Retirement and Legacy Blueprint Webinar – Episode #7

Michigan attorney and advisor Chris Berry of Castle Wealth Group answers questions on estate planning, elder law, retirement planning live. Register at or contact our office at 844-885-4200 or visit us online at

We are seeing clients both in-person and virtually. We have retirement and legacy planning offices in Brighton, Ann Arbor, Bloomfield Hills, Livonia, Novi, and Lansing.

On this week’s webinar, attorney and advisor Chris Berry of answers questions on what happens to tax after 2025, beneficiary designation, and retirement accounts.

In this episode, you’ll learn…

  • Chris’ positive focus for the week
  • How the market performs in the short term during an election
  • What happens to taxes after 2025 and what you can do about it?
  • How stealth taxes work
  • 3 kinds of tax buckets
  • How to get rid of step up and basis and its effect on saved retirement accounts
  • COVID response with the stimulus package
  • Advantages of naming the trust vs naming your children directly as a beneficiary
  • Secure Act
  • Widow’s Penalty
  • Beneficiary designation to pass assets
  • Reverse mortgages concept

Episode Transcript:

Get all of this setup real quick. My name is Chris Berry, of course. And we do these weekly wisdom webinars where I log on and answer questions. Either question that has been submitted ahead of time, or if you have questions as we go. Typically don’t have necessarily a theme other than just kind of what questions come in or if something is really kind of newsworthy. And again, if you do have questions, feel free to go ahead and put those questions into the question and answer section and I’ll go ahead and answer them.

And, always I like to start with a positive focus, just something positive that happened within the last week. And I think my positive focus is that I won’t be getting any more political phone calls and texts and all of that stuff in the mail. So, that’s one nice thing. So hopefully you can see my screen at this point. So obviously the first thing probably should talk about is the election. And we’re not going to get political here, but I was interviewed on a news station out of Lansing the day before asking about if Trump wins or Biden wins, how’s that going to affect the economy?

And so the first thing is just talking about the markets, how do the markets perform? A lot of people have assumptions if one party wins or the other party, what does that mean for the markets in the short term? And what we found is looking at our crystal ball, looking forward, I can’t tell you. But what I can tell you historically is that typically there’s a 6% to 8% bump up a lot of times after an election. And it really doesn’t depend on which side wins. A lot of times we do see an uptick. I think in my research, I want to say it was about 84% of the time the markets went up, regardless of which side wins. That said, presidential elections happen once every four years so I’m not sure if it’s a correlation or causation issue there.

But what I would suggest is that just because one side wins versus the other, there’s not a lot in terms of the markets that should change based on which side wins. There are some things we need to think about for sure. But in terms of investing in the markets, stick with a plan. Maybe now’s the time to revisit that plan, but it’s important to have a plan. So markets, I wouldn’t say the election is the biggest thing with it. Really what I look at is the pandemic and the fact we’ve been on a 12-year bull run. And the fact that in March, we saw that gut-punch of what happens when the markets drop. And then somehow, amazingly enough, we made it back in 119 days, the market’s rebounded. If we have another drop will that happen again? I’m not necessarily sure. So I’m a little concerned and I think the market risk is a big concern for a lot of people right now.

Now, with the election, and this is really the biggest thing coming out of this election that I’m looking at it. And I’ve been touching upon this before, is that I’m concerned with what’s called tax risk. So if taxes go up, what effect will that have on my retirement accounts, on those pre-tax accounts? So if marginal tax rates increase, if they raise taxes, what’s going to happen? Well with taxes, we have a couple of things. So the first thing, and I’ve talked about this before, is we had the Tax Cuts and Jobs Act, and this was passed during the Trump administration. So it passed in 2018. And the way it’s structured is it runs until 2025. And what the Tax Cuts and Jobs Act does is basically across the board lowers marginal income tax rates 3% to 4%. So in 2025, if right now you’re at say the 22% tax bracket, let’s say a married couple making a hundred thousand dollars at 22% tax bracket, understand that when the Tax Cuts and Jobs Act ends, that’s jumping to 25%. Okay.

So, the expectation or we’ve always had this window of opportunity from 2018 to 2025, where we’re doing things like Roth conversions, moving money out of those pre-tax accounts with the understanding that we have at least until 2025. Well, here’s the thing. If Biden wins, then he stated as part of his policy that he plans on repealing the Tax Cuts and Jobs Act. So what that means is, is that that window of opportunity from now till 2025, that window might be closing. And it could close as soon as next year, or depending on how the Senate and everything else goes, maybe it remains in effect a little bit longer. But understand that we have till 2025, but it might be a shorter window of opportunity depending on the results on how everything pans out because Biden has stated that he plans on repealing the Tax Cuts and Jobs Act.

So that’s the first thing. And then the second thing is that if Biden were to win and repeal the Tax Cuts and Jobs Act, then also the estate tax exemption. So we talk about state taxes that tax upon death. Right now it’s at $11 million thanks to the Tax Cuts and Jobs Act. Well, what’s going to happen is it’s going to then drop down to $5 million and not everyone has $5 million or 6 million or falls within that range. But it’s just something to think about is that understand that now more individuals or families will have a state tax issue that they need to take into account.

Here’s a big one and this is part of Biden’s proposal. Sorry, my pen’s being a little squirrely. This is part of Biden’s proposal as he planned as part of his tax plan, plans on getting rid of step-up in basis. Now, this is a little bit confusing and this is what I call a stealth tax. So he’s not necessarily raising taxes, but in effect, it will raise taxes. Kind of like the secure act was a stealth tax where previously they used to be able to stretch out the IRA’s, inherited IRAs over your lifetime and pay the tax, but now you have to pay all the taxes within 10 years.

Similarly, part of Biden’s proposal is to get rid of the step-up in basis. So if that were to happen, well, let me kind of talk about what that is. So let’s say you bought a property or bought something for a hundred thousand dollars. So that’s the basis. You bought it for a hundred thousand dollars and now let’s say a grows to $200,000 over time. Okay. So normally you would have some gains there. And if you were to sell, you might have to pay taxes on those gains, right? And then let’s say you pass away. So this was the value at death, right? And then let’s say your kids sell that investment for say 210,000. And this could be like a cottage, a family farm or something like that or investments. And now they sell for 210,000. So the question is, what are the gains? Or what would be the taxes? What would we potentially do in terms of taxes? Well, right now we have step-up in basis that says that when someone passes away, we don’t use the original basis of what they purchased, they get the step-up value.

So now, if the kids were to sell, we’re only looking at $10,000 worth of gains versus if we were to get rid of the step-up in basis, now we’d have $110,000 worth of gains that would be taxable to the beneficiaries. So getting rid of this step-up in basis, it’s a little bit of a stealth tax. It’s not something that’s official or anything. Heck, even the elections aren’t official yet, but it’s just something that was part of Biden’s tax plan that really jumped out at me.

Now with regards to social security, Biden has talked about additional social security benefits going out. And that’s part of his tax on the wealthy he said is how he’s going to cover that. Trump, interestingly enough, with the deferment of payroll taxes, he’s talked about getting rid of payroll taxes, which I think funds about 90% of social security. So I think either side, we have some questions on what’s going to happen with social security. I think social security’s still going to be there if you’re claiming it now or near the age starts claiming it. But I think the program is going to need some help because even if you look at your statements the last couple of years, it says, unless changes are made, they’re only going to be able to pay out 74 cents on the dollar by 2034.

So I think with both sides, no matter which side wins, there’s going to have to be some questions answered with what are we going to do with social security. My personal feeling is they’re going to push back the full retirement age. Originally when it started, it was 65. Now it’s just 67. So I think they’re going to have to push that back for families. And in fact, I just saw something in the Wall Street Journal today talking about how they’re thinking about pushing back the required minimum distribution age, which used to be 70 and a half. Thanks to the SECURE Act it’s 72. I saw something, a bill proposed to push it back to 75 when you have to start taking out those pre-tax dollars. And I think that’s, the SECURE Act, the pushback the RMD age from 70 half, 72, kind of set the stage for them to put social security back from 66, 67 to maybe 70.

And then next, the COVID response. Both sides are talking about another kind of stimulus package. And the interesting thing for me again is getting back to taxes, is that we entered this year $23 trillion in debt. This was before the pandemic. And then we had the first round of the CARES Act added another $2.2 trillion to the deficit. And with the second stimulus package, whether it’s from Trump or Biden, both of them have talked about it, they’re talking about adding another $1 to $3 trillion. So again, getting back to I think the biggest concern, regardless of which side wins is taxes. Because this nation is going to be about $30 trillion in debt when we come out of 2020. So think about that in terms of your pre-tax accounts, think about where you’re saving money right now if you’re still saving. Should you be over-funding that traditional 401k, or maybe look at other options in terms of where to save that money? So nothing is set in stone with regards to the election. The results are still coming in, but I just wanted to kind of outline what I saw from both sides.

And a question came in, please explain the elimination of step-up in basis when retirement account goes to the heirs. So the question is kind of a clarification on the step-up in basis. You don’t have to worry about step-up in basis when we’re talking about retirement accounts, pre-tax accounts, or 401ks or Roths. Where you have to worry about step-up in basis is in… Think of it like this. There are three kinds of tax buckets that we have. So let me share my screen real quick again. Just a moment.

There we go. All right. So we have three types of tax buckets. So we have what we call taxable accounts. We have tax-deferred and then we have tax-free. So taxable accounts are like your checking, savings, brokerage accounts. Real estate we would put in the taxable bucket, meaning you pay potentially capital gains on this. Okay. And this is where step-up in basis comes into play on those taxable accounts. Okay. Then you have tax-deferred like your traditional IRAs, 401ks 403Bs. You’ve never paid any income tax on it so you don’t have to worry about basis, just whenever you pull the money out, whether you do or your beneficiaries, it’s taxed at ordinary income. So here you have capital gains. Here it’s taxed as ordinary income, and it’s just additional income on top of whatever other income you have. And then this is, of course, a tax-free bucket. And this would be like your Roth IRAs, Roth 401ks, index universal life, cash value life insurance, 529, et cetera.

So the question was, how does getting rid of the step-up in basis, how does that effect say retirement accounts? Here it’s going to have no effect on the IRAs, 401ks, 403Bs. But if taxes do go up in the future, because the Tax Cuts and Jobs Act ends, that’s where they’re really coming after this. We see this with the SECURE Act. They’re coming after these accounts upon death. We see that with the current tax code, where right now we have what we call the widow’s penalty, where marriage filing jointly you have a larger tax bucket to fill up. When one spouse passes away, typically the income remains the same, but now you have a single filing versus a married filing jointly. And that surviving widow, a lot of times pays more tax because of that.

And so getting rid of the step-up in basis, it’s really coming after the checking accounts. Well, you’re not getting much growth on that, but like your brokerage accounts, individual stocks. And really the big thing, and this is what I was explaining on the news program is on real estate where if there’s real estate that’s been in the family for a number of years and now we lose a step-up in basis, selling that farm or that cottage up North, you could get clobbered in terms of taxes. And I’m not trying to be political, I’m just saying that as part of Biden’s proposal, he’s talked about getting rid of the step-up in basis. Which again, it’s like a stealth tax. It’s not raising taxes per se, on your income, but it is an additional tax. So hopefully that was helpful. And again, if you do have any other questions, feel free to put them into the chat. Otherwise, I’ll answer some of the other questions we had. So give me just a moment.

All right. So that’s the election and the economy. If you have any other questions on the kind of the election, please let me know, put it in the question and answer. All right. So the next question. Some people say to name the trust as a beneficiary, some name the children outright. Which should I do? I’m going to give you the legal answer. It depends. Because It depends on what type of trust you have. Now, a majority of the trusts that we draft, so let me say this. And I had this conversation with a client today. If you’re relying on beneficiary designations to pass assets, like you just named your kids as beneficiaries, then you’re basically launching a pillowcase of money at them. And that could be a problem for one or two reasons. One, it could be their own poor financial mismanagement. So if you have any beneficiaries or children that maybe can’t necessarily manage money, or maybe are minors, you don’t want it to go outright with them. Instead, you want to have a trust set up and maybe someone else manages it.

But the second issue why you might not want to rely on beneficiary designations, or, I see a lot of trusts that say outright distributions, which I’m not really a huge fan of, is because while we might trust our children to make good decisions, a lot of my clients don’t necessarily trust the outside environment. What happens if you pass away, you’ve set an outright distribution to your child, and then they get a divorce? Half that money might be lost in that divorce. Or what happens if they inherit this money and they pass away? All that money might go to a spouse who might remarry, versus going down to your grandkids. Right? So in our trusts, and this is not all trusts, a lot of the revocable trusts that we review to say outright distributions.

And so if you already have a current trust and you want us to take a look at it and we didn’t draft it, we can do what we call an estate planning audit, which is we go through about 10 different items. And one of those is we look at the distribution pattern. Is it this pillowcase of the money approach? Or a lot of times what we do, and we call this legacy inheritance trust provisions, so LIT, is we leave it to our beneficiaries so it’s held in trust. And they could even be the trustee of their own trust. But by doing this, saying that instead of it going outright, it’s held in trust for their benefit where they can decide how it’s invested. They can receive the income so it’s not taxed any differently. But what we’re doing is we’re giving our beneficiaries the opportunity so whatever they inherit from you are protected from creditors, protected from divorce and the money stays in the bloodline. So that’s a big advantage for naming the trust as the beneficiary.

Now, why do you hear conflicting advice on this? One, sometimes people don’t like doing the additional paperwork of naming a trust as a beneficiary. Some other financial advisors pushback on it because they don’t necessarily understand trusts and how they work. They don’t understand it from a tax perspective. How, as long as you have the income coming out of the trust, it’s taxed at personal income tax rates. So the way I view it is really, there’s no downside of naming the trust as a beneficiary. There are only advantages. And the advantages, depending on how the trust is set up, if it does have this legacy inheritance trust provision, it can protect against creditors, divorce, and make sure the money stays in the bloodline.

So while I say it depends on whether you should name the trust or children, if we’re the ones to set up the trust and we built in this legacy inheritance trust provisions inside of the trust, it’s a no-brainer to name the trust as a beneficiary. The only downside is maybe you have to fill out a little more paperwork and that’s something if you’re our client, we’re going to help you and advise you on how to do that. So in our office, we always named trust.

Another point of confusion is sometimes I hear people say, even advisors, even attorneys sometimes say that “Well if you name the trust with retirement accounts, you can’t stretch it out.” Well, with the SECURE Act, at most, even if you named the kids as a beneficiary, you can only stretch out those taxes up to 10 years. Same with trust. If the trust is set up properly, we can still stretch it the full 10 years. So again, there really isn’t much of a downside of naming the trust as a beneficiary, other than some additional paperwork.

So that is question two. Let me see if any questions came in. See what if I do a reverse mortgage, how does that affect my taxes? If you do a reverse mortgage, and I don’t see a lot of reverse mortgages, but if you were to do a reverse mortgage, I don’t think that would be income and I don’t think that would have any effect on your taxes. That’s just off the top of my head. And again, if you want to dive deeper on any of this, always feel free to just book some time on my calendar and I’ll put it into the chat. Just go to and we can talk more about it. But yeah, I don’t think a reverse mortgage off top of my head would have any effect on your taxes.

IRS requirement differences. Yeah. So the comment is what about the IRS? So yeah, I guess, and I was kind of lumping that in with the paperwork. If you do name the trust as a beneficiary, upon death you have to get a trust ID number, which isn’t that big of a deal. You can go online and get it from the IRS directly. For our clients of course, we’ll get them. And then you have to get a certificate of trust. But again, I just kind of lumped that all in, in terms of the paperwork. There aren’t any additional taxes if the trust is set up properly, because all of the income would be shot out of the trust. So yeah, maybe you have to do an extra tax return in a K-1.

But again, I think the asset protection for the beneficiaries far outweighs any additional paperwork. And then also the way that we typically set up the trust is that if the kids inherit it and it’s held in trust and they want to take it out and just be done with it, they certainly can do it. So that’s why I say it’s an opportunity to receive this money So it’s protected. And again, as I said, I don’t think there’s much of a downside assuming that the trust is set up in such a way to offer that asset protection.

So then again, if you do have any more questions, put them into the chat. Otherwise, I have one last question to answer. So let me go ahead and hop back into the whiteboard. All right. So the last question here is with regards to again, taxes. As I said, taxes, the big three risks I think right now for people are, first of all, I think the biggest right now is tax risk. Not just because of the election and if Biden gets in, I was saying this before because of the Tax Cuts and Jobs Act, the SECURE Act, and our deficit. The second biggest thing is market risk and the third is long-term care. And not necessarily in that order. But this last question again gets to this issue of taxes. So, I’m under 59 and a half. If I have money inside of a 401k or IRA and I move it to Roth, is there any penalty? There isn’t a penalty, but you would have to pay the tax. So if you just withdrew that money, then you would pay a penalty. Depending on your situation, a 10% penalty.

But if you’re doing a Roth conversion, and in fact you can do what’s called backdoor Roth, where if your income is too high, where normally you couldn’t contribute to a Roth, you can put it into your 401k or IRA and then do a Roth conversion. And again, what this is getting to is the idea that if taxes go up on these pre-tax accounts, so if taxes go up, proportionally, your value is going down. So the idea is to move money from tax-deferred to maybe tax-free, or the very least taxable. And that could be Roth conversions, that could be looking at IUL, which is cash value life insurance. And really this gets to the order of money. Which I think is important to understand, because this can affect how you’re saving as well as if you are retired, moving money between these different buckets.

So the best type of money is free money. So you might be asking, well, what is free money? Well, free money is if you’re working, your employer match. You always want to take the free money. That’s a no-brainer. So if your employer offers a match, always take the free money. Second best type of money, if you agree with me that taxes are going up is money that grows tax-free. And again, what’s this? This is like your Roth, your 529s is your HSAs is your IULs. Okay. The money here grows tax-free. The third best type of money, taxable. And again, this is where step-up and basis comes into play. So this is on real estate, this is on brokerage accounts, CDs, checking, savings. Not that they earn much, but any post-tax savings.

And then the fourth type of money is tax deferred. And again, if you think taxes are going up, then that’s not what you want. This is what IRAs, 401ks. So if you’re working, think about where you’re saving your money. The old school way is to put everything into these tax-deferred accounts, defer, defer, defer paying taxes as long as possible. Well, what happens is then people come in and they see me and around retirement age, and they’re like, “Chris, I’m looking at paying more tax now than I was while I was working.” Because you have to pull money out of here and it’s taxed at ordinary income tax rates, which right now max out at 37%, but most people think these are going to go up. And then what about taxable accounts? These max out at capital gains, which are 20%. And again, if we lose that step-up in basis, we’re going to see a lot more attacks upon death on these taxable accounts.

And then tax-free of course is zero. There’s zero tax. It’s already been taxed. So, younger than 59 and a half. You have money. You’re still working. Think about where you’re saving that money. And then also consider Roth conversions, which you can do without penalty, even if you’re younger than 59 and a half.

So that’s all the questions I had. If you do have any more questions, put it into the question and answer real quick. Otherwise, and I’m not seeing anything come in. Otherwise, it’s been a pleasure. I’m glad the world didn’t end last night with the election. Of course, we’re still kind of watching everything and don’t necessarily know how long it’s going to take for us to get a clear defined winner. But once that happens, we’ll certainly kind of dive deeper into each side, or the winning sides proposals moving forward to see which direction everything’s going. So with that, thank you so much. Make it a great week. Take care.

Castle Wealth Group Legal in Media

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