What is the best use of the Federal Estate Exemption |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.

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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.

  • Introduction / Positive focus
  • I have saved mostly inside of my company’s 401k, as I approach retirement within the next year, I want to roll that money into a Roth, what do I have to do?
  • My mom fell and is at a nursing home recovering, someone said I should get guardianship for her because she has the beginnings of dementia. Is that the right step?
  • What is the best use of the Federal Estate Exemption if we’re married and have a net worth of 8 million? How do you make a claim or report either exemption when one spouse passes?

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Episode Transcript

I’m going along please feel free to communicate that via the chat and with that let me hit this button okay cool, So my name is Chris Berry and we do these workshops or webinars about once a week every Wednesday at one o’clock and they’re also recorded to our Youtube channel. So you can watch previous episodes. If you want to or if something’s unclear or if we cover something and you want to forward it to a friend you can do that all via our Youtube channel just search for Castle Wealth Group Youtube and probably shows up. 

And so we do these every week at one o’clock and it’s really an opportunity just to answer questions or talk about kind of what’s going on in the news or changes in law or markets and that type of thing. So let me share my screen real quick and I always start with a positive focus on something positive that happened and my positive focus is that just hanging out with my son yesterday, So I have a son and daughter and I don’t get a ton of like one-on-one time with them and we had a nice daddy Sunday. I went to a bookstore he picked out a book on American history for teens and he’s really into history. So it’s kind of cool and then we played around on the lake. So it was nice all right and this is all general information if you have questions feel free to book some time on my calendar by going to www.15chris.com. 

And with that, we will jump right into it so the first question  I have submitted is I’ve saved mostly inside my company’s 401k as I approach retirement within the next year. So retirement next year I want to roll that money into a Roth what do  I have to do so there’s a little bit more to this but what makes a Roth kind of special is it’s post-tax and the growth on it is tax-free and so everyone kind of defaults to I want Roth money if you think taxes are going up. But here’s the thing so 401k it’s pre-tax and also it’s what we call an employer-sponsored plan meaning you don’t have full control over that 401k. Like if you have a 401k right now you’re limited in terms of what investment choices you can make inside of that 401k basically your employer kind of contracts with others like fidelities or empower someone else to put together this plan and then that plan administrator gets to pick and choose what investment choices you have available. So with a 401k, you’re typically limited to terms of investment choices in terms of how those portfolios are put together but also you’re limited in terms of what you can do with your money. So that’s why what most people do when they retire or even before if their company allows for in-service transfers is they roll that money over to an IRA which stands for an individual retirement account. So 401k think of it as kind of limited an IRA you have it’s your own. 

I almost call it an independent retirement account meaning you can really do whatever you want inside of the IRA you’re not limited to this just base selection of investment choices or portfolios you can do stocks bonds you can even do real estate inside of an IRA. You can do annuities inside of an IRA there’s a lot of different options with an IRA. So not only do you have freedom in terms of your investment choices but also you have a lot more freedom in what you do with that account the IRA is still pre-tax okay. So we haven’t gotten it into the Roth at this point but really now you have a lot more freedom to do whatever you want to do with the investments and invest however you want. Now the purpose of this question was to get over to the Roth right. So what has to happen is okay now that we’ve rolled it over from the 401k to the IRA there’s no taxable consequence on that now we need to start thinking about and we would look at doing this in an intelligent manner start doing what we call Roth conversions and I’m not saying that the Roth conversions or Roth IRAs are the only way to go it is a simple way to get money to that tax-free bucket. And remember if we’re talking about what kind of grows tax-free we have things like Roth cash value life insurance index universal life 529s which have to be used for health or education and h health savings accounts all of these grow tax-free. So you don’t owe any capital gains on and really whenever we’re doing this we’re looking at how much to convert because you do have to pay tax. So how much do we pull out of those pre-tax accounts and then where do we put it? So don’t we don’t always put it into the Roth but that’s the way kind of everyone defaults when they initially start thinking about this but again so we roll the money from the 401k we can either do that now or when you retire assuming they allow for in-service transfer. Now it’s an IRA we can do what we want we can do the Roth conversion and we just need to make sure that we pay the tax as we pull money out of the IRA which we call the always tax bucket and put it somewhere else like a Roth. So it’s more than just 401k to Roth we have to do 401k to IRA and then IRA then we can start talking about Roth conversions. So hopefully that was helpful. What is the maximum I can put into a 401k and what about catch-up contributions what if I contribute more or does it automatically shut off contributions when I reach the max no it’s not going to. 

So the person has a 401k so they’re still working how much can they contribute it’s based on their age and I always reference my key data for the 2021 sheet and if you email me I can send you a copy of it but the 401k is the maximum contribution is 19 500 and for people, over the age of 50 you have an additional catch-up provision of 6500. So if you do have a 401k the maximum contribution is 19500 and then if you’re over the age of 50 you can contribute another 6 500 to that 401k. Now what I would recommend depending on where you’re at in terms of tax brackets is looking at if they offer a Roth 401k option. So you have your traditional 401k that is pre-tax see if your company offers a Roth 401k because otherwise, I might not be over funding that traditional 401k anymore because taxes are scheduled to go up in the future. Plus being 30 trillion dollars in debt I think taxes have to go up much higher in the future. So a lot of times people just default to putting as much into that traditional 401k as possible I’m not saying don’t save but I’m saying maybe we should rethink where we’re saving that money. For example, I’ll just share in my own personal situation  I stopped all contributions to pre-tax accounts this last year and I’m saving in post-tax accounts or tax-free accounts at least for the time being given that the tax cuts and jobs act says that taxes are going up in the future. So yeah so that is a lot on 401ks which shows.

A couple of questions came in here, I’ll get to those so thank you for those additional questions coming in we’ll get to number two here my mom fell in as a nursing home recovering and so it sounds like she’s probably covered by medicare. Someone said I should get guardianship because of dementia is that the right next step. I probably would lean towards no. So the problem with guardianship is it’s basically living probate. So you’re going to the probate court to get control over someone and that’s called guardianship and if they happen to have money like over a hundred thousand dollars then you might also get a conservatorship. So this is really relying on the government’s rulebook versus creating your own rulebook and now you’re leaving it up to the courts to decide whether your mom actually needs a guardian and that is a tough step because a guardianship you’re taking away someone’s independence. It’s I call it a nuclear option it’s like the last thing we ever want to try.

So the courts would make a decision of whether she needs a guardian or not and she might not and they’re going to appoint a court-appointed attorney to advocate on her behalf that she’s okay. It’s basically taking your mom or your loved one to court and then second they would appoint a guardian which could be you or could be someone else could be a court-appointed lawyer that has 250 other wards of the state that they’re quote-unquote taken care of. So I wouldn’t go the guardianship route right away. Instead what I would do is make sure that we create that your own rulebook with an estate plan and more specifically what we call disability documents the big things being your financial power of attorney. So that’s the document to make financial decisions for a loved one and then the other one is the medical power of attorney to make the medical decisions. So the medical power of attorney is kind of like the alternative guardianship financial power of attorney is the alternative to conservatorship so as long as your mom’s having lucid moments. Where they might have a diagnosis of dementia but as long as they understand what they’re doing even if they make forget it or something then she probably still has the capacity to do the financial and medical power of attorney because then that’ll give you the authority to make decisions for mom without having to go to court and getting the courts involved. So I’d try not to do the guardianship. First I would start here before going the guardianship route all right what is the best use. So this question just came in I was able to type it up right before we hopped on what is the best use of the federal estate tax exemption if we’re married and have a net worth of 8 million. 

How do you make a claim or report either exemption when the spouse passes yeah. So we’re talking about estate taxes here and right now the estate tax exemption think of it kind of like a coupon right now for a single individual is 11 million dollars for a married couple. We can double it and with the inflation, it’s basically 23 million dollars meaning as long as you’re married right now with less than 23 million dollars you owe zero in estate taxes but that is from now actually 2018 until 2025. And that’s when the tax cuts and jobs act expires and now it jumps drops down to 5 million adjusted for inflation and for a married couple it’s 11 million dollars. So if we’re sitting here at 8 million two things one your three things one you’re currently under and you will remain under the estate tax exemption as it currently sits now. That said the second thing is your estate may continue to grow and the third thing is is the estate tax exemption may continue to drop. So President Biden’s proposal so this isn’t in effect yet it’s just a proposal but the proposal as President Biden’s proposal is to drop this down to 3.5 million for a single individual. Which would take this to roughly 7 million for a married couple. 

So now if you’re sitting at 8 million if President Biden’s proposal goes through now you’re going to have an excess of 1 million dollars over the estate tax that’s or estate tax exemption that’s going to get taxed at 40 percent and then here’s the thing if that money is pre-tax IRA money. You’re going to have two taxes that you have to worry about one is the estate tax and then the second is the income tax because if they’re inheriting pre-tax dollars then they have to pay tax on that. And also if President Biden’s proposal goes through and you have taxable accounts then you lose step up and basis and so now your kids will also have to worry about your capital gains on anything they inherit as well. So in essence there could be three taxes upon death if you’re sitting at eight million dollars and President Biden’s proposal goes through you’re having an estate tax which is going to be 40. So 400 000 on that million dollars potential income tax if there’s IRA money they’re inheriting and then if it’s like taxable accounts real estate they might have to pay capital gains if they were to sell.

So and this is another reason why I say taxes are one of the biggest risks and biggest opportunities right now if you’re whoever you’re talking to or is helping you isn’t talking about taxes whether it’s income tax or state tax or capital gains. They’re really missing the boat in terms of advice so there are some things to do given this lower dropping of the estate tax exemption because kind of what’s happening is you’re I see this with a lot of my clients, especially with the markets. The value of their estate is going up but the estate tax exemption is going down. So if we’re right here and there’s like today 2020 this could easily be 2025 where now we’re going to have estate taxation. So one of the things that we could do is okay if we’re at seven million now maybe we can move a million dollars into something that’s is removed from your estate now before this exemption continues to drop and there are some different strategies to do that. So that’d be more proactive planning so if you do have an estate worth about 8 million right now I’d say let’s have a conversation and talk about whether we want to take some proactive steps before this tax cuts and jobs act expires. Before President Biden’s proposal goes through because with the larger estate tax exemption. Now there are some things that we can do to take advantage of it before it drops and then the second piece of the question is how do you make a claim or report the exemption when one spouse passes well that’s what we call portability and we’ve had portability ever since 2011. 

And portability means when one spouse passes away that coupon or exemption isn’t completely lost all you have to do is make a tax election. So it’s just a tax form that’s filed when one spouse passes away to lock in that exemption prior to that we would always have to do separate trusts for a married couple one for one spouse one for the other to lock in those exemptions. It was kind of silly but yeah we would do what we call a b trust. So prior to 2011 we’d almost always do a b trust separate trust for spouses but then in 2011, they passed a change in law and now we have portability. Now we have portability where all we have to do is just fill out a tax form when one spouse passes away to lock in that exam but again that’s just going to double the exemption and if we’re sitting at 8 million and it’s potentially going to drop to 7 million for a married couple there might be some proactive planning that needs to be done. 

All right a couple more questions that came in here. I just answered that one stay climbers I’m sure all right here’s the last question I have submitted so if you do have any more questions please put it into the chat or the question and answer. So the question is all right we have a retirement benefits trust holds all your tax-deferred accounts require that your kids only take out the funds evenly over 10 years with the balance in the 10th year oh can you oh okay. I’m sorry I’m reading this on the fly can your retirement benefit trust be okay all right. So the question is we have these pre-tax accounts okay accounts that you haven’t paid any tax on we also call this tax-deferred and these are things like your traditional 401k IRAs 403bs right and all this money is pre-tax. You haven’t paid any tax on it so if you’re sitting there and in the account, you see that you have a million dollars you don’t really have a million dollars because why you still have to you have to pay your tax liability at some point either while you’re alive or now when you pass away the kids have to pay the tax on your death within 10 years. And so in 2020 we had which seems like a lifetime ago we had the secure act and prior to the security act the kids if they inherited this they could pay the tax over their lifetime okay. So if they inherited a million dollars and let’s just say there is a tax liability of 25 so 250 thousand.

I wish there was only that much tax they would have to pay they could stretch it out over their lifetime. Well, when the secure act passed nope not over your life anymore now all the taxes have to be within 10 years. So now with the IRA, there are two ways to leave the account to the next generation one is through a beneficiary designation okay. So you could just name your kids outright and then they inherit the money. But what happens if there’s a divorce a lawsuit credit or action bankruptcy they might lose that money or what happens if you don’t trust them financially. So instead of what a lot of people do and most of our clients they’ll leave it to a trust in these days you don’t have to do a separate trust this could all be done in one trust. In the past we used to do a separate trust for the retirement accounts now we do it all in one trust. So we have your qualified and non-qualified real estate all going to kind of one trust and that trust could build in this language. So what the question was getting at is okay so with the secure act what it says is all the taxes have to be paid within 10 years but what it doesn’t say is how do we want to handle the taxes. So we could pay all the taxes right upfront, okay but that would drive up your tax bracket we could pay all the taxes in the 10th year. So it could grow for another 10 years tax-deferred before you pay taxes or you could take it out and pay the tax evenly over the 10 years and so if you leave it outright to a child they can decide how they take it out. But with a trust to answer the question yeah if we wanted to set up a trust we could say specifically in the trust that this is how the retirement accounts would be handled is that we would pay the tax evenly over the 10 years or and then the balance and your time if we wanted to. So yeah that’s where a trust is creating your own rule book and so we can create the rules of how we would want to handle those retirement accounts. All right so that is all I have for questions. Any more questions please submit them real quick otherwise going once going twice sold. All right well take care everyone thank you so much make it a great week bye bye-bye. 

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