Castle Wealth Group

November 26, 2021

Does Social Security and Pension Have to Be Taken for Nursing Home Expenses? |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 www.wisdomwebinar.com 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 www.castlewealthlegal.com answers the below questions.

• 0:00 Introduction / Positive Focus
• 3:35 Can you explain how trusts are taxed while alive, as well as when you pass away? How do IRA’s play a role?
• 11:00 Don’t donor trust avoid taxes?
• 12:38 Certain states in Utah is where wealthy set up trust to avoid taxes
• 14:03 In 2020, we did not have taken the required minimum distribution on a beneficial IRA, do we need to take the required minimum distribution in 2021?
• 18:38 What are the best ways to save for college for young children?
• 26:04 Can I pay my granddaughter’s college tuition from my IRA and avoid paying taxes on it?
• 27:27 Explain a Castle Trust
• 34:37 What happens when you sell the house?
• 35:11 Can you get assets out of the trust?
• 35:21 Can social security and pension monthly payments be added to the castle trust?
• 36:56 Does social security and pension have to be taken for nursing home expenses?

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Episode Transcript

My name is Chris Berry and this is our Weekly Wisdom Webinar where I answer any legal financial tax plan questions submitted either ahead of time via email or while I’m live today. There’s a Q&A section and you can type in a question, if you have once again a legal financial tax planning question or feel free to put it in the chats. And I always like to start with a positive focus. Something positive that happened over the last week and this week I have two actually so professionally spent a couple of days out of the office doing continued education so I always have to be sharpening this all learning what’s new from a legal financial and tax standpoint especially with all the potential changes coming president Biden’s Buildback America program. 

So just trying to learn from other smart advisors and attorneys so I had my continued ed education meeting in Minnesota. And so when I saw I was booked for Minnesota in October I was not super excited for that based on the weather like if it’s kind of fall-winter I’d rather go somewhere nice and warm but actually it was my first time to Minneapolis Minnesota and it was like 70 degrees and sunny walking around so it was kind of nice and learned a lot so that was nice. And then on the personal front something positive is my girls soccer team so far we’re undefeated with one game left and we already secured the league championship with a really tough game this past week and my daughter was in goal the whole time and she pitched a shutout. 

We won one nothing so it’s pretty stressful that she took about 20 shots on goal but we ended up pulling it out and then kind of funny I coach my girls and boys tonight we’re having the boys girl soccer ball where my eight-year-old girl’s team is going to scrimmage against my 11 year old boys team and we’ll see how that goes I’m roughing we have some assistant coaches including my dad who coaches with me he’s going to coach the boys and then we have another coach for the girls I’ll be roughing and making sure everyone’s not playing too rough in the scrimmage today but enough about my positive focus let’s get into the question so again if you do have a legal financial attacks question please put it into the Q&A and I will go ahead and get to it so with that let me click this button to share my screen and I’ll hit this button and now we should be seeing in just a minute my whiteboard all right so again if you have a question please put into the Q&A. 

This is general advice you want to see how this applies to your situation feel free to just split some time on the calendar and with that let’s get going here all right so really I just had two questions or submitted ahead of time and again if you if something is floating around in your head you have questions about your your situation or you read something on the internet now’s the time to go over that so question number one can you explain how trusts are taxed while live as well as when you pass away and how IRAs play a role in this so understand there’s lots of different types of trusts out there but in our office we’re doing basically two main types of trusts we’re doing what we call revocable living trusts these are I guess more common in the overall estate planning world and then we’re doing what we call Castle Trusts. 

The big thing here are these are an irrevocable even though you can make changes to it but really what it is is a asset protection trust now there’s something that’s there’s a lot of things in common the biggest difference with the Castle Trust is we’re building an asset protection while you’re live protecting from things like long-term care costs and creditors lawsuits so that’s the big difference here but there is a there’s a lot of commonalities and the big one from a tax perspective is that both of these to use a legal term are what’s called grantor trusts and why that’s important is that it’s taxed at your own personal income tax rate not a trust tax rate so from a tax perspective both of these trusts operate exactly the same while you’re alive and why that’s important is let’s look at our key data sheet for 2020 so I was marking this up with clients earlier today and looking at marginal tax rates and so I just draw your attention let’s go married filing jointly I have a lot of clients who kind of naturally fall in this tax bracket maybe they fall in here when we start taking talking about pulling money from the IRAs and we’ve talked about from a tax perspective how when the tax cuts and jobs act expires this is going to 25 percent this is going to 28 so maybe we should start paying taxes sooner rather later but that’s not my point here. 

My point here is if you look at the top tax bracket which right now is 37 percent for a married couple you have to have over 630 dollars worth of income to get to that tax top tax bracket but if we have a trust paying taxes we get the top tax bracket at thirteen thousand and now all of a sudden we’re paying thirty seven percent on any additional income that’s coming in so that’s why it’s super important I i get this question often often of okay we have this trust whether it’s a revocable trust or it’s an asset protection trust do we have to pay trust tax rates and the answer is no because it’s a grand tour trust that means it’s taxed at your own personal income tax rate whether it’s married filing jointly or single filing okay so very important these trusts at least these two trusts while you’re alive and well taxed at just the way you normally would get taxed okay and then what happens when you pass away well upon death there’s two typical ways that assets go out right to our beneficiaries one is this pillowcase to money approach where we just launch a pillowcase of money at our beneficiaries the other is we give them the opportunity. 

So whatever you inherit or whatever they inherit from you is protected for their life from creditors divorces etc and it could split into separate shares depending on the number of kids that you were to have for example a client I just met with has two children two children so and they’ve built in the ability so that whatever the kids inherit will be split into two separate trusts each child could be the trustee of their own separate share trust but the way things are taxed upon death is typically we have the income coming out or we could actually have the income remain in the trust but the income goes to the individual so still it’s taxed at upon death we have most of our trust tax again still at personal income tax rates so if your child inherits this money and they’re making a let’s say a hundred thousand dollars then whatever they pull out in terms of income if it’s pre-tax money would be taxed at 22 now IRAs play a role because these are and I assume we mean pre-tax in the question so pre-tax means we haven’t paid any income tax on it and so when it goes down to beneficiaries thanks to the secure act that passed in 2020 all the taxes have to be paid in 10 years so if you have a hundred thousand or let’s say a 100 let’s say a one million dollar IRA that the kids inherit they’re gonna have to basically within 10 years pay all the tax on that so that’s another reason why a lot of my clients right now are looking at these tax brackets and paying the taxes sooner rather than later because a we know taxes are going up in the future and then b when you leave it to the kids they have to pay all the taxes within 10 years and then even before that what happens when we go from a single filing to a widow or a married couple to a widow now if we need that same amount of income we might be jumping up tax brackets and this is called the widow’s penalty. 

Where if you look at it the tax brackets for a single individual are very different whoops for a single individual are very different than what they are for a married couple so ed slot calls that the widows penalty so again taxes I think are one of the biggest risks and biggest opportunities out there right now we know taxes are going up in the future thanks to the tax cuts and jobs act which runs from 18 to 2025 plus we’re 30 trillion dollars in debt so there’s a good chance that taxes might go up much higher than just what they’re set to expire to so hopefully that’s helpful yeah so the biggest thing IRAs are really what plays a big role the type of trust basically is neutral from a tax perspective if the trust is set up properly which others are really the biggest thing is just looking at the type of asset that you’re leaving to that next generation if it’s pre-tax IRA money then coming in can you email the 2021 tax schedule yeah if you could do me a favor and if you want that tax schedule I just showed please just do me a favor and reply to the email for this or you can email contact at castlewealthgroup.com. 

Another comment here don’t donor trust avoid taxes so you could set up a donor-advised fund where the taxes are going or your so there’s two things so you could do either donor advise fund or what a lot of my clients are doing right now is qualified charitable distributions so if you do have pre-tax IRAs and you have to take out RMDs because you’re 72 rather than taking those RMDs and then maybe later like contributing to church or a charity have those requirement distributions go directly to that charity that’s going to lower your income and then you it doesn’t even count in terms of your standard or your itemized deductions so if you are donating to charity on a regular basis. 

I would use RMDs as a way to do that and then yes you could also set up a donor advise fund where in the end the ad account is going to go to charities as well so if you do have charitable interests there’s a lot of different options to avoid taxes so that’s always something that we’re bringing up is hey what type of charitable giving are you planning on giving more than 10 or 12 or 15 000 a year when we’re putting together that estate or trust are there any charitable interests you want to leave 10 to the church or charity do we do that as part of the trust do we carve out a portion of the IRAs and just say they go to the the charities so yeah if you do have tradable interest there’s a lot of different options there all rights okay certain states utah is where wealthy set up trust to avoid taxes well so certain states have different statutory protections but not with regards to federal estate or federal taxes different states will have different state taxes like Michigan we have 4.25 percent state income tax other states like florida texas if I remember correctly they don’t have income tax but you’re not going to avoid federal tax by moving like the situs of a trust to a different state really the only times you would look at different states for a trust. 

Typically would be if you’re looking at taking advantage of some of the statutory asset protection but that’s where I’m going to argue a trust like a Castle Trust or irrevocable trust like I look at state statutes like Michigan has a domestic asset protection trust statute that’s kind of trying to create an asset protection trust paint by numbers where if you don’t know what you’re doing you can follow these steps and you can have an asset protection trust but you have to give up a lot of control versus if you know what you’re doing you can rely on things other than the statutes to create that same level of asset protection here’s another question coming in in 2020 we did not have taken RMD on a beneficial IRA do we need to take RMDs in 2021 yeah so 2020 was a weird year thanks to the cares act the cares act said that if you were required to take an RMD last year in 2020 you did not have to you could waive it so you had the ability to waive the RMDs for last year this year RMDs are coming back so if you did have an inherited IRA prior to 2020 which means it was grandfathered in prior to the secure act every year you’re going to have an RMD based on your life life expectancy. 

So if you’re 72 your RMD might be 3.65 if you’re 40 the RMD might be two percent so that’s for someone that passed away prior to 2020. if you if the person passed away after 2020 now you’re operating under the secure act and you just have to pay all the taxes within 10 years it doesn’t have to be all up front or 1 10 every year you could wait to the last year if you wanted to so you have to understand the rules for an inherited IRA or beneficiary IRA pre-passing away 2020 versus post secure act those rules are different but yes if you did not take RMD last year to do the cares act this year there they have not been any they have not gotten rid of the need to take your RMDs so that’s what we’re doing with a lot of our clients right now is we’re going over their RMDs looking at their tax brackets and figuring out how much we should do in terms of Roth IRAs et cetera all right here’s another ques comment year after year in south dakota state lawmakers approved legislative draft by trust industry insiders providing more and more protections and others blah blah blah the u.s paper says one of the biggest incentives is a state span and the rule against perpetuities for blah blah blah yeah so Michigan doesn’t have the rule against perpetuities either so again some of this you got to be. 

I don’t know the news is the news you can read whatever whatever is going on there but yeah even if you have a trust in south dakota you still have federal estate taxes you can’t get around that so yeah but again yeah so a lot of states are looking at kind of paint by numbers statutory ways to create asset protection it just depends on what your goals are some people throw out like should I go offshore with my trust yeah probably not question is on a dynasty trust can I set one up in south dakota sure but I don’t see why you wouldn’t want to set it up in Michigan if you live in Michigan I would depending on your state just set it up in whatever state you want to set it up in because again Michigan doesn’t have any rule against perpetuities what our legacy trust does or Castle Trust that has legacy provisions built basically builds in a dynasty trust where once you leave the next generation is asset protected they pass away it can flow down to the next generation so again I always try to figure out what is your goal let’s figure out the best strategy to help you achieve the goal and then pick the best tool so I’m not going to start with all right let’s talk about a South Dakota dynasty trust like all right let’s figure out what are you trying to accomplish let’s figure out the least expensive easiest simplest way to accomplish what your goals are. 

And okay maybe it is looking at a trust out of state but for majority people I don’t think we’ve ever found a reason to do a trust outside of the residence of where the person’s living so I’ll leave it at that okay pop up answer that you are welcome all right now I have one more question though submitted ahead of time so if you do have any other questions feel free to plug them in but otherwise I’ll go back to sharing my screen I hit this button I hit this button I hit this button and then I hit this button and then I hit this button hit all the buttons all right what are the best ways to save for college for young children so I always especially right now I’m always going back to taxes so we have what I call non-qualified or taxable accounts then we have tax deferred or pre-tax and then we have stuff that grows tax-free so if I’m saving for college and I’m assuming that we have young children and we’re putting money away well the question was young children then I want growth and I want it as much as I can tax free so what are the things that grow tax-free Roths cash value life insurance 529s which have to be used for education and then health savings counts okay now you have some other things like cover deals and a couple other things but there’s a lot of limitations like you can only put in 2 000 a year like that’s not gonna that’s not gonna do it like that’s helpful and there’s certain credits that are available as well but really when you talk about really saving for college. 

I want to focus on something that grows tax-free so the obvious answer assuming that okay we are using this money for college is a 529 so 529 Michigan has an amazing 529 program I save in the 529 in fact I just shared on our facebook page article from morningstar I’m gonna see if I can pull it up real quick yeah here we go so I’m gonna share my screen real quick stop sharing that and I will now share this screen right here so this actually just came out I saw this today I have too many windows open so it’s a morningstar top 529 savings plans of 2021. and again I’m not saying morningstar is the end-all be-all but this is something that I’ve known so what are the best 529s I always my favorite investments are actually in the utah plan they use funds called dimensional funds but Michigan is right there and then the reason I chose Michigan for myself is I live in Michigan and we get some tax deductions if I didn’t live in Michigan I’d probably choose the utah plan but very low cost and the money grows tax-free so Michigan has an amazing 529 plan so I would start there as a easy answer for where to save money someone comment I funded three kids entire education with Michigan savings plans yeah yeah the Michigan education savings program is awesome. 

Some states don’t have as good of a plan but if if you’re for sure wanting to put the money away for expenses college expensive educational expenses you can’t go wrong with the Michigan savings plan and then also the nice thing is you can always transfer it so I have two kids I have a savings plan set up for both of them if one of them doesn’t go I could transfer it to the other one or I could even transfer to grandkids so you can you can transfer who you’re using the money for so I always start there now understand that you’re limited in your investment options with these so basically they’re going to be invested in the market either aggressively or conservatively and I’m a big fan of diversification so kind of the number two way is we look at cash value life insurance now also 529’s though it’s owned by the parent it does fit into your fafsa in looking at whatever financial aid is going to be calculated versus cash value life insurance cash value life insurance does not count towards parents resources and then the nice thing about cash value life insurance is that if it if the market goes up and down if the market goes down you don’t lose anything and you just collect the upside of the market so currently that’s how I’m saving is in two different vehicles these two vehicles partly to a 529 which has to be used for education. 

It goes up and down as the market goes up and down and then partly in cash value life insurance where if the market goes down right as my kids turn 18 sorry ryan and maddie instead of getting two years or four years you’re getting two years so it’s just creating some different diversification both inside of whoops both inside of this tax-free bucket and a lot of people ask about like rate of return a lot of times on iul over time you’re gonna see on average about a six percent rate of return which is when you factor in the volatility and everything in the market could be about the same now depending on your age here’s a interesting option is you could also look at a Roth as a way to save for your kids education depending on how old you are so I can’t do math in my head but roughly if you’re 43 and have a newborn well guess what that’s going to get you to about 59 and a half when they turn 18 and now you can pull money out of the Roth penalty free so once you turn 59 and a half you can pull money out of a Roth which technically is supposed to be used for your retirement but it doesn’t matter what it’s used for as long as you pull it out after age 59 and a half penalty free so I actually had a conversation with a client the other day and he wasn’t sure if one of his kids would go to college but he wanted to save. 

And so I said well maybe a Roth is a better option based on his age because he could pull that money out in the kid’s second year now to pay for college so there are some outside the box options other than just the 529 you could look at an iul cash value life insurance that grows tax-free has to have a life insurance component to still grow tax-free and that’s part of section 7702 of the tax code similar like 401k and stuff all these things are named after sections of the tax code 529 it’s named after a section of the tax code okay so yeah so those are some options kind of the easy answer especially in Michigan Michigan 529 if you want to diversify a little bit maybe you look at cash value life insurance has a little more flexibility and then depending on your age you can even look at Roths so that is all I have for questions let me see any other questions coming in all right here’s can I pay my granddaughter’s college tuition from my IRA and avoid paying taxes on it so the question is can I pay my granddaughters I right college tuition from my IRA and avoid paying taxes on it my inclination is going to be no because you’re still have to pull money it’s it’s not like you’re donating it to college like you’re not donating it to a 501c3 or to a charity or anything like that so my inclination just off top my head would be no you’re still going to have to pay taxes on it you could get around someone depending on how you handle it you could get around some of the gift tax issues. 

Which really isn’t a big deal because you could always fill out a gift tax form so as long as you have less than 11 million dollars you don’t owe any gift taxes you fill out a gift tax form but that’s it but no I would say you cannot pay your granddaughter’s college from your IRA and avoid paying taxes IRA unless you’re leaving it directly to a charity you’re always going to pay taxes so you could leave it to the college potentially or a charity but you couldn’t have it go to pay for a kid’s college yeah okay explain a Castle Trust all right so so what is a Castle Trust all right so in the big scheme of things we have two types of trust so let’s first look at a revocable living trust this is you you have your investments your house your stuff god forbid you pass away you don’t want this stuff to end up in probate so that’s why a lot of times we set up a trust and there’s different types of trust we have what we call a revocable living trust think of it like this you get home from grocery store you don’t want to just leave your stuff sitting in the driveway what do you do with it you put it away into your house. 

Am I sharing my screen no let me share my screen all right now I’m sharing my screen alright so young stuff you don’t want to leave in the driveway instead you put it away into your pantry and your house like similar with your assets we need to get them funded or titled in the name of the trust so upon death it avoids probate now with a trust we can decide how we want to leave things upon death to our beneficiaries and this is getting into some of that dynasty trust questions but a lot of times I see people leaving things outright to their kids at specific ages 25 30 35 with the idea we’re protecting them from their own poor financial mismanagement but what a lot of my clients have found is okay they trust their kids but they don’t trust the outside environment so instead they want to build an opportunity so whatever their kids inherit from them they can receive a lifetime of asset protection where it could be held in separate share trust for each one of them at the end of the day what it’s doing is protecting your beneficiaries protecting them from creditors protecting your beneficiaries from divorce and if your kid passes away then what whatever they have left it goes down the bloodline goes down to like your grandchildren right but that’s great that’s all done in a revocable trust but what is a Castle Trust well we need to understand what a revocable trust does not do does not protect you against two potential catastrophes. 

The first one is lawsuits and so if you were to get in a car accident hit a school bus full of kids or something like that and then the big one is the long-term care costs specifically the nursing home care which runs eight to twelve thousand dollars per month okay I had a meeting with client this morning dad is 92 and is in a nursing home paying a big chunk of change so a revocable trust does not give you asset protection what a revocable trust does it avoids probing controls that distribution upon death so instead maybe we want to look to a asset protection trust called a Castle Trust which is a form of asset protection trust and so what happens is we can put our money in here we can put our assets in here and immediately what it does is it shields us from any type of lawsuits or creditors okay as long as something hasn’t already happened I had a woman approach me she had a second piece of property her son was staying there her son invited a friend who’s a woman over he stepped outside the dog ended up biting the woman’s face and then mom now got sued for 750 000 dollars and wanted to set up an asset protection trust at that point it’s too late once you already have a claim or something like that you’re not going to be protected from creditors at least that specific point. 

But really the the big reason a lot of my clients do this is what the Castle Trust does is it starts a race where if we can make it five years from the time we set up this trust before we need a nursing home then everything would be protected from that nursing home or medicaid spend down because medicaid is a governmental program that can pay for that nursing home care and then medicaid looks back five years to see if you moved any money around and if you have they’re going to penalize you but if we can set up the Castle Trust and then make it five years we can then wave a checkered flag to know that a hundred percent of what we have inside of that trust is protected from that nursing home or medicaid spend out so now we can have medicaid pay that base level of care and then we have a pot of resources available to pay for additional services to improve our quality of life or if we’re married couple ensure that healthy spouse isn’t completely impoverished just because one spouse needs long-term care so that’s that’s really what the Castle Trust is looking to do. If a revocable trust can avoid probate and control that distribution upon death then what a Castle Trust can do is avoid probate control the distribution upon death and then build in the asset protection and this is again where we’re not painting by numbers we’re not relying on the Michigan domestic asset protection trust what we’re doing is we’re taking these complicated trusts we used to use for estate taxes when the estate tax exemption was at six hundred thousand dollars and if you passed away with anything more than that you would owe 40 percent would go to the government because of the estate tax exemption being so low well that continued to grow to now 11 million dollars for an individual 23 for a married couple so clients aren’t as concerned about estate taxes and then also what happened is people were living longer than ever so I wasn’t getting calls that hey we have an estate tax issue I was getting calls that mom fell broke or needs a nursing home what can we do so clients who are coming to us looking for protection from long-term care costs and that’s where we rework these trusts we used to use for estate tax purposes to make them very easy to to work with you can make changes to it but it builds in that asset protection so think of it almost like a revocable trust on steroids where now not only can we avoid probate and control the distribution but now we can build in asset protection and we’d only go that route if we’re concerned about long-term care costs or creditors or lawsuits in the future which a lot of my clients are like I had a business owner today I’m concerned about liability so we set up a Castle Trust. 

I had someone else today dad’s in a nursing home they see the cost they’ve worked very hard their whole life and they want to make sure it’s protected Castle Trust is irrevocable irrevocable can the assets be removed from the trust yes the assets can be removed from the trust at any time without any penalty what if you have a Castle Trust with a house in it and you need to go in an assisted living community you also have dementia and your child is your poa they sell that home would that money need to go to the assisted living or would that money go into go to your pta or poa so let me get back to my screen real quick so the question is what happens if you sell the house so all right so let’s say we sell the house so we have the house right here inside of the trust now we sell the house okay well the pro that house just gets turned into cash and the and it would remain inside of the trust you could invest it do whatever you want but it’d still remain asset protected and wouldn’t restart the five-year clock and yeah someone asked can you get assets out of the trust yes we can always open up the escape hatch to get the money back out none of my clients would do this if if the money was locked up in there forever can social security and pension monthly payments be added to the Castle Trust no so your social security and your pensions and whatever income goes into your name but then from there if you wanted to add kind of your savings to the trust you could. 

Like I had a call with some existing clients this morning they had built up a good chunk of change in their savings account where they had about a hundred and sixty thousand dollars in their savings account and and we talked about well that money is not working for you it’s just sitting there plus it’s not protected and so they’re gonna move another hundred thousand dollars from their savings account into the trust and then we can get it invested and working for them so your social security pension has to go to your name but if you build up a good amount of savings we could always knock that money into the trust all right getting back to someone saying they still have money in the 529s do you want to name my kids as beneficiaries more than happy to do that they would always appreciate more college savings money so if you do have more money in the 529s okay any other questions going once going twice and sold all right well wish us a luck at our practice our scrimmage tonight I don’t know if you’re team boy or team girl I think the girls might need a little help today so think good thoughts for them oh here’s another one does social security and pension have to be taken for nursing home expenses the answer is yes so if you are in a nursing home they’re going to take your social security your pension leaving you 60 a month worth of your own income works a little bit differently if you’re married if one spouse is in the nursing home typically they’re going to take their income but they’re not going to completely impoverish. 

The healthy spouse but yeah typically they’re going to take your income that’s part of what’s called a pr a patient pay amount so if you have three thousand dollars social security and pension they’re going to take all of that leaving you 60 a month which is basically a haircut and getting your nails done so that’s why we work hard to build in protect the money so you can get dental work eye work get your hair done other things like that or if you’re a married couple ensure that healthy spouse isn’t completely impoverished that’s why the asset protection nature is so important that’s also another reason why when we’re talking to clients about retirement whether it take the pension or not a lot of times we lean towards not taking the pension because you lose control there’s other things we can do so but if you just take the pension it’s straight income stream like social security and if you need nursing home care that’s money that’s just going to the nursing home we can’t divert that any other way first is if it was a lump sum there’s different things we could do to protect it whether we lump sum it out and put it in asset protection trust or even last minute there’s things we can do to protect it so that’s why typically not a huge fan of the pension if you want that guaranteed income there’s different things we can do but still we would take it out of the pension all right done once going twice.