if you are doing a Lady Bird deed, you should have absolutely zero problems with the refinance. Now, if it’s a trust-owned property, so typically we’re doing an asset protection trust, a Castle Trust, the way that we draft the trust, legally you still should have no problem because it’s a grand tour trust.

There’s this act that I can’t remember, I can’t spell it off the top of my head, but it’s the Graham Beach Act of, I think 1993, that says that a mortgage company cannot basically discriminate or trigger a due-on-sale clause on any type of grantor trust. Meaning if you have a grantor trust, you still should be able to refinance you still should … they can’t trigger the mortgage because it’s not technically in your name, even though it’s in a piggy bank that you’re holding on to. So from a legal perspective, they shouldn’t give you any problems on the refinance as well. But for whatever reason, some refinance companies want you to deed the property out of the trust, do the refinance there and then deed it back in, while there are other mortgage companies that will do the refinance directly in the trust.

So just understand from a legal perspective, whether you have it as a Lady Bird deed or the trust own, you should not have any issues with a refinance, but it might be based on that business, they can have their own rules or procedures, but there are companies that refinance for sure if it’s a Lady Bird deed without having to do another deed in the meantime, same with a trust-owned. So that’s with the refinancing.

Continuing on that thought, with the low-interest rates and why everyone’s doing these refinances, that’s good. It keeps the mortgage rates low, but the flip side of the coin and the downside of having this low-interest rate is that it’s really affected the bond market. I’ve talked about this before, but there’s this idea that as we move into retirement, maybe we change the amount of equities and bonds and now we go more heavily bond sided but unfortunately with interest rates dropping, bonds and CDs are also underperforming. So if you are looking for safety, you might not want to always just focus on bonds, or especially CDs, which aren’t offering a very good rate of return. So, that is the refinance. [Inaudible 00:07:54]. Therese [inaudible 00:07:57] question … I’ll have to get to that.

Trust administration. Unfortunately, we’ve had this for a while, but when you set up estate plans and trusts, at some point, you’re going to have to administer them. Someone’s passed away and now we need to walk through the steps. This is something that we will help you with for sure, but really at its base, this is getting into estate administration. So when someone passes away, how do assets transfer out of their name? First, would be through joint ownership. So if you are joint on an account, it goes to whoever the beneficiary is or whoever you’re joint with.

Second, would be the beneficiary designations. So if you have an IRA, a 401k, it’s going to enter you named as a beneficiary. Third would be through a trust, so that’s what we’re going to talk about but if an asset doesn’t pass through joint ownership, beneficiary designation, or trust, then it ends up going into probate and that’s what we want to try to avoid.

So typically, we’re relying on one of these first three ways. So let’s focus on the trust. What are the steps to administer a trust, just big picture? We’ve had whole webinars on estate administration, but when you’re administering the trust, the most important thing is the death certificates. You’re going to get these, or actually the funeral home typically we’ll get these for you, but usually, it takes about 14 days, sometimes a week before you get the death certificates. But unfortunately, there’s really nothing you can do until you get the death certificates. That is unless you have set up final expenses, which more and more people are doing.

So, when someone passes away with a final expense product, you could have the payout within 24 to 48 hours to handle paying for their funeral and expenses and that type of thing. Then the death certificate, typically this will take maybe 10 days and the death certificate is what you’re going to utilize as you’re transferring money from the trust to whoever the beneficiaries are. You’re going to need a death certificate, that’s going to be through the funeral home and then you’re going to most likely need a certificate of trust showing who the new acting trustee is. So if it’s a revocable living trust or a trust you created while you’re alive and then you pass away, chances are there’s going to be another trustee, someone you appointed already that needs to step up and start acting.

So for them to be able to act with the financial institutions, they’re going to have to get a death certificate from the funeral home, and then a certificate of trust, which is something that we can prepare. Then from there, then it’s just gathering the assets, going through the joint ownership, beneficiary designation trust, make sure we get a full list of the assets paying off expenses, make sure there are no bills hanging out there.

Typically, we recommend about a month before we start thinking about dispersing, at least a month before you start distributing assets because you’ll see what bills are coming in, that type of thing. Then one thing I did forget, so a certificate of trust, also something we can help you with is quite often when we might need to get a new trust ID because a trust is an ID of typically the individual who set up the trust, it’s in their social security number. So we might have to get a new trust ID from the IRS website, which isn’t super complicated, but it’s something that we can help you with.

Then distribute the funds, so distribute the assets. So once we’re sure all the bills are paid off, then we follow the terms of the trust and we distribute the assets and they might go, “Oh write to them.” Or maybe it’s held in a separate trust where now, whatever they’re inheriting from you as protected, but that’s the trust administration process. Ideally, this is done within a year just so that you don’t run into any tax issues because if a trust is open for over a year, then you might have to do a trust tax return, but ideally, all of this is handled within a year.

Then the next question or issue is really around Medicare. So this is typically for people 65 and older, and just want to do a brief little overview because what’s important is it’s coming up on open enrollment period, where, from October 15th to December 7th, you can switch around which Medicare plans you’re in. A lot of times this is the time to price check, to make sure there isn’t anything better out there because things changed quite often. But just a big overview of Medicare, we call this the alphabet soup. You’re going to have part A and B. Part A and B are what’s called Original Medicare. Then typically with that, you’re going to add a supplemental policy, as well as part D, which covers prescription costs. The other option is you can go with part C, which is called the Advantage Plan.

Basically, the Advantage Plan would replace the original Medicare as well as the supplement. I would say a majority of the people that we work with choose Medicare part A and B, with basically the original, with a supplement plan. That’s something that with our team, it’s something that we can help you with now. So if you are over 65 and on Medicare and want us to take a look at things, we can certainly do that.

Then this question was submitted. “In determining the best investment tool, what is the best way to determine how it will affect my taxes?” This was just emailed a day ago. Old school says in deferred accounts until retirement but I know some seniors that did such and they’re paying more in taxes. I hear this so often and it’s the old paradigm versus the new paradigm.

The old paradigm was all about defer, defer, defer paying taxes as long as possible. But now moving into 2020, a lot of people are thinking that taxes are going to go up in the future because that’s what the Tax Cuts and Jobs Act says. If you look at the amount of debt we have as a country, coming into 2020, we had $23 trillion worth of debt. With the CARES Act, we had another $2.2 trillion, and then we’re supposed to have another round of the CARES Act. So a lot of experts are thinking that we’re not going to come out of this year with less than $30 trillion worth of debt. So that has to be paid off at some point, what are the choices? Are they going to cut spending? Probably not. So they’re going to potentially raise taxes.

In fact, I saw an article talking about Europe and how a country over there, because of all the debt, they’re raising taxes. So I think people need to rethink this. This brings up what I think the biggest risk right now for retirees. The first one is tax risk, where if you’re sitting there with IRA money or 401(k) money, or 403(b) money, pre-tax dollars, understand if taxes go up the value of those accounts go down. Just like we’re talking about in terms of home ownership, a lot of people like to be debt-free in retirement. Well, guess what? If you own IRA money, if you own 401k money pre-tax, you’re not debt-free. You have a debt you have to pay to the federal government and it’s just a matter of when and how you pay it and if we know that … So think of it kind of like a mortgage, you own a home and it sells for $500,000, but you have a $100,000 mortgage, how much do you really have? 400,000, right?

Similar to your IRAs. If you have $500,000 sitting in your IRA, do you really have $500,000? No, you have to pay tax. Maybe it’s 22% or 24%. Well, guess what? Not only is it a mortgage, but it’s also an adjustable rate mortgage based on where marginal income tax brackets are when you withdraw from those accounts. So, if we know that taxes are going up in the future, then having a tax plan, and this is something that we can help you with … In fact, I was sitting with someone just before this meeting as we were talking about where they’re at and looking at their tax brackets and how much they can pull out of that money, maybe do a Roth conversion before they jump into the next higher tax bracket because right now taxes are going up with Tax Cuts and Jobs Act where right now if you’re at the 22% tax bracket, guess what? In 2025, if not before, that might be the 25% tax bracket.

The reason I say, if not before, is we have the Tax Cuts and Jobs Act that runs to 2025 but if we have a change in presidency, we might not get the full five years of that Tax Cuts and Jobs Act. So taxes could revert back to their pre-Tax Cuts and Jobs Act amount sooner than 2025. So really, it’s a two-step process when we talk about tax planning.

The first thing is, so step one, is to figure out how much. How much to pull out of those pre-tax accounts in any given year. What we’ve been doing is working on … and we’re really right in the middle of this right now with our clients just based on getting near the end of the year, is looking at those tax returns, figuring how much we can pull before we move up to the next tax bracket.

Then the second question, and this really depends just on what are your goals? What do you have in terms of current investments? What legal structures do you have in place? Second, question is what to do with it. So let’s say we do pull $100,000 out of the IRA, pay the tax. Where do we put it? Does it go into a Roth? Does it go into the trust? Do we want it in the market? Do we want it in annuities? Do we want it sitting in CDs? Do you want it sitting in checking and savings? That’s going to be a more in-depth conversation, more individualized, but the first question is how much to convert and the second is what to do with it.

Also, understand that whatever you’re investing inside of your IRA, whether it’s mutual funds, stocks, bonds, equities, you can pay the tax and invest in that same exact thing somewhere else. So this is important, not only for those that have accumulated wealth, which is a lot of retirees, they’re sitting on larger IRAs, but also think about it in terms of if you’re still working, where are you saving money? Are you saving money into tax-deferred accounts that are going to grow tax-free, or tax-deferred, where when you pull that money out, if we are at higher tax time, you’re going to receive less of a benefit? So hopefully that was helpful.

All right, let’s see, with trust in place, we have a death certificate and trust ID, dad’s assets trust no income when preparing for what action is needed to the designated account?” Okay, so there’s a question submitted. “My question, just for your cash account with no interest, my question trust is my dad’s assets were limited in his life.”

So this is getting back up to trust administration. So when someone passes away, we have to pay off any of the final expenses, et cetera, dad’s assets were limited, there was life insurance in cash with no interest. So what you would do is open up an account, make sure those accounts are in the trust. The trust will have no income. So with that, if the trust has no income, then you don’t have to worry about paying any trust taxes. “[inaudible 00:20:10] money was put into the designated account, provide dad’s [inaudible 00:20:13], we [inaudible 00:20:16] account.” Yeah, this might be … Why don’t you just schedule a time by going to that website, and then we can dig into it a little bit more. The question was getting into details of a specific trust administration situation. So yeah, why don’t we … that’d be better off for just a phone call. Let’s talk about it real quick.

That is everything I have in terms of the submitted questions. Thank you. You’re welcome. So if you do have any last questions, please send in via the Q and A. The last question, I’ll take a look at it and I’m clearing out the ones that I answer. Okay, so with that, I want to thank everyone for taking the time to listen to me blabber on about death, taxes. It’s been a pleasure. This is actually the largest number of people we’ve had. Good to see you Elaine, and Joe, and Mary, and Mary, and Pete, and Phil, and RJ, and Tim, and all the other people that I didn’t mention. I really do appreciate these. I’ve gotten a lot of good feedback and we’re going to continue doing these because we used to do weekly workshops, basically weekly workshops, educational workshops, really believe in education and we miss some of that connection, but this is our best option in the virtual world.

So with that, thank you, everyone. Same time next week, same login. If you do have questions, feel free to email those over a contact@castlewealthgroup, email them over. Thank you so much.