How does Castle Trust work with IRA? |Weekly Wednesday Wisdom Webinars

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.

In this week’s webinar, attorney and advisor Chris Berry of discuss some issues and answers the below questions.

  • 0:00 Introduction / Positive Focus
  • 2:35 3 Important P’s in Estate Planning
  • 11:59 Roth Conversions still worth it given, trade-offs of NIIT, Medicare Premiums?
    22:53 How does Castle Trust work with IRA?
  • 23:52 Define Stagflation and provide some investment strategies to address it.
  • 27:32 Inherited IRA

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Episode Transcript

So my occasional kind of one off educational pieces on YouTube, to educational channel there. Now we are going live over on YouTube as well. So again, my name is Chris Berry, we do these workshops or webinars once a week, every Wednesday at one o’clock they are recorded. So if you do miss one, you can always catch up on YouTube. But I love having people on and I love the interaction and questions. As I’m going through this, if you do have any questions or something’s unclear, feel free to just put it into the chat or the q&a section. q&a is really good. It kind of pings me, as I’m talking where I can check it as I’m going. Feel free to put it in the q&a. And I always like start with positive focus something positive. That’s happened in previous week. A lot of times it’s family related. That’s what’s most important to me. And this week, my positive focus is that for the second year in a row, yeah, second year in a row, I’m coaching my kids and soccer. So we had our soccer coaches team meeting Monday, and we’re going to be starting practice next week, my son is loving, and my daughter is eight. And they’re really enjoying soccer. And I’m really enjoying coaching with them. And also my dad, who is my soccer coach, he coaches with us as well. So it’s a whole three generations of berries out there playing soccer, which is kind of fun. So that’s my positive focus. And with that, I’m going to go ahead and share my screen. So I’m gonna hit this button, this button, this button, add one more button I’m going to have to hit there we go. And this button ups. All right, give me a second. All right, and we should be seeing it but we’re not. I love technology, except for when it doesn’t work. There we go. Alright. So now we’re live with my trusty whiteboard. And again, this is general information, it may apply to your situation, if you ever have questions or want to schedule some time on my calendar, just go to www dot 15 And you can book some time on my calendar.

So with that, we’ll go ahead and get started. And the first thing I wanted to cover. And I sent out an email about this is the idea that estate planning, it’s really about the three P’s. There are three important PS to estate planning. And so bear with me as I as I draw here. But the first thing that we need to think about. So if we think about estate planning here, right here in the middle. first concern is probate. Most people are concerned about probate. That’s typically where people start off with, I want to avoid probate. I want to make sure if I pass everything is handled without having to go to court. There’s really two types of probate, there’s probate while you’re living and probate upon death. Most people are familiar about with probate upon death, they might be less familiar with probate while you’re alive. And what might happen is that your loved ones might have to go to court if you don’t have certain documents in place. And we’ll talk more about how to avoid probate generally, that’s people’s first concern. The second concern or second key that we have to worry about is people. And we’ll talk more about this, but it’s okay, who are we going to include in that estate plan? Where’s our stuff gonna go? What are the roles and responsibilities that have to be handled. And then the third P is predators. And predators can take different forms. Predators could be the IRS. So protecting against taxes, a big one is long term care costs, protecting against devastating cost of long term care could be in loss. Okay, leaving things to the kids, and then what happens if there’s a divorce? So really, when it comes down to it, when we’re talking estate planning, and making sure everything is protected, it’s protecting against the three P’s. And so how do we go about doing that? Well, when we’re talking about kind of probate, really there’s two aspects that have to be covered or there’s two tools that we use. And first we need to understand the state administration. In a lot of times it’s a question of do we want a will based estate plan versus a trust based estate plan
and understand that a will does not avoid probate.

What a will does is gives them structions to the probate court and how to administer your estate. So if you’re looking at avoiding probate typically a will based estate plan isn’t the route you want to go. And then how do we avoid probate while you’re alive? Well, this is by having what we call disability documents. This is avoiding the guardianship and conservatorship. So what is what are the disability documents, things like financial power of attorney, medical power of attorney, and sometimes a personal care plan that gives instructions to your financial medical power of attorney and how best to care for it. Now, if you have a will and a trust, and it’s funded properly, and you have a financial medical power of attorney, then you should avoid probate at the end of the day, both living as well as that. So that takes care of the first fee. Pretty straightforward. Now, this is where it gets a little more complicated. And this is where there’s different levels of planning that can be done. We have to think about people. And with people, a lot of times the way that this is handled is through proper trust design. So a lot of times we do use a trust as a probate avoidance tool, but a trust can do more than avoid probate. One of the things that we have to do is think about what are the roles and responsibilities that we have to fill? So who are the beneficiaries? Who are the people? Who are the trustees? Who are the successor trustees? Typically, you’re the initial trustee. So that’d be the role that you feel you’d be the one holding on to the suitcase, so to speak. And then who are the beneficiaries? Are they the kids? Are we leaving things to charity or carving things out for grandchildren? Do we want to include spouses? Do we not want to include spouses, but that’s all part of that trust design is making sure we have the right people sitting in the right seats, whether they’re a successor trustee, whether they’re your medical power of attorney, who are your beneficiaries. So that’s that second level, or a second p that we have to think about is the people. And then the third thing is, what do we want to protect against? Obviously, we want to avoid probate, and we want to make sure our stuff goes to the right people as efficiently and effectively as possible. But then what are the things that we’re concerned with? And depending on what we’re concerned with, that tells us what type of tools we might have to look at. But really what we’re talking about here is different forms of asset protection. How can we protect our assets from the devastating cost of long term care? How can we protect our assets, so that whatever our beneficiaries inherit, instead of them receiving the money outright, it’s protected for their lifetime, from divorces, predators, action, etc.

And then if a child were to pass away to make sure that it goes to those children, or if toddlers pass away to make sure that it flows down to the grandchildren, versus going out right to a spouse who might remarried. So an asset protection, we have two ways that we can go about this. One is through legal methods. And really, a lot of asset protection for a lot of my clients is protecting against devastating costs or long term care, nursing home care. But one way we can do it is through legal protections, setting up an asset protection trust, we call it a castle trust. So we can move our assets into the trust. And then once they’re in trust, immediately, they’re protected from lawsuits and creditors. But then also what it does starts a five year race to protect against nursing home care. So again, predators, IRS, long term care costs in laws, also lawsuit creditors. And then also, there’s financial strategies as well, as well as insurance strategies. For example, one of the things that we recommend, if you’re concerned about like creditors or lawsuits, is looking at umbrella policies, from your property and casualty agent. So wherever you get your homeowners insurance, you can get a million dollars worth of umbrella protection, which is just creditor protection for like $200 a year. So it’s super simple. But more what I’m talking about here is long term care costs. How can we protect against long term care costs? Well, we can use some financial strategies as well. One of the ones that’s real popular right now is we’re taking say, I’m just making up numbers here $300,000. And depending on your age and health, that can be turned into a bucket of money. That’s again, I’m making up number of $600,000 that could be used for long term care or death benefit. So that $300,000 now a $600,000 of long term care benefits and then if you don’t use it, then it could be a tax free death benefit to the beneficiaries. So I just wanted to share that This idea, I was thinking that really estate planning, kind of good estate planning comes down to just having a plan for these three P’s. And that’s something that we address is part of our process when we’re putting together a legal structure is first everyone wants to avoid probate. This is typically Goal number one. Second thing is we want to make sure things go to the right people in the right way. And then third kind of level of planning that we do for our clients is look at, okay, now that we have the basics in play, what do we want to protect against? We want to protect against taxes in the future, and we have different strategies for that we want to protect against long term care costs, do we want to make sure the money stays in the family versus going to in law who might remarry or being lost in a divorce? Do want to protect against lawsuits or creditors? How can we go about doing that? So hopefully, that was helpful little exercise. And hopefully, you enjoyed my little drawing there. Now, let’s get into a couple questions. Well, actually, there’s only one big question. Well, there’s two questions that were submitted. And let me boop, boop. And what I did is I basically combined some of the questions.

So I had a couple of questions come in, both talking about Roth conversions. And whether they’re still worth it, focusing on net investment income. I’m blanking on it right now. The extra tax you pay, depending on your level of your level of income, if it’s over, we’ll talk more about it. But if you have over $250,000, you might have to pay an additional 3.8% tax on your investment income. And so sometimes when you do Roth conversions, I could affect that. So we’ll talk about that. And we’re also talking about Medicare premiums. So there’s a couple comments that I’ve been really advocating for a Roth conversion. And just to make sure we’re all speaking the same language here, let’s talk about how these work. And if you’ve attended these, you’ve seen me draw my little tax box. But we have different types of accounts, we have taxable accounts, seconds, we have tax deferred accounts. And third, we have tax free accounts. So basically, every investment or asset falls into one of these categories. So taxable accounts, this is your checking savings, this would be a brokerage accounts. tax deferred, this is your traditional IRAs, traditional 401, K’s, four, three B’s. And then your tax free is your Roth. Your Ul’s cash value life insurance, health savings accounts. And then 529. So, the concern here is how these things are taxed. So your tax deferred are taxed as income whenever you pull it out, your taxable accounts may be taxed at Capital Gains rates, but maybe not depending on your situation. And tax free is income tax free, gain tax free, but it’s not a state tax free. And so we have another bucket that is a state tax free as well, but I won’t get into that. So the concern is that we have this tax cuts and JOBS Act. And so we know in 2025 marginal income tax regime income taxes are scheduled to rise. Plus, with all the spending that we’re doing, taxes could go up in the future. So the big thing is, if taxes go up, then the value of your pre tax accounts drops. So what we’ve really been advocating is taking money out of here and trying to move it to this tax free box, or at the very least the taxable bucket. And so one of the ways that we can do that is through a conversion. So we take money from the IRA, move it over to the Roth via conversion, not contribution conversion, there’s no income tax on the conversion, you just have to pay the tax. And now we have the money in the tax free bucket. And again, you still have to pay the tax and a lot of times the tax for the conversion comes out of here. So I was talking to a client today, they have we’re going to do a small little Roth conversion. They’re going to move 35,000 over here, and they’re going to be taxed basically 7000 out of this account. Okay, so So that we can get the full Roth conversion.

So Roth conversions make a lot of sense, depending on your situation. So with anything that we’re talking about here, a lot of its general advice, we always have to take a look at your specific situation, I have some people that are moving, instead of 35, or 35,000, I have clients moving $4 million out of the IRA, this year, to just be done with it, so that they’re in the 0% tax bracket for the rest of their retirement. I have some clients where a Roth conversion doesn’t make sense. So every situation is a little different. But what we do know is taxes are going up. And that’s going to mean the value of these accounts is going down. So just looking at that is an idea in the strategy, because there are downsides. And so I had a couple emails this week. And maybe there’s a news article about it. But actually talking about net investment income tax finally came to me, I was blanking. And given the net investment income tax, an additional 3.8% tax, if you make over 250,000, and Roth conversions count towards that 250,000. So potentially, on your income, so over here, that might have an additional 3.8% tax on it. That said, that’s a might, it’s a might have a VAT tax, versus we know across the board taxes are going up about 4% in the future, at the very least. So yeah, your gains may be taxed at 3.8% might, for the year you do the conversion, versus a 4% raise in your income tax. Very big difference there. So yeah, the Roth conversion, I would argue almost every time. Even if we have a net investment income tax, depending on your situation, that’s negligible. So for most people, that’s negligible. Now, one thing that can be a little bit of an issue is that we do need to take into account what happens your Medicare premiums, because again, both of these things are affected by your income. And again, when you pull money out of your tax deferred accounts, that’s going to be additional income. Now, what I might argue is also guess what this 3.8 tax might be 3.8 now, but guess what, this could easily jump to 7%, they can easily change that. Not everyone understands how net investment income tax works, just like they’re talking about getting rid of step up and basis. Not everyone understands how that works. And that could have a drastic effect. So again, I think across the board taxes are going up. And if you understand that, then at least exploring that idea. And I’m not saying everyone should run out and do Roth conversions. And I’m not even saying the Roth conversion is the best thing to do every time with this IRA money, it’s probably the simplest. But I have a lot of clients that are moving money to taxable accounts for various reasons, I have a lot of people moving money to cash value life insurance for various reasons. But the story is get money out of that tax deferred account. Because if taxes go up, the value of that account goes down. So now let’s talk about Medicare premiums. And this is my key financial data sheets that I just had it ready to go.

I always have on my desk, but somehow I moved it Oh, I was walking around with it. So I was having like right here in front of my desk just because it’s hard to keep track of all the numbers in your head. So just kind of big picture. I have a lot of clients that fall in this 20 to 24% tax bracket. Where Yeah, you’re making 100 1000s or you have income that’s generating 100,000 plus of money. What’s important is you’re in this 22 to 24% tax bracket. And what the tax cuts and JOBS Act is saying is that this, this number is going to 25%. And this number is going to 28%. So maybe it makes sense if you’re at say $100,000. Right now, let’s fill up the 22% tax bracket, which would get us up to 172,000. But maybe we fill up the three the next tax bracket by doing a bigger move of money out of that out of the IRA. And now we can move instead of let’s say we’re at 100,000 instead moving 72,000 we can move 229,000 out, and we’re paying we’d be paying a 24% tax on that move. But if we don’t do it, and we stay at that 22% or stay at that $100,000 of income, then we know 22 is going to 25 and guess what? 25 is greater than 24. So I’d rather pay a 24% tax on money we’re pulling out of the IRA, then at 25%, or even higher in the future. Now, why I got to this page is first, we have to talk about, oh, yeah, here we go. So we’re talking about that net investment income. And let’s, okay. Yep. So here we go. Oops, wrong thing. So we might pay a tax on your gains, again, gain, it’s not additional income tax, it’s tax on your potential gains. So yeah, that’s something that we have to consider. That’s, like I said, that’s kind of negligible. The bigger issue is the one I have saved here. And if you want to copy this, just reply to the email, and I can send you a copy. But something to consider is that when you do the conversion, two years later, so this is the 2021 numbers, your mark, your Medicare premiums will shoot up. Okay. But in every situation, again, it’s not this amount for everyone. I have it on my other sheet, it’s okay, I’ll write it in. So let’s say we Max, we got into that 24% tax bracket, your Medicare premiums would be 475. So yeah, you’re paying an extra couple 100 a month for the year you do it. But then you set up the rest of your retirement to be much more tax efficient. So yeah, we do take into account I always talk to clients that it’s important understand your Medicare premiums will go up in the future, but they will drop back down after the year that you’ve done that conversion, oh, two years following, okay. So you’re if you do everything in one year, then for one year, two years later, your Medicare premiums will be up, but then everything will drop back down. So, so hopefully, that’s helpful. But just like anything, when you do a Roth conversion or pull money out of that tax deferred account, yes, it’s going to affect your income. And there are some other things that we need to think about as well. So just don’t. And that’s why we always preface these webinars with don’t just run out and do what I say.

Let’s have a conversation to weigh the pros and cons, and figure out if it makes sense. All right. So that was all I had ahead of time. Now let’s get into some of the questions that just came in. So if you do have a question, please submit it. Alright. So the first question here, how do castle trusts work with IRAs? How do castle trust incorporate IRAs? Well, we named the trust as a beneficiary upon death, but you and only you can be the owner of your IRA. So a lot of times, what we’re doing is we’re moving money out of the IRA. paying the tax for all the reasons I just said, and now we invest the money inside of the castle trust, and you can invest in whatever you want. If you had XYZ mutual fund inside of the IRA, you’d invest in XYZ mutual fund inside of the trust. If you like TD Ameritrade or fidelity or Schwab, you can have your money stay at TD Ameritrade, fidelity or Schwab. But now instead of being in the wrapper of an IRA, it’s in the wrapper of the trust. For now it’s asset protected, because your IRAs are not protected from long term care costs. A next question, please define stagflation and provides some investment strategies for addressing so stagflation. Probably Google it, but if I remember correctly, is when everything is just kind of staying the same stagnating. And in reality, a lot of people are talking about inflation is a big concern right now, where if the cost of bread goes up, then and the cost of gas goes up, then the value of your cash is just sitting there. With regards to stagflation, where things are just remaining the same. From an investment strategy, I guess, let me explain it this way. So the big thing is having the right amount of amount of money in cash. So the way we look at it is any investment has two out of three characteristics and you can only pick two, so most people want their money to grow, especially if we’re dealing with inflation or even stagflation. Second, you want your money safe, okay, we don’t want to lose our money. You’ve worked hard for it. And then third, you want your money liquid, you want to get access to it, right. But any investment really only has two out of these three characteristics. So money that’s safe and liquid, this is money that we keep at the bank, this is what you have in checking savings. It’s safe, it’s liquid, you can pull the money out at any time. But it’s not growing.

And that’s the big concern, you don’t want to have too much money sitting here. We call this lazy money, the money is not working for it, right. And if the cost of goods go up, then the value of that dollar goes down. So we don’t want a ton of money sitting here. Typically, all we have here is whatever your emergency fund is. So maybe six months worth of expenses, whatever big expenses you have for the year. So if you’re taking a big trip, and then if you’re retired, and your expenses per month are greater than your income, whatever your income gap is, that should be all that’s sitting in that lazy money, then we have money that’s geared towards liquidity and growth, this is having the money in the market. And this is where we see kind of goes like this over time. 2008. But it goes up over time, but there’s no guarantees of safety. And then we can have money that’s sitting in safety and growth. And short term, we have things like CDs, really offering a really low rate of return right now. Second, we can have what’s called multi year guaranteed annuities, these are getting you maybe two to 3% rate of return, same thing as CD, but offered by a bank. And then third, we have fixed indexed annuities and indexed universal life a little bit longer time horizon. But here, you can see a rate of return a six to potentially 8%. So we’re concerned about stagflation or inflation. Or we just have a lot of lazy money, then we got to decide where do we want that extra money to go. Because otherwise it’s not working for us. And what makes this side kind of different is the market goes up, you don’t lose anything if the market goes, or if market goes up, you participate in the upside, if the market goes down, you don’t lose any. So girls kind of like that. So sometimes people like money over here. Sometimes people like money over here, sometimes people like money in either place. So hopefully that was helpful with regards to that. All right. Next question. inherited IRA spouse extremely financially irresponsible to autistic boys, the DA one girl, do I need to trust three trusts? Alright. So just kind of Sutton summarizing this. Zoom. My whiteboard, my good. Alright, so alright, so we have a IRA that we own. This is me drawing a person. So we own our IRA. And we’re married. I don’t know if we’re talking about the wife, the spouses, the I don’t know if the spouse or the kids or your spouse. We have two boys and we have children we want to leave it to, um, they have some issues are on disability, that type of thing. The question is, do I need a trust? Or do I need a? Do I need a trust? Or do I need three trusts? What we’ll do is we’ll set up basically one trust, maybe let’s just say a castle trust for you. So this would be yours. And then upon death, it would split into separate shares for your children. So you would only probably need one trust. And typically the way trusts work is you set up one trust if you’re married or single. Sometimes we do separate trusts for married couples.

And then upon death, you pass away. And then now it can be held in separate trusts. Your one trust could split into separate share trusts, one trust for each one of your beneficiaries. And these trusts could operate differently. And they don’t have to all receive trusts, maybe depending on the situation. We haven’t go outright to our beneficiaries. So the question that was submitted life as a spender maybe. So the comment is the wife is a is the spender husband owns the trust. What typically what we’ll do then is we’ll have husband maybe as the only trustee of the trust, and a successor trustee would not be the wife but might be someone else. And that’s really getting into what we talked about here is is people right is With trust planning, that’s how we can take care or address these these people answers. So I appreciate those questions. Hopefully that’s helpful. So yeah, getting back to the question, I probably would have one trust. The trust could hold joint assets could hold husband’s assets. But maybe we just have the husband is the trustee. And wife’s not on the trust. And we’ve done that before. A next question, does modified adjusted gross income go up each year? The answer is yes. Every year they adjust kind of what the range is. So yeah, it’s not a lot, but it is adjusted every year. Some things aren’t adjusted, but modified, adjusted gross income. That is adjusted every year. Okay, done and done. Alright, so if you do have any other questions, now’s your opportunity to put them into the chat. Otherwise, it’s going to be a wrap. So and if you’re calling in it missed some beautiful drawings, but you can always check them out on the YouTube channel and the YouTube channel, I put it into the chat. So you can just click the link and then subscribe. I think it might even notify you when new videos come up. But hopefully I was helpful. Alright. Thank you for the information. Thank you, Lisa. Alright, we’ll call it a wrap. If you do have questions, feel free to email them over reply. And I’ll take care of them either answering the question or I will take care of it next week. So thank you so much. Make it a great week. Take care. Bye bye.

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