Retirement and Legacy Blueprint Webinar – Episode #9

Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1pm 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 answers questions regarding the five-year rule with the ROTH, the inherent problems of gifting money, and the relevance of the power of attorney with the personal care plan.

In this episode, you’ll learn…

  • Chris’ positive focus for the week
  • The Five-year rule with the ROTH
  • Tax-free money after moving money from the Roth
  • How to take advantage of the financial power of attorney?
  • The immediate financial power of attorney versus a springing financial power of attorney
  • What is the medical power of attorney?
  • The relevance of the power of attorney with the personal care plan
  • Should I convert money to ROTH?
  • The value of knowing the tax brackets
  • The inherent problems of gifting money
  • Lowering your RMD in 2022
  • Why the government wants you to defer tax payments
  • Why using non-IRA funds is the ideal way of handling Roth conversions

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Episode Transcript:

My name is Chris Berry, certified elder law attorney investment advisor representative with Castle Wealth Group. And we do these every week. We call these wisdom webinars where we have individuals submit questions either via email ahead of time or you can actually log on and ask a question right here on the webinar and I’ll take a shot at answering it. And also if something is unclear or you want clarification, feel free to put that into the question and answer section. And we do have four questions that were already submitted this week. So I will get into those. But before I do, I always like to start with a positive focus, something positive that happened this past week, especially with everything going on in terms of 2020, it’s important to focus on the positive things.

And so this past week, my little daughter, Madison ended up not being a seven year old anymore. And now she’s an eight year old. She had her eighth birthday and obviously with the social distancing and everything, normally we do a big party, invite all of our family and friends, that wasn’t possible. So we had a drive by birthday party where I think there’s about 15 cars lined up at a specific time. We had a big sign saying happy birthday outside. And we surprised her with that. And so they dropped off presents and stuff. So it worked out well. She was pretty darn excited. So my positive focus is my daughter’s eighth birthday. And even though we’re in a shutdown pandemic type world, her family and friends were still able to celebrate with her. And I guess my unpositive focus is she’s getting into American Girl dolls, which are crazy. I thought she’d get past that phase, but nope, she got a lot of American Girl doll stuff.

So what I’ll do now is share my screen and we’ll get into these questions. And if you want to see how this information applies ever to your situation, feel free to book some time on my calendar and you can go to and I’ll write that out for you. But let me go ahead and share my screen real quick. And with magic of technology we’re good. All right, so the questions, and again, this is individual advice, or this is general advice. If you want to see how this applies to you, I would recommend that we talk about it before you take action. You can always book some time by going to and we can chat about any of the ideas that I’m going to go over today. So the first thing is a question that came up last week that I kind of muddled the answer a little bit.

So the issue is when you’re doing a Roth conversion, there’s this five-year rule with the Roth and there’s confusion over what that five-year rule is. And the idea is that the money that you convert over to Roth needs to stay there, or you need not to touch it for five years to take advantage of the tax-free growth. Now there’s a second piece of it. So really there there’s two five-year rules with a Roth. And again, this typically doesn’t become an issue because Roths are typically the last of the money that you would want to touch because it’s growing in a tax-free environment, but there’s two rules. One is, and a lot of people confuse this, there’s what’s called a Roth contribution. So that is while you’re working, you’re contributing to a Roth and that’s based on your income, whether you can or cannot, and you can contribute anywhere from 6,000 to $7,000 to a Roth.

Now, when you’re doing a Roth conversion, the way the five-year rule works is as soon as you open that Roth, so as soon as that Roth IRA is open, that starts the five-year rule. So if you open a Roth and move money in in year one, and then you move more money in in year four, the five-year rule started when you originally opened up the Roth and moved the money in that first time. And so once you’ve made it five years, you can take the money out of there and it’s tax-free if you wanted to. Now compare that to a Roth conversion. A lot of people confuse these big picture, but then when we’re getting into the details of the five year rule, it really becomes a jumbled. So a Roth conversion, what you’re doing is you’re taking money from a pretax account, like an IRA, and then you’re moving it over into a Roth, and now it can grow tax free.

But what you have to do is you have to pay the tax. And the five-year rule on a conversion happens each time there’s a conversion. So think of it as there’s multiple five-year rules or five year time horizons, based on every time you do a conversion. Now again, we’re getting in the weeds on this, and it’s a little detail that really doesn’t come into play very often. Because again, if we’re looking at tax buckets and where do you think taxes are going in the future, we have tax free, tax deferred, and taxable. And so tax deferred, or like your IRAs, 401ks, 403Bs, your tax-free Roths, cash value, life insurance, et cetera. If you think taxes are going up, then you probably should prioritize spending down your tax deferred money first, second your taxable, and last your tax free money, because we want this tax free money to take advantage of this tax free growth.

So again, little detail. I wasn’t very clear on it because I was confusing these two rules, but again, it’s something that doesn’t typically come up because more often than not, we’re going to leave that money growing in that tax-free Roth. So that’s the five-year rule. I just wanted to clarify that from last week. And let me see if I have any questions, let me hop out. Any questions? No, again, and if you do have a question, feel free to go ahead and put that into the question and answer. And then with that, I’ll get into the next question that I had.

And so the next question was submitted ahead of time and we should see it. Okay, good. So what is the difference between a durable and general power of attorney? Well in reality, there’s no difference between these two things. So really at the end of the day, when we’re talking about disability documents, we recommend three different things. We have a financial power of attorney, a medical power of attorney, and then what we call a personal care plan, which gives instructions to the financial and medical power of attorney on how best to care for someone if they were to need long-term care. But the two biggies are that financial and medical power of attorney. Now a financial power of attorney, we call it a financial power of attorney. You might also hear it called a durable power of attorney and the word durable means that it’s effective even if the person’s incapacitated.

So every financial power of attorney we do is a durable financial power of attorney. And then also it’s a general power of attorney because we list out all the different things that that individual can do if you were to get a knock on your head versus a limited power of attorney. A limited power of attorney would be limited to one specific transaction. So sometimes if you were closing on a house and you weren’t able to be there in person, you might appoint someone as a limited power of attorney where they can handle that limited transaction. But really what we’re doing in our office when we’re doing a financial power of attorney, when we’re setting up an estate plan, we’re creating your rule book, we’re doing a general durable power of attorney that is general.

It gives the authority do all these different things on behalf of the person from a financial standpoint, and it’s a durable meaning if the person’s incapacitated, they still have that authority. It’s not revoked due to incapacity. Now there is an interesting question between what’s called an immediate financial power of attorney versus a springing financial power of attorney. So springing versus immediate, we do mostly immediate financial powers of attorney where the person you’ve appointed has the authority to make these decisions for you. And typically it’s the spouse first, and then kids, if you have kids. But also there might be what’s called a springing power of attorney.

The problem with a springing power of attorney, is it for it to be effective, you need to have like two licensed physicians, two doctors signing off to say that someone’s incapacitated. So that’s the first problem is trying to wrangle two doctors together to make a determination like that, that can slow down the process. The second big issue is that we don’t go from healthy to completely incapacitated. A lot of times we go through a slow gradual decline where someone might not be completely incapacitated or have Alzheimer’s dementia, where they don’t recognize someone, but they might just get to the point where as they age, they don’t want to have to worry about paying the bills or things like that.

And that’s where that springing power of attorney ends up failing. And so for that reason, a lot of times we’re doing an immediate financial power of attorney. So again, general durable power of attorney really those are the same thing, we’re all referring to what’s called a financial power of attorney. Someone to give you legal authority to make decisions. And then a medical power of attorney you might hear let’s called different things. Healthcare proxy. In Michigan, the technical term is a patient advocate designation. You might hear it called a living will, advanced directives. Really these are all the same thing all referring to this medical power of attorney, a document, appointing someone to make medical decisions. Now what a medical power of attorney is not, it’s not a DNR, so it’s not a DNR. And a DNR is a do not resuscitate. And what that says is that EMS or MT comes and because I have a heart attack, they’re not going to resuscitate me if they see the DNR, that’s not what most people want. Unless they were staying in assisted living or a nursing home or dealing with other issues.

Typically we don’t want a DNR. Instead, we want a medical power of attorney that has end of life decision-making in it. And then third thing is a personal care plan. In a personal care plan, if the medical power of attorney gives the guidance with regards to end of life decision-making, the personal care plan gives a direction with regards to long-term care planning, like do want to be kept at home as long as possible, certain books or music you like to listen to, certain foods you like or don’t like, certain religious preferences and things like that. So we think that’s a good addition to the financial and medical power of attorney and collectively, we call these three things together disability documents. And really this is your rule book if you were to get a knock on your head, if you were to be incapacitated, if you have a stroke or diagnosed with dementia, these documents are key in that situation.

So let me hop out real quick. See what questions we have here. All right, do you advise persons who have to withdraw from IRA at 70 and a half to put money into a Roth conversion? So the question is, should someone who’s already taking required minimum distributions, which thanks to the secure act, is now age 72. So you have to take out your RMDs. Should they convert money into a Roth? That’s an individual answer. I’m more than happy to run the numbers and go over it in more detail, feel free to just book some time with me, and we can go over your personal situation. But really at the most basic level, the conversation goes like this. Do you think taxes are going to go up or down in the future? And if you think taxes are going to go up, and I can give you a variety of reasons why I think taxes will go up.

In fact, they’re slated to go up as soon as late as 2025, if not sooner, thanks to the tax cuts and jobs act. So if you think taxes are going up in the future, then I would rather pay the tax sooner rather than later, I’d rather be taxed on the seed versus the harvest. So that goes for if you’re working right now, where are you saving money? Maybe you shouldn’t overfund that traditional 401k. If you’re already retired and taking out RMDs, maybe you should take out more than the RMD, pay the tax, and now put it into something that can grow tax free either for the rest of your retirement or what you leave to the next generation. So big picture, I would advise taking a look at that no matter what your age is. There really is no downside. If you think taxes are going up in the future, then looking at doing it in an intelligent manner.

Now I’m not saying liquidate the whole IRA or 401k all in one year, but what we’ve been doing the last couple months is looking at these different tax brackets, seeing how much space is in the tax bracket, and then doing a conversion based on that, or moving money from the tax deferred account to the taxable or from the tax deferred account to the tax free. So yes, I would recommend even if you’re over 72 to consider getting the rest of your retirement more tax efficient, plus what you leave to the next generation. So thank you for that question. So we talked about powers of attorney. Number three, so my 97 year old mom transferred assets five and a half years ago, basically she gifted it to the kids or one of the children as a way to remove the money from her estate, I’m guessing, are there gifting issues? What money should be used to pay for her care now she’s in assisted living?

So the interesting thing is, is the money was gifted away five and a half years ago. So that’s important because of Medicaid has a five-year lookback period. And I’m not necessarily a big fan of gifting because there’s some inherent problems with that. Technically a gift tax form probably should have been filled out. If you give to a son or daughter and they go through a divorce, lawsuit, creditor action, bankruptcy, long-term care, then that money could be potentially lost. If there’s a falling out, that money could be lost, you’ve given up control. So a lot of times to take advantage of this five-year lookback period, we don’t look at gifts, but we look at special types of trusts, like a castle trust where we can move the money into the trust and then once we make it five years, everything inside of the trust would be protected and you could be in control.

So I know in this case, we can’t go back in time, but because mom gifted that money five and a half years ago, that money is free and clear from Medicaid. So if she were to go into a nursing home, then everything she gifted would be protected from that nursing home or Medicaid spend out. So if we’re looking at paying for her care now, I would not use the money that’s already been gifted because that money is protected from the Medicaid spend down. Now going back in time, I probably wouldn’t have done a gift, I would have put it into a trust to protect it, but we can’t go back in time. So it’s already gifted. We can’t undo that.

But the nice thing is that it is now protected from that nursing home or Medicaid spend down. So I would use mom’s current money, money that’s in mom’s name now, to pay for her care because that money is not protected. Now are there any gifting issues? If you do gifts more than, this year, it’s $15,000, you do have to fill out a gift tax form, but you can cut into your lifetime gift tax exclusion amount, which is tied to the estate tax. And it’s called a unified credit where your estate tax exemption is the same as your gift tax exemption. And right now the gift tax exemption or the estate tax exemption, your lifetime estate tax exemption is $11 million for an individual. And so is the gift tax exclusion. So if you were to gift $100,000 now, there’d still be zero tax, all you’d have to do is fill out that gift tax form to notify the government that you’re cutting into your lifetime gift tax exclusion amount.

Now the interesting thing, not that this is a question, but I was talking to a client this morning. They have about $12 million in assets, tough problem to have, but they have an estate tax issue. So the interesting thing is that this $11 million exemption is set to become, when the tax cuts and jobs act ends, about 5 million. So they’re really going to have an estate tax issue. But what they could do is they could gift a portion of this to a trust and remove it from their estate now and when the estate tax exemption drops down to 5 million, the IRS has said that for gifting purposes, we could still use that $11 million gift tax exclusion if we gift it now. So kind of off topic, but it was just an interesting little planning point that if you were to make gifts now to remove money from your estate, if you set it up correctly, even if the estate tax exemption and the unified credit drops in the future, you’ll be grandfathered in. The IRS actually gave us a private letter ruling on that.

So getting back to the original question, are there really any gifting issues? Probably your mom should have filed a gift tax return five and a half years ago notifying the IRS that she’s cutting into the exemption. But if she’s not going to have a taxable estate at the end of the day, probably not that big of a deal because in the end, she still would have owed zero taxes. You might have a gifting issue if you were to give that money back to mom, but if it’s less than $15,000, or if you’re married, $30,000 per year, you don’t even have to worry about it. So that’s the gifting issue. Let me see if there’s any questions. No, all right.

Now the last question came in right before the call. So they’re talking about lowering your RMD in 2022. So your required minimum distribution, once you turn 72, and they’ve even talked about pushing it back to 75, but right now with the secure act, once you turn 72, you have to pull money out of your IRA accounts. Prior to the secure act, when you turn 70 and a half, you had to pull out about 3.65%, and that percentage goes up each year. So you have to pull more and more out of the account.

So they’ve talked about stretching out or lowering the required minimum distributions. And the email that came in was adding conflicts with my idea that the government has to pay these taxes or they’re looking for more money. In fact, no. And I’ve talked about this before. The government actually wants you to defer paying taxes as long as possible, but they also need the money sooner rather than later. So there’s a little bit of this conflict where if we look at the secure act, which is a stealth tax, they’re saying they want more tax now. So when you pass away and you leave it to the beneficiaries, instead of them stretching out the taxes, they have to pay all the tax within 10 years. And then we also have what we call the widow’s tax, where when you’re married, you have married filing jointly. But then when one spouse passes, you have a single filing and now probably the same amount of income need, but now a smaller tax bracket.

But in reality, the government wants you to defer paying taxes. It’s in the government’s best interest. So they really don’t want you pulling money out of these IRAs and paying the tax. And let me demonstrate this for you. And I’ve talked about this before, so I’m sorry for repeating myself, but it is an interesting exercise. So let’s assume just for argument’s sake, we have $100,000 in an IRA. And let’s assume we look at doing maybe a Roth conversion or put it into something that grows tax-free and let’s assume, just to keep the math the same, we have a 20% tax. And so if we were to do that, then sitting in the Roth, we would have $80,000.

Everyone with me on that. So we have a hundred thousand dollars, we pay the tax, 20% of 100,000 would be 80,000. Now here’s the thing, let’s assume it’s invested in the same exact thing. So both of them are invested in XYZ mutual funds. And what that means is let’s say it goes up 10%. So XYZ mutual fund goes up 10%. And so 10% of 100 is $10,000. 10% of 80 is $8,000. So now we’re sitting at 110,000 and we’re sitting at 88,000. So now let’s assume now we have to pay the tax. So we have to subtract our 20%. And so what would that number be? That would be $22,000. And so at the end of the day, what are we left with? $88,000. So this, first of all, some important takeaways with that. First, having pretax dollars, that bigger pre-tax number, it really doesn’t matter because a lot of people think, “Well, if I’m growing $100,000 I’m getting compounding interest and that type of thing.”

If we look at it, no, you’re not. It’s the same exact thing where if taxes remain the same, your money at the end of the day is going to remain the same, whether you convert or not. So pre-tax really, if taxes don’t go up, is the same thing after taxes Roth, even if there’s growth, because we saw the growth, both accounts go up 10%, but here’s the thing. What are you really doing? By deferring and allowing the money to grow? You’re growing a bigger tax bill. If you convert right away and it’s at $20,000, you’re paying a $20,000 tax. If you allow it to grow, you’re paying a $22,000 tax. So by them pushing back required minimum distributions, or allowing less money to come out of the IRA for the longterm benefit of the government, it benefits the government for you to defer paying tax.

And that’s why it’s been beaten into our head defer, defer, defer, because what are you doing? You’re growing a bigger tax bill. That’s all you’re doing. You’re not putting more money in your pocket. You’re growing a tax bill. And this is assuming taxes remain exactly the same. What happens if after taxes grow, now taxes go up 10% more. Well now you’re going to have to pay even more tax than if you were to do it previously. So it would be 30% of whatever, 110 is. And I can’t do that math in my head. So no, I don’t think them pushing back RMDs or lowering them out of RMD money coming out is saying that the government is in a better position. It’s saying that they want to grow a bigger tax base. So it makes sense for them to do things like that. And the reason why the secure act is so worrisome is that they’re calling the taxes sooner on the beneficiaries.

So on one hand, they’re stretching it out saying, “Defer, defer, defer,” while you’re alive, because they want a bigger tax bill on the back end when you pass away. And the kids are going to be less upset about that because they’re looking at it, “Hey, I got this money and,” if now they have to pay tax on it, they’re like, “Oh, well at least I got it. So they want you to defer paying taxes because you grow a bigger tax bill that way. And if you want to see how this applies to you, I can run the numbers for you to show this. But this is a lot of the conversations we’re having with people right now because we’re near the end of the year, we have the tax cuts and jobs act, this window of opportunity where we know taxes are going up in the future.

Plus we’re $30 trillion in debt. We just had the secure act. So again, taxes are, I think, one of the biggest risks and one of the biggest opportunities right now, whether we do Roth conversions or moving the money into the asset protection trust, there’s different things that we can look at doing. So with that, that’s all the questions that I had. If there are any last questions, feel free to put them in the question and answer. Here’s one, if you use non IRA funds to pay conversion taxes, you win the game. Yeah, so the comment is, if we’re doing a Roth conversion, there’s two ways to do it. One is let’s say you have $100,000, you move $100,000 from the traditional IRA to the Roth. And now you have $100,000 sitting tax free.

But at the end of the day, you’re going to have to pay the tax. So if the tax was say $20,000, we would use taxable money, so money sitting in checking and savings, ideally, to get the most over into the Roth. So at the end of the day, we’ll take $20,000 from your checking savings to pay the tax. Now we have $100,000 tax free. That’s the best way to get the most money over to that tax free bucket. That’s not the only way. We could also withhold that money. So instead of taking $100,000 pre-tax, moving $100,000 tax-free, we could have $100,000 pretax pay the tax, and now we could have $80,000 tax free. So if we’re really trying to maximize the Roth, then we want to use non tax deferred, we want to use taxable money to pay the tax. But sometimes people don’t have that $20,000 sitting in cash to be able to pay the tax still moving money even if you can’t use taxable money getting $80,000 tax-free is still a good situation.

So I appreciate that comment. You’re right. Using non IRA funds is the ideal way to handle doing those Roth conversions. Just unfortunately, people don’t always have the money sitting there available to do that. Any other questions? Okay, and again, if you want to see how this applies to you, you want to see how this works from a tax perspective, feel free to go to and we can book some time. If a 90 year old mom depleted her to funds and the kids now need to support mom in assisted living, should they give the money back to mom? And is that a reportable gift or should they pay the facility directly? So this was a continuation. So let’s say mom depletes all of her funds, should the kids give mom back the money or should they pay the facility directly?

Either way, technically it’s a gift. I would probably just pay the facility directly. If we were within the five-year timeframe, my answer would be different because I want that money to touch mom again. But I would just skip going back to mom and just pay the facility directly in that situation. All right, any other last questions? All right, so with that, I want to thank everyone and we will have another call next week at the same time. We will not on the 23rd and 30th. So we’re going to have one more wisdom webinar this year, and then we’ll be starting up again in January, on January sixth. So make sure you get any questions you have in, I’ll make it a good one before the holidays. And with that, hope everyone has a great week. If you have any questions, we’re here for you. So make it a great week. Take care, bye-bye.

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