Castle Wealth Group

July 18, 2021

Why Is Long-Term Care Insurance a Good Investment Better Than FIA or IUL? |Weekly Wednesday Wisdom Webinars

Certified Elder Law Attorney and Financial Advisor Chris Berry of Castle Wealth Group answers retirement and estate planning questions every Wednesday at 1pm.

Want to join our live webinar? go to www.wisdomwebinar.com to register or give our office a call at 844-885-4200.

Want to book a 15-minute call with Chris Berry? Register at 15chris.com to book a schedule in his calendar.

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 the below questions.

• If an IRA is inherited by an estate or trust (according to Suze Orman in the Costco Connection) if the deceased was not taking RMD’s, the account must be fully withdrawn if 5 years. If the deceased was taking RMD’s withdrawals can continue to be made using tge RMD method. Is that right? Who’s age do they use in calculating the RMD?
• Husband’s IRA goes to me(wife) upon death. If I am gone then it goes to the trust which is supposed to go to the kids. So ten years to them or five?
• Any indication that RMD’s will be waived this year?
• Can you take your RMD from your spouse’s account? I know that you can take RMD’s from one of your accounts to cover all your other accounts that require a withdrawal.
• Husband is retiring next March, I assume that any Roth contribution would be limited to his income for 2022
• Why is long-term care insurance a good investment better than FIA or IUL?
• Can you have them withhold the taxes out of the IRAs? So that you would have the money withheld when you do your tax return.

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Episode Transcript

All right, we’ll go ahead and get started. hope everyone had a great week my name’s of course Chris Berry. If even been on one of these weekly wisdom webinars. we do these weekly every Wednesday at one o’clock then they end up getting recorded. and I have a bird knocking at my window behind me. He’s very excited for the webinar apparently. So if you do have a question feel free to put that into the question and answer section. I have some questions already submitted ahead of time. So I’m going to make sure to go through those first. Someone okay someone did just put in another question cool and with that, we’ll go ahead and get started. And while I do this we always start with something positive that happens. I call it a positive focus we start all of our dinners and team meetings with something positive. And for me, my positive focus is that my son Ryan who’s 10 grand something is away at boy scout camp for the first time. So he’s gonna be gone for six days without mom or dad or grandma or grandpa. With a bunch of boy scouts. So it’s pretty exciting he’s gonna come back Saturday. So with that let’s go ahead and get started. All right so the first question. If an IRA is inherited by and again if you have questions this is really for you. There are no prepared slides or anything or PowerPoint it’s really just asking or answering your legal financial and tax planning questions. And if you want to see how this applies to your situation always make sure to schedule a time to chat with me. So if an IRS is inherited by an estate or trust according to Susie Orman in a Costco connection if the deceased was not taking RMDs. The account must be fully withdrawn which should be in five years. If the deceased was taking RMDs withdrawals can continue made using the RMD method is that right. What whose age should they use in calculating the RMDs well here’s what happens. So really this is 10 years typically and this is the big thing. Here is an understanding of the Secure act. 

So the secure act passed in 2020 and it does a couple of things and you might be asking what is an RMD a required minimum distribution. So prior to the secure act you had to start taking out your required minimum distributions at age 70 and a half and what the secure act did is pushed it back to age 72. Now what happens when you pass away with pre-tax IRA money is that all the taxes because you’ve never paid income tax on it. All the taxes do not have to be paid right away. Like if mom passes away and there’s a million-dollar IRA. The kid doesn’t have to pay all of the tax right away. They could stretch it out over their lifetime and they would use the beneficiary’s age to determine what the RMD was because understand that when you inherit an IRA no matter what your age is. You had to take out RMDs prior to the secure act now the younger you are the lower that RMD might be. So at age 70 and a half, it used to be to take out 3.65 well if you inherited an IRA and you’re forced to take out RMDs. And let’s say you’re age 20 your RMD might be one percent. So we used to do a lot of stretch IRA trusts and stretch IRAs where we could leave this money to grandkids where the RMD might be one percent. But if the accounts earning three four five six seven eight percent. It’s almost creating this perpetual kind of income stream for the kids well the secure act did away with all that and now regardless of your age when you inherit an IRA the RMDs have to or the required minimum distribution.

So the taxes basically have to be paid within 10 years okay. Now if it’s left to a trust or to a non let me rephrase that if it’s less left to a poorly drafted trust or to someone other than an individual then we get to five years. But with the Secure act it’s really a 10-year distribution and there are some strategies with regards to like spouses. But regardless no matter what all the taxes have to be paid within 10 years. When we leave it to someone other than a spouse we don’t really have any choice. So this whose age do they use in the calculation really doesn’t matter it’s just all the taxes have to be paid within 10 years. So it’s not based on age or anything it’s regardless of age all the taxes have to be paid within 10 years unless it’s left to a spouse or there’s a couple of other exceptions. So hopefully that’s helpful and please don’t just blindly follow any advice general advice. It’s always kind of the details are what is important. Let’s see a couple of questions came in does the IRS accept or challenge backdoor IRAs. If done properly typically no but they’re a little bit tricky. So you have to make sure that you do them correctly I assume that’s we’re talking about Roth IRA. Meaning back to our traditional contribution from Roth conversion no to deduction of taxable income.

So I’ll just kind of jump ahead so the concept here is what’s called a backdoor Roth and so just kind of basics the Roth this money grows tax-free. So especially if you think taxes going up in the future you want things that are in the tax-free bucket things like Roth also cash value life insurance or IUL 529s HSAs and these are kind of your tax-free income sources but we’re talking about a backdoor Roth. So the thing with the Roth is that there are contribution limits based on your income. So if you make too much money you might not be able to contribute to a Roth that’s why a lot of people would look to actually iul kind of the nickname for this is rich man’s Roth because again it’s a there is no income test for the IULbut there is kind of a tricky strategy. Where you contribute money to like a 401k or IRA typically an IRA. And then what you would do is then do a Roth conversion kind of in that same year.So it’s allowable it’s a little bit tricky uh but yeah the IRS does allow what’s called backdoor Roth IRA. So if you’re are over on income and normally you wouldn’t be able to do a Roth contribution you might be able to do a Roth conversion using that backboard raw strategy. 

So I answered that question so husband’s IRA goes to my wife upon death if I am gone then it goes to the trust which is supposed to go to the kids. So oh so ten years to them or five yeah so any of our trust the question is if we leave it to a beneficiary or a trust would we get ten or five years for the stretch. And if it’s one of our trusts or a trust that’s well-drafted you’ll get the 10 years because the trust will qualify still as a designated beneficiary. So really for any of our clients, the kids will get a 10-year stretch whether we leave it to this trust or to the individual beneficiary all right let me just see. All right saying what other questions all right any indication that RMDs will be waived this year no so what happened last year is even if you’re over 72 you didn’t have to take an RMD because the cares act waived that for last year with all the craziness. That was going on there really hasn’t been any inclination or indication that they would waive RMDs and to be honest depending on your situation and me just generalizing I go the other way because almost everyone agrees that taxes are going up in the future. 

So I wouldn’t take an RMD like last year I’d advise clients not to take their RMD but instead do a Roth conversion. So the thing with the RMD is the RMD has to go into a taxable account but now you’re taxed on capital gains but if you do a Roth conversion move the money from the IRA to the Roth then now this money can grow tax-free. And if you think taxes are going up in the future you need to understand we have these tax buckets so taxable tax-deferred and this is where your IRAs are and tax-free. So RMDs force you to take the money and put it in the taxable account even better would be to try to do a Roth conversion and put the money into the tax-free bucket. So if you’re taking out RMDs now what you’d want to do if you want to get more money into the tax-free bucket is figure out where you’re at in terms of the tax brackets and figure out how much additional on top of your RMD you would want to convert. So this would be like a Roth conversion here well this is your RMD. So again we want to if you think taxes are going up in the future you want to get as much as you can over here or even to the estate and income-tax-free depending on the size of your state because Roth is tax-free. But it’s not a state tax free cash value life insurance if it’s in an islet is the state and income tax-free.

So getting back to the initial question uh no. There hasn’t been any indication that they’re going to waive RMDs this year that could change but as of right now no indication. There a lot of RMD questions can you take RMD’s requirement of distributions for your spouse’s account. So let’s say we have a husband and we have a wife and let’s say there’s a million IRA money here and let’s say 1.5 million in the whites right and you’re both over 72 can. And lets I’m just making up numbers but let’s say the RMD together is 60 thousand. So we have to take sixty thousand between the two of you out of the RMDs and again I’m screwing up the math as I’m doing this on the fly. But let’s say thirty-five thousand of it would be having to come from the wife and 25 is my math right that should yeah should equal 60. Yep okay so the question is okay if we know together we have to get to an RMD of 60 000 could I take the full 60. Let’s say from the husband and allow the wife to continue to grow unfortunately the answer to this is no. You can’t do that you have to look at your individual IRA amounts and calculate the RMDs separately now the question does add-in I know that you can take RMDs from one of the accounts. Yeah, so you might have multiple IRAs so let’s say the husband has a couple of different IRAs.

If you wanted to you could take all of that 25 000 from one IRA okay and you could allow the other ones to grow that’s why a lot of times in our IRAs we’ll we’ll have kind of two buckets of money. One so if this is an IRA because we know that we have to pull money out. We might have one bucket that’s more kind of safety-focused and then another portion of it that’s more growth-focused. So if it’s a down market then we pull from the safe side if it’s an upmarket we pull from the growth side. It’s a way to satisfy those RMDs. So you can take it from different accounts but if we’re married you cannot your spouse has their RMD. You have your own RMD so the answer to this is no. All right a couple of other questions that came in here husband retiring next march congratulations. I assume that any Roth contribution would be limited to his income for 2022. Yeah so uh example he earns 1500 by march retirement. So we can each contribute 7 000 to our individual, yeah yeah so this is getting to Roth’s contribution. So the answer to the question is yes you can if you have income and maybe only one spouse is working uh both spouses potentially could contribute to a Roth. Normally a Roth contribution you can put in 5 000 but if you’re 50 plus then you can put in 7 000 and so it could be each spouse can put in that amount. Now keep in mind this is something that’s always confusing. 

That’s different than a Roth conversion you can do Roth conversions whenever you want all you’re doing is basically taking IRA money moving it to a Roth and then out of the cash you have sitting in maybe checking savings you pay the tax. So you can do any amount and there are no income tasks and you don’t have to be working to do a Roth conversion. Anyone can do a Roth version Roth contributions the key is you have to have income earned income or one of the spouses does. All right now this is the last question I have. So if you do have anything floating around in your head that you want me to answer please submit it now please explain why long-term care. Maybe a good investment better than FIA or IUL maybe some clarification on that. So please explain why is long-term care a good investment better than FIA or IUL. Okay so this was kind of was submitted and feel free to clarify if I’m not capturing the question correctly. Why is long-term care I’m assuming insurance a better a good investment better than FIA or IUL? I don’t know I can’t well I’m not. Okay, so it is insurance I can’t say it I would never say that I don’t think any investment is good or bad. I think they’re all tools it depends on what your goal is and in fact pure traditional long-term care insurance. I would hardly ever use that tool anymore. So let me so let’s say our goal is we want to address so what is our goal right. So what is our goal so let’s say our goal is to address long-term care costs. So we’re concerned about long-term care costs in the future. There’s a lot of there’s different strategies that we can utilize to help address this. So what are the potential strategies well one is a legal strategy? Where we can move money into an asset protection trust and if we make it five years everything inside of the trust is protected from that nursing home Medicaid spend-down. We could look at a kind of financial well let’s just talk about pure long-term care insurance. So I’m not, to be honest, I’m not a big fan of pure traditional long-term care insurance. The reason for that is sure it addresses your goal of long-term care but there are two big things I’ve had a lot of clients or a lot of conversations with clients that have purchased these first of all the premiums can increase on you at any time. 

I just got off a call with clients uh this week where they purchased policy a number of years ago before they met me been paying on it every year. I think their premium is like 3 000 for one person and 2 800 for the other and they just received a notice that unless they kick in like an extra thousand dollars a year that their policy benefits are going to go down. So one problem is the premium increases and then also any value with these is lost at death. So really we saw a lot of insurance companies get out of the business entirely so if you have pure traditional long-term care insurance. I’m not saying just let it lapse or anything because it might be a good policy to maintain but really I wouldn’t recommend typically pure traditional long-term care insurance for an individual instead that’s where we look at more of a kind of finance financial insurance strategy. Where now we get into tools and maybe we look at index universal life which is cash value life insurance that could be used for tax-free income. Where the cash value grows and if the market goes down you don’t lose anything the market goes up you get the upside and then the death benefit could double as a long-term care benefit or what I call asset-based long-term care. Where now we’re just purchasing a death benefit that doubles as a long-term care benefit so it might be a 500 000 death benefit. That also could be used for long-term care. So you’re either going to need it for long-term care or if you pass away then whatever is left of that policy would go to your beneficiaries potentially tax-free. So getting the question of why is long-term care insurance a good investment. I can’t answer that without knowing what the goals are and the strategy but if I’m looking at the specific tools I probably would look at maybe an asset protection trust cash value life insurance. Asset-based long-term care or there’s even fixed index annuities FIA sorry for all the acronyms fixed index annuities where we can turn this into an income stream for life. 

And then if you were to need long-term care the income will double if you need long-term care for a period of time. The nice thing about this is there’s no underwriting versus these two would have underwriting where you have to be relatively healthy. We could do this like if he had a loved one that was already diagnosed with Parkinson’s or something like that. So hopefully that was helpful and if you want to talk about your situation feel free to just reach out. Okay, another couple of questions can you explain I just did that one on the conversion. So we’re getting back to the Roth conversion can you have them withhold the taxes out of the IRAs. So that you would have the money withheld when you do your tax return you can but it’s going to put less money in the Roth it’s probably not the ideal way to do it but if you don’t have the cash on hand yeah you just take out more pay the tax but that’s going to put less into the Roth side. So you can do that are there any secure investments that have a higher rate of return than the very low rates currently offered by banks and treasury notes yeah. So really any specific investment has two out of three characteristics at the end of the day. So this is re-do the question again. In a second, so you can only have two out of these three characteristics in any specific investment tool. So most people want their money to grow most people don’t want to lose their money. So they want safety and then they want to access their money okay they want liquidity. So what is money that’s safe and liquid this is typically money you keep at the bank? So this is your checking savings money market the nice thing about this is that it’s safe meaning you’re not going to lose money. Though you are technically losing to inflation and it’s liquid. So you can pull the money out at any time we typically call this your now bucket of money think of it as the money you might need over this year. 

Then any other money that you’re not going to need over the next year should probably be more geared towards growth and so we can have money that’s geared towards growth and liquidity and this is having money in the market. Okay and we can have aggressive portfolios we can have conservative portfolios and we can have everything in between but this money kind of typically goes like that if you look at how it grows and then we can have money. That’s geared towards growth and safety and so here we have things like CDs offered by banks pretty short term but what are you getting in terms of rate of return like maybe one percent if you’re lucky maybe two. They’re really not worth it like everyone’s refinancing their home because mortgage interest rates are so low well guess what that’s also affecting other fixed interest rate investments like CDs your interest rate on your savings accounts taking it one step further. We also have what’s called multi-year guaranteed annuities multi-year multi-year guaranteed annuities these are basically the same thing as CDs but offered by insurance companies. You might be getting a two to three percent rate of return. So those are both fixed okay so if you move into a CD and they’re offering you 1.2 you’re going to get 1.2 that’s it there’s no other room for growth. So really the big picture I’m not a big fan of moving money into CDs or multi-year guaranteed annuities because interest rates are so low. And now you’re going to be stuck in this low-interest-rate environment. 

So what are some alternatives well if we’re willing to give up a little bit of liquidity and say hey this is money we’re not going to touch for the next three years at least then we might get into things like fixed index annuities and index universal life. The way that these grow is that if the market goes down you don’t lose anything but if the market goes up you get a portion of the upside of the market, okay I just got my IUL policy as of June 3rd and my policy was up 8.4. So that’s pretty good for something that has downside protection but typically you’re looking at rates of return anywhere from five to say seven percent over here with the downside protection. The sacrifice is that we have to give up some liquidity where we wouldn’t want to liquidate either of these right away. So that would be I guess the alternative if you’re looking for secure investments that have a higher rate of return than the very low rates currently offered by banks and treasury notes. So yeah we can get you a five,six, seven percent rate of return with downside protection but we’d have to give up some liquidity to do that the idea is that we’re not going to touch the money right away. So hopefully that was helpful any other questions? If you have another question please submit it. Going in once going twice and all right. Well have a great week thank you, everyone, it was a pleasure, and if you do have questions thanks for the. answers today you are very welcome good to see you if you do have questions feel free to submit them thank you you’re welcome otherwise I’ll see you