How to Include Survivors Tax Rate Considering Roth Conversions |Weekly Wednesday Wisdom Webinars

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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 answers the below questions.

  • 0:00 Introduction / Positive Focus
  • 2:18 We are seeking to get a mortgage on a property in an LLC. The mortgage company is giving us hard time, what should we do?
  • 4:31 Mom fell and is in rehab, we are not sure if she will be able to return home, what are our options?
  • 9:01 I am working with mom and dad and working on getting their finances in order, they have some old annuities, a few investment accounts, and about $450k sitting in cash in checking and savings. What should I do with that money sitting in cash, should we put it into the asset protection trust and how should it be managed?
  • 12:58 How to include survivors tax rate considering Roth conversions?
  • 16:06 Home Insurance

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Episode Transcript

I’d like to start with positive focus and just something positive that happens this past week and a lot of it’s been around my kids and playing soccer we’re in the middle of soccer season and my 11 year old boy up until this weekend was winless in his four games and my eight-year-old daughter Madison she was undefeated so between the two of them I was breaking about five hundred and then this weekend my son son seemed short a couple players one game we actually had to play one player short it was eight on nine he got smoked and I was looking at my daughter sitting there and she’s pretty good for her age. I was like ah we should I should have brought a jersey for her to play up and so we had a game Sunday we had enough players but we were still short a couple. 

So I ended up having my daughter play about 10. 10 minutes in the game and she really did well she held her own and then my boys actually won that game so now my daughter thinks that the only reason my my boys team won is because she played with them so she still maintains her undefeated streak so it’s kind of funny just seeing how you’re out there playing and then just realizing the chaos I created my family because now my daughter can hold that over my son’s head. But anyways it was fun so that’s my positive focus all right so let’s get into this so I have three questions or submitted them ahead of time. 

If you do have a question or something’s come up or all right here’s a question that includes surprise tactics conversions okay if you do have a question please put it into the q a just another one came in I’ll make sure to address that one but otherwise I will address what’s come in our oh zoom you’re making me install something real quick these are live kind of on the fly webinar so sometimes technology isn’t always my friend as we’re doing this but whoops we’ll work through it all right hit this button this button this button alright you can see my screen now all right you do have a question feel free to just reply to the email or go to that should take you to a link where you can book about 15 minutes on my calendar see how this applies to your situation so with that let’s get into it so first question we’re seeking to get a mortgage on a property and LLC the mortgage company is giving us a hard time that’s what they do what should we do all right so here’s the thing you have the mortgage company and there’s a lot of different mortgage companies out there you can go through your bank we have some good resources whether we’re trying to get a mortgage in a trust or LLC that’s a little different than just going to your everyday mortgage person but a lot of times with an LLC. 

LLC is a limited liability company and think of that as a container so we have the mortgage company over here they would much rather lend to an individual versus lend to an LLC so a lot of mortgage companies they won’t even bother lending to an LLC we do have some that will but what you can do depending on the situation is if you have the property and it has to be something other than your residential or primary residence if you had an LLC you would actually take it out of the LLC secure the mortgage and then you would put it back into the LLC. Now you’re still on the hook for the mortgage so the mortgage company could come after you but depending on how the LLC is set up that might not set off the there’s what’s called a due on sale clause but depending on how the LLC is set up it wouldn’t set that off similarly with the trust kind of works the same way a lot of times we’ll try to if we can get the mortgage directly from the trust but worst case we can always deed the property out of the trust get the mortgage and then put it right back into the trust. So just it’s mortgage companies giving you a hard time first see if there’s another mortgage company that will do what you’re trying to do and just reach out to us if you need a referral or a recommendation so go to a different mortgage company or second just jump through the hoops to get this done so it is a deed we charge 450 to do a deed and handle the recording fee and everything. 

So hopefully that’s helpful all right another question all right mom fell and is in rehab we’re not sure if she’s able to return home what are her our options all right so this is what we call the elder care journey that we see and so what happens is we start off living at home independently until we can’t live at home anymore then we might move into kind of either independent slash assisted living and the lines between these are starting to gray then a lot of times we go into a nursing home so this is just the common progression and kind of depending on situation sometimes you might have a slip and fall at home or some type of event to get you the nursing home sooner. But a lot of times we don’t see people going the other way unless it’s short-term rehab so it sounds like in this situation they went into rehab they’re not returning home or assisted living so now they’re going to need nursing home care so this is where we need to understand that there are six ways to pay for long-term care. 

So first you can private pay so just pay out of your own funds second we can have the kids pay a lot of times they don’t pay financially. But they pay in terms of their time whether they’re taking time out of their day to visit with me or putting their life on hold to become a full-time caregiver third we have long-term care insurance and there’s different types of this I’m not a fan of traditional long-term care insurance instead we look to a lot of times asset-based long-term care insurance or some hybrid plans four medicare but medicare really only pays for rehab so when you see medicare think rehab and at most you’re gonna have a hundred days fifth we have the VA benefit and the VA benefit is a great way to pay for home care and assisted living but it’s gonna max out at about two thousand dollars per month just over that so when you talk about nursing home care which is gonna run eight to twelve thousand dollars per month that’s just a drop in the bucket. 

And six we look to medicaid now medicaid is a governmental program that’s only going to pay for nursing home care it’s not going to pay for assisted living or independent living or home care so in this situation what we would do is okay if mom’s going to remain in nursing home care then we need to do medicaid planning because a single individual can only have two thousand dollars worth of accountable assets accountable assets are everything other than home small cash value of life insurance personal belongings prepaid funeral and automobile everything else is accountable asset and then medicaid looks back five years to see if you’ve moved any money around and if you have there they can penalize you so in this situation we would do what we call medicaid crisis planning where we figure out okay what assets do mom have or if mom’s married mom and dad have and then there’s things we can do at the last minute to protect at least half of the assets using what’s called a half-loaf plan kind of complicated but think of it like a loaf of bread half the money might have to go to the nursing home the other half we’d be able to protect so what are our options I would say give us a call and work with us to figure out how we can protect as much money as possible. 

To make sure mom has the best quality of life possible all right in fact I just had got off a call right before this similar situation a gentleman called in mom’s in rehab she’s about to be discharged she has a home she has it like seventy thousand dollars of buyer money and checking savings and automobile and so we’re gonna we’re gonna set up an appointment to develop a plan to protect at least as much as we can and every situation is a little bit different but this is what we call crisis planning things that we can do at the last minute maybe we can protect half versus if we plan ahead we might be able to protect 100 of everything. That’s why we set up these asset protection trusts so if we set up an asset protection trust and we make it to five years we can protect 100 percent versus we wait to the last minute last minute we can maybe protect half at the best. 

Number three let me see questions okay a couple questions those are a little unrelated and I’ll get to those next number three I’m working with mom and dad working on getting the finances in order they have some old annuities a few investment accounts about 450 000 sitting in cash checking savings what should I do with that money sitting cash what should we should we put that into asset protection trust and how should it be managed. 

So I whenever that’s a lot of money to sit in cash so in terms of just basic financial planning I kind of break things into time horizons like how much money do you need for the next year that should be what’s at the bank and that should be in mom and dad’s name or just sitting in cash second how much money do we need kind of maybe over the next five years that’s our soon bucket and then just maybe later bucket is depending on how old we are so if this is one to five this might be five plus if we’re younger then maybe it’s a ten year time horizon so having four hundred fifty thousand dollars sitting in cash probably not the best bet especially given I don’t know if you saw the email today, social security cost of living so think of this as an indicator of inflation is going up 5.6 next year so the social security cost of living adjustment is going to be 5.6 so think about that your social security is going up 5.6 that’s an indicator that that’s where inflation so we’ve been talking about inflation being kind of high and if you have that much money sitting and checking savings. 

What is that earning you’re lucky if you’re owning one percent we call that going broke safely and slowly right so I would move whatever we don’t need for the year so let’s say we with an emergency fund and spending maybe we need a hundred thousand sitting in checking safety that’s probably being generous then the rest of it should be invested for this might be more geared towards growth this might be more conservative given that we might have to pull the money but yeah especially if we have an asset protection trust having 450 thousand dollars just sitting in your name doesn’t make sense what I’d suggest is that we invest this move some portion into the trust so it’s asset protected let’s say 350 not counting the other accounts and then there are certain things that are right now we have a tool called legacy asset excel which is kind of interesting. 

I don’t talk about tools too often because I like to focus on strategies and goals but you can get a guaranteed at least two point five percent rate of return and it’s completely liquid and it could be as high as five percent rate return maybe even higher and it’s completely liquid so if there’s that might be something that would be a good tool to put into that soon bucket of okay you know what rather than having this money sitting in cash let’s have it at least earning at least two and a half percent guaranteed if not more at the very least to keep up with inflation and again this is this is something that I don’t think enough people are talking about right now is just there’s kind of two types of taxes there’s explicit taxes where they just raise taxes but also understand that inflation is another form of tax and what it’s really taxing is that lazy money that money that you have just sitting in cash because now that lazy money it’s not even keeping up with inflation so you’re actually losing money we call that going broke safely and slowly so yeah if you have a lot of money sitting in cash based on the fact that the cost of living is going up 5.6 percent next year. 

You may want to think about some other options other than just having it sitting in cds or cash so and then of course it should be protected in that asset protection trust because we can always get money out of the trust if we need to all right okay that was all the questions I had submitted ahead of time here’s a couple more questions that just came in how to include survivor’s tax rate when considering Roth conversions all right so we’re talking about Roth conversions and here’s the important thing to understand I’m not sure if I’m getting to kind of the crux of the question but understand that we have two tax brackets and this is what I heard this from ed slot he calls this the the widows penalty so understand while you’re married you file under what’s called married filing jointly. 

And just for example let’s say the 22 tax bracket here max is out I’m pulling out my trusty guy because yeah 172. so you can have 172 000 worth of income before you get into the 24 tax bracket well guess what happens when and what happens when you turn 72 you have to start pulling money from these IRAs yeah whether you like it or not they’re called required minimum distributions and they come in at your marginal income tax rate so we’ve been kind of pounding the drum to think about pulling money from these accounts and here’s another reason why is because of this widow’s penalty is guess what once one spouse passes away now that 22 tax bracket. So for a single filing so single filing that 22 tax bracket now maxes out at 86 000 and here’s the thing a lot of times in retirement when one spouse passes away the income needs their expenses are about the same so I would say on average most of our families have about a hundred thousand dollars plus of income coming in from RMDs or social security or pensions per year well guess what well if that’s a hundred thousand dollars under married filing jointly you’re paying a 22 tax bracket well versus once one spouse passes away now you’re going to get into the 24 tax bracket at 100 000 which is actually shooting up to 28 so when you factor in doing things like Roth conversions of moving money from your IRA to a Roth if you do it now while you’re married you might be paying a 22 tax versus if you were to wait until one spouse passes away plus we have the tax cuts and jobs act that’s expiring in 2025 that says you’re 24 tax bracket’s going up to 28. well if you do it when you maybe in the future when now we’re single or widowed you might be paying a 28 tax on that Roth conversion and this is what Ed Slack calls the widows penalty. 

Is that understand while you’re married you have this married filing jointly tax bracket that has an extended extended range to do things like Roth conversions so again the sooner you think about pulling money from those pre-tax accounts in an intelligent matter I’m going to argue the better off you’re going to be not only for your retirement but what you leave to your spouse and what you leave your potential kids all right so here’s another question regarding last week’s question Michigan farm bureau underwriting criteria for a house owned by revocable trust the name insured and the homeowner’s policy is individual however the trust must be added as an additional insured so this is just a follow-up to what we talked about previously where you have an individual they own a home and then they have a trust and the question is with regards to the insurance and like we said if the home is in your name that’s great the insurance remains the same if you were to pass away and we do what’s called a ladybird deed and now it flows into the trust then we would recommend to name the trust also as a named insured or if you were to set up an asset protection trust then yeah you can also name that trust as an additional insured is important to dodge your eyes and cross your t’s but I’ll tell you in my 16 years of doing this i’ve never had a problem with any insurance companies but that said yeah it’s always good to make sure that your p and c your property and casualty people are updated and also understand when you pass away. 

And it’s just in the trust and there’s no one living there the insurance might be a little bit higher because it might be unoccupied but that is just one of those things like upon death or any change in circumstances it’s probably good to reach out to them all right let’s see I want kind of quick there’s a couple good questions in there anyone have any other questions [Music] all right okay so just the thing that came across today is just the fact that the social security cost of living increase it looks like it’s going to be about 5.6 percent now understand you’re not getting an additional 5.6 because we don’t know what medicare premiums are increasing as well but to me what that’s telling me is we’ve been talking about inflation as kind of taxes being a big concern and then behind that inflation because and I guess inflation is tied to taxes in the sense that we’re 30 trillion dollars roughly in debt at this point and so what’s the government going to do they’re either going to cut tax or raise taxes which president biden has talked about kind of changing some of the tax code to account for his 3.5 trillion spending spree but that’s not addressing the fact that we’re already 28.2 trillion dollars in debt so the government either has to cut spending which they’re not doing raise taxes which today president biden’s saying that this isn’t going to raise taxes on on the average people per se or print money which is going to lead to inflation so I think we’re seeing the fact that we’re not really cutting the spending and we’re still at one of the lowest historical tax rates ever so the only third option is kind of printing more money which is leading to inflation so I think with seeing social security cost of living adjustment being at 5.6 which is the largest I think in 40 years since like the early 80s that should be a a warning sign that some of the things that and again this isn’t I’m not pointing the finger at one political party or the other for basically the last 20 years we’ve been just ramping up the federal deficit but at some point we’re going to have to pay the piper on this and so I think seeing this 5.6 social security increase is just another warning bell that taxes are going to have to go much higher in the future so and we’ve been banging that drum and I think it’s one of the biggest risks and biggest opportunities given that taxes are at the lowest they’ve ever been historically right now so there’s some probably some moves that should be made depending on your situation we’ve been spending a lot of time with our clients talking about that so with that I will let everyone go wish me luck my daughter has a soccer game tonight it’s a makeup game so hoping to continue our undefeated season so with that thank you everyone take care it’s been a pleasure feel free to invite friends and family to this I really enjoy seeing.

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