Castle Wealth Group

September 25, 2020

Retirement and Legacy Blueprint Webinar – Episode #3

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.

On this week’s webinar, attorney and advisor Chris Berry of www.castlewealthlegal.com answers questions regarding Social Security, Castle Trusts, Required Minimum Distributions, and more.

In this episode, you’ll learn…

• Chris’ positive focus for the week
• How should we plan for Social Security
• How much privacy does a trust really afford an individual
• Castle Trust will protect against lawsuits and long-term care costs
• Should a trust be named as a beneficiary of a qualified account
• Castle trust designated beneficiary
• Building asset protection against divorces, lawsuits, creditor action, bankruptcy, et cetera
• Protected from that nursing home or Medicaid spend out
• A way to lessen taxes on required minimum distributions
• Taxes through a micro lens versus a macro lens
• Does a Castle Trust also include the legacy inheritance trust provision as the Castle Trust?
• Can I open a Castle Trust with my son as a trustee, excluding my husband?
•  Social Security Optimization Report

Episode Transcript:

Good to see everyone. And with that, we’ll go ahead and get started. So, it is one o’clock, and something that we do on our radio show and that we start every meeting with is what we call a positive focus. So, just something positive that happened the previous week. And for me, something positive that happened … And I like doing this, especially given everything that’s happening right now, is my son he actually graduated in Cub Scouts and now he’s, what’s called an Arrow of Light. So, he graduated from Webelos. And let me just share a picture of my son, Ryan. So, you should be seeing him there, social distancing, mask enforced, but he is now an Arrow of Light.

And so, that’s pretty exciting. And so, let me stop sharing that and what we’d like to do … And don’t mind my Stormtrooper is behind me, we’ll go ahead and get rid of the virtual background. I’m in my Lavonia office today. What we’d like to do is just answer questions that people have throughout the week or that our clients have, or email or submit to us throughout the week, just as a way to provide some education. So with that, if you do have questions, feel free to type those into the question and answer section. Otherwise I have about, what do I want to say, about four or five questions that people submitted this past week. So, let me get into those.

And what I’ll do is I’ll share my screen. So, give me just a moment here and I will share my screen. Let me do our iPad. Give me a second. Technology is always fun. You know what? Let’s do it this way. All right. So, what I’m going to do is, my iPad’s not working, loading up. So, we’re going to do it this way. I’m going to open up a white board in Zoom and we’ll go from there. All right. So, the first question we had was regarding Social Security timing strategies. So, the first question was, “How should we plan for Social Security?” And really the answer for everyone is different. And the idea is that really with Social Security, you can claim it any time from 62 or actually 60, if you’re a widow, up until age 70, and you’re going to have what’s called full retirement age.

Full retirement age, depending on when you’re born is either going to be 66 or 67. And especially with married couples, there’s a lot of different variables in terms of how to maximize Social Security. And one of the things that we can do is run what we call a Social Security Timing Report, where if we get a copy of your Social Security statement, we can go ahead and, especially with a married couple, run a Social Security Timing Report, figure out what is the way to maximize Social Security for you over your lifetime. And so, we have to factor in, when do we think we would pass away? And maybe it’s 85, maybe it’s 75, maybe it’s 95.

And then based on that, we can look at, does it make sense to delay taking Social Security or does it make sense to take Social Security earlier? And it really is different for everyone. For example, just last week, let’s say I have a hypothetical client, one client is on disability and in poor health and the wife is healthy, considering whether to retire prior to 66 or 67. So, in their situation because the husband’s had a higher Social Security and wasn’t super healthy, based on conversations it made sense for her to retire prior to full retirement age, understanding that she’s going to get less of a Social Security, but when the husband passes away, she’s going to get bumped up to his Social Security. So in that situation, it made sense for her to take Social Security earlier, because if he passes, she’s going to get bumped up to his Social Security anyways.

Now, you compare that, there’s a lot of situations where it makes sense to delay taking Social Security because every year you wait after basically full retirement age, Social Security grows at about roughly 8% per year. So, your income for the rest of your life can grow at roughly 8% a year the longer you delay taking Social Security up to age 70. And then what happens is that if you do delay taking Social Security, that fits into a nice tax planning concept of if you do retire and then you delay taking Social Security, then you can pull money from your IRAs when you’re at a lower income tax bracket. So, it fits nicely into a tax planning scenario as well. So, just when is the best time to take Social Security? Unfortunately, it really depends, but that’s something that we can sit down and figure out in your situation, when is the best time to take it?

Sometimes it makes sense to take Social Security as soon as possible. Sometimes it makes sense to delay taking Social Security. It just fits into having some type of plan for income. So, that’s the first thing that came up this past week was when to take Social Security? Now, the second thing that popped up was privacy with regards to trusts and how much privacy does a trust really afford an individual? And let me see if I can share my screen again, while I’m doing this. My iPad’s just not working. Okay. So, the question is with regards to privacy and a trust and I’m not sure necessarily where the individual was coming from with the question, what they were trying to protect, but when we’re talking about the privacy within a trust, a lot of times we name the trust is just the last name of the family member.

So, if your name is John Smith, we might typically name it the Smith Trust, and then it’s going to have a date. So, maybe under stands for Under Trust Agreement, UTA, and then whatever date, let’s say 9/16/20. So, that’d be the date you signed the trust. So with that, that doesn’t really offer much privacy. Taking it one step further, what we could do is, is we could change the name of the trust. Now the trust name doesn’t have to be necessarily your last name. So, hypothetically, let’s say, you had a client and they named their trust The Rising Sun Trust UTA, Under Trust Agreement 9/16/20. So, that would offer some more privacy, but the thing to keep in mind is that typically they’re going to need to know who the trustee is. So, the full name, when we’re recording a trust might be Jim and Jane Smith Trustees of the, let’s call it The Rising Sun Trust Under Trust Agreement 9/16/20.

So, as you see Jim and Jane Smith’s name’s still probably going to be on there. So, a trust really doesn’t offer a ton of privacy necessarily, but what it can do is offer asset protection, depending on how the trust is set up. So keep in mind, a revocable living trust, and this is probably the most common type of trust, so if you have a revocable living trust, this offers zero asset protection. So, zero asset protection, meaning if you were to be sued with a revocable living trust, it’s like a suitcase you’re holding onto you. They’re going to come after that. Versus we do have asset protection trusts, so if you are concerned about protecting assets from creditors, lawsuits, that type of thing, we do have a asset protection trust called a Castle Trust. So, we move assets into the Castle Trust, as soon as we move those assets into the trust we’re protected from money lawsuits, creditors, bankruptcy, that type of thing.

And then, also what a Castle Trust does is it starts that five-year clock for Medicaid purposes. So, it starts the Medicaid clock. So, if you’re concerned about long-term care costs, a lot of time a Castle Trust makes more sense. Now, that said neither of them are really going to be a great tool for privacy, unless we think outside of the box a little bit. So, one of the things we could do, and you’d have to give up some control, is maybe a point someone else as a trustee. So we could, if let’s say you’re a parent, maybe you appoint one of the kids as a trustee or someone else. You’d have to give up some control, but that’s where you could build in some privacy. So instead of Jim and Jane Smith Trustees of The Rising Sun Trust, maybe it’s, just making up names here, Jeff Johnson, who’s maybe a friend of the family or something like that.

That’s a way to maintain privacy, but you have to evaluate is that privacy worth the trade-off of appointing someone else to hold those assets for you? But if we’re just looking at asset protection, we could have a Castle Trust and you could be the trustee of that trust. And again, the Castle Trust will protect against lawsuits and long-term care costs. So, hopefully that’s helpful. And again, to create the asset protection trust or to create the privacy, we’d have to look outside of the box a little bit and maybe appoint someone else as a trustee. Also, we could look at LLCs as part of that as well. So, with regards to privacy, what we could do is create, let’s say The Rising Sun LLC, and then from there, the owner of that LLC could be The Rising Sun Trust. But again, if they were to dig deep enough, they’d still figure out who the trustees of The Rising Sun trust is.

So, we can build in layers of privacy but if someone wanted to dig enough, I don’t think with a trust you can really build in full privacy unless you appointed someone else as a trustee. Okay. So, now let’s move into the third question that I had, and again, if you do have any questions, feel free to put them into either the chat or the question and answer section. And also, if you do have questions or if you want to see how this information applies to you, feel free to book some time with me, just go to www.15chris.com and we can book a short little 15 minute phone call, figure out how we can best help you.

All right, our third question here, should a trust … And this is a common question, be named as a beneficiary of a qualified account? So, qualified accounts are things like 401(k)s, IRAs, 403(b)s, really anything pre-tax. And in fact, this is a question I get from not just family member … Or our clients, potential clients and clients, but also from other financial professionals. And this is one of the things that really frustrates me is the confusion on this topic, and in fact, just before I hopped on this webinar, I saw that I have a phone call scheduled with another client’s advisor to educate that advisor on how this works. So the answer is, unfortunately, it depends. It depends on what type of trust that you’re creating. Any trust that we create in our office is going to qualify as what’s called a designated beneficiary. So, this is the key is that the trust has to qualify as a designated beneficiary because if it doesn’t qualify as a designated beneficiary, then all the taxes would have to be paid within five years.

So, if you’re leaving a million dollar IRA to the next generation and the trust does not qualify as a designated beneficiary, then all the taxes would have to be paid within five years. Now, prior to the Secure Act, if we set up the trust in the proper manner, all of the taxes could be paid, stretched out over the lifetime. But now because we have the Secure Act, whether we name a individual, like a son or daughter as a beneficiary or a trust, at most we have a 10 year stretch out. So either way, whether we name an individual or a trust, thanks to the Secure Act … So, the Secure Act means that we can only stretch out those pre-tax accounts 10 years, meaning stretch out paying the taxes over 10 years. And that’s regardless of whether we name a trust, one of our trusts that qualify as a designated beneficiary or an individual. Now, typically we name the spouse as the primary beneficiary.

So, they can do what’s called a spousal rollover, where now that surviving spouse inherits that IRA, and it becomes their IRA, where they don’t have to take out any required minimum distributions or anything like that. But typically we’ll name spouse as primary beneficiary, and then the trust as a contingent beneficiary. And one of the big reasons why we do that is a lot of times in our trust we build in what we call legacy inheritance provisions. Meaning that if your children were to inherit an IRA or 401(k) 403(b), post-tax accounts, Roth life insurance, if they’re to inherit, and it’s one of our legacy inheritance trusts, then whatever they inherit from you would be protected from a divorce, a lawsuit, creditor action, bankruptcy. Very different than leaving it outright to a beneficiary. Plus if that individual were to pass away, then the money stays in the bloodline versus going to a spouse who might remarry.

So, for that reason or two reasons, one is we name the trust as a beneficiary because it will have the same tax implications if we named the individual. And then second, typically when we’re setting up a trust, we build in language. So, whatever the beneficiaries or kids inherit would be protected from divorces, lawsuits, creditors, bankruptcies. And this is something that just for the last 10 years has infuriated me, is that a lot of people who hold themselves out as financial advisors or financial professionals are giving wrong, bad, or just uneducated advice with regards to trusts. And so, again, I think the trust should be named typically as a contingent beneficiary if you’re married, because we can maintain all of the tax benefits in naming the individual outright, but now we can build in the opportunity for a lifetime of asset protection. So, if someone’s telling you not to name the trust as a beneficiary of a qualified account, I would be happy to have a conversation with them and educate them on why the trust typically should be named as a contingent beneficiary.

Again, we want to name the spouse as the primary beneficiary nine times out of 10, but then we’ll name the trust as a contingent beneficiary for the asset protection provisions that we talked about. Plus from a tax perspective, it’s no different with our trusts than naming a individual outright. So, there’s no downside to naming the trust only an upside of naming the trust as a beneficiary of that qualified accounts. All right. So, and I’m moving into my last question that I had, previously submitted. So if you do have any specific questions, feel free to put that into the question and answer section or the chats. And so, the last question that I had submitted previously. So let me get … We’ll call this question four, this is from Phil and I think Phil is actually on the call, “Does making changes to a Castle Trust restart the five-year clock?”

So, some explanation here. So, in reality we have two main types of trusts. We have, and I talked about this in question two, we have a revocable living trust and what a revocable living trust does is two things, and it does these two things very well, and it’s a good trust. One, is it avoids probate, assuming it’s funded properly. So, most people want to avoid probate because it’s a core process, time consuming, it’s messy on the backend. And then, two, what a revocable living trust does is that it can control that distribution. So, you can control where your assets go at the end of the day. So it can control the distribution. For example, if you wanted to build in this legacy inheritance trust that we talked about, you can do that inside of a revocable living trust. So, that’s pretty powerful.

Then we have a second type of trust called a Castle Trust, okay? And what a castle trust does, is it avoids probate, so that’s important, right? Most people, that’s the starting point for their estate plan. Two, we can control the distribution, so decide how we leave things to our beneficiaries and we can either leave it outright to them, or it could be held in trust for their benefit. Again, protecting against divorces, lawsuits, creditor action, bankruptcy, et cetera. And then three, it builds in asset protection, and this is the big one. This is what a revocable living trust does not. And when we’re talking about asset protection, we’re talking about lawsuits. So, immediately, whatever you move into the trust is protected from creditors, from bankruptcies, you get in a car accident with the changes in auto insurance law, you’re a business owner, whatever’s inside of the trust would be protected. And then the big thing is it protects against the devastating cost of long-term care, and really what we’re talking about here is nursing home costs, okay.

A nursing home right now costs about eight to about 14 plus thousand dollars per month, and the average stay in a nursing home right now is two and a half years. And current statistics say one out of two individuals will need nursing home costs. So you do the math. That’s a big concern for a lot of my clients, especially married couples. And with that, we have a governmental program that will help pay for nursing home care and it’s called Medicaid. Now, a lot of people think if you’re on Medicaid, you’re in some rundown nursing home, that’s not the case. Any nursing home that accepts Medicare also typically accepts Medicaid. But if you were to try to call up a nice nursing home and say, “Hey, I need a nursing home bed for my loved one or a Medicaid bed.” They’re going to say, “Oh, I’m sorry, we don’t have any Medicaid beds available.” But here’s the thing, you private pay for a couple of months to get in that nice nursing home, then you can flip over and have Medicaid pay that base level care.

It’s kind of like back when you could travel. So, if you were flying to California, you might buy a ticket to California and it’s $700. Well, the person sitting next to you in the same exact seat, maybe it’s first class, just like you, or coach or whatever it may be, same exact level of service. They might have bought their ticket for $99 just based on where they bought it or the timing and that type of thing. So, they’re both getting the same level of service, both going to the same place, but you’re paying very different things. Similar with Medicaid is that we can have Medicaid pay that base level of care and then with, say a Castle Trust, we move the assets into the Castle Trust, we make it five years, then everything inside of the trust would be protected from that nursing home or Medicaid spend out.

So, now you could have Medicaid pay that base level of care, and then you’d have a pot of resource available to pay for additional services to improve your quality of life, or if you’re a married couple and one spouse needs long-term care, that healthy spouse isn’t going to be completely impoverished having to pay for that care. Now, Medicaid has a five-year look back period, meaning Medicaid is going to look back five years to see if you moved any money around and if you have they’re going to penalize. So, again, what the Castle Trust does is as soon as we move the assets into the trust, it starts that five-year clock. Where now we wave a green flag to say that we started that race, and then once we make it five years, everything inside of that trust is protected from that nursing home or Medicaid spend out.

And so, the question is … It’s really a twofold question. So, the first question is with the Castle Trust, because you can make changes to it, you can change beneficiaries and that type of thing, if you were to make a change to the trust, does it restart that five-year clock? And the answer to that is no, just because you make a change to the trust that does not restart the five-year clock. And then a follow-up question, and this is one that I get a lot, is that if I were to sell my house from that Castle Trust, and let’s say downsize to a condo, does that restart the clock? And the answer to that is no, because all you’re doing is you’re changing the nature of the assets in the trust.

For example, if you had $500,000 of cash in the trust and then you bought a condo, everything’s remaining in the trust, so it remains protected. If you had $500,000 of checking savings and now you want to go to a mutual fund, all of that remains in the trust and it remains protected. So again, if you were to sell your property, as long as everything remains in the trust, the proceeds of the sale would come back to the trust. Doesn’t touch you individually. Then everything would remain protected in the trust and it would not restart that five-year clock. I have a lot of clients that they downsize or they sell, they move into independent living or assisted living, and the proceeds of that sale remain protected inside of the trust. So yes, you can sell the house from the trust. All right, so it looks like a couple more questions came in.

Let me go ahead and address these. “Is there a way to lessen taxes on required minimum distributions?” So, the question is we have these pre-tax accounts like IRAs, 401(k)s, can we reduce the taxes on those required minimum distributions? Well, and this is something that we’ve been really hitting the drums or banging the drums on for the last couple years ever since the Tax Cuts and Jobs Act, and we’ll call this number five. And really, so this is what we just call tax planning. We’ve been doing quite a bit of this for our clients. And really, what we need to understand is look at taxes through a micro lens versus a macro lens. So, a lot of people just focus on minimizing taxes in one specific year. That’s what a lot of CPAs, that’s what a lot of tax preparers do. How can I just minimize taxes this year?

Well, what you need to do because of the Tax Cuts and Jobs Act that runs from now, or 2018 to 2025, is look at minimizing taxes, not just in one specific year, but we need to look through the macro lens of minimizing taxes over your retirement. So, the rest of your life and what you leave to the next generation, because again, we’ve had the Secure Act that says they’re going to come after those pre-tax accounts for those beneficiaries. So with the Secure Act, they’re coming after those IRAs for beneficiaries, plus with the Tax Cuts and Jobs Act that runs from now to 2025, taxes are on sale for you.

So, for a lot of clients, what we’re doing is we’re actually paying the taxes sooner rather than later. And I can run a Tax Planning Report to show you the value of this, where depending on your situation, if we put together a plan to minimize taxes over the next, say, five years, depending if it’s, say a 500 or a $100,000 … or a million dollar IRA, I can over that period of time, show you how we can pay hundreds of thousands of dollars of less taxes, because again, taxes are going up in the future.

Right now, if you’re at the 22% tax bracket, in 2025 it’s jumping up to 25, if not sooner. So, the question is there a way to lessen taxes on RMDs? Not in a particular specific year, but I can minimize those taxes over your lifetime. And I guess, to be honest, yes, I could minimize taxes, RMDs, in a specific year, we could look at things like qualified charitable distributions, but really I would first figure out what are your overall goals? And then we’d help you with the strategies and then develop the tools because it might be a situation where we take more than those RMDs because taxes are on sale right now. So, that’s something that it would be great, let’s set up a quick little phone call and you can go to www.15chris.com, and we can talk more about your specific situation and how we can minimize taxes.

All right. The next question, “Does a Castle Trust also include the legacy inheritance trust provision as the Castle Trust?” The answer is yes, it can. So, with what I talked about in terms of a Castle Trust can provide asset protection for you. Also, we can pass that same asset protection down to the next generation. So yes, a Castle Trust can include legacy inheritance trust provisions, and in fact often it does. All right. And I think there was one more question, let me hop over, I think it was in the chat.

So, “Can I open a Castle Trust with my son as the trustee excluding my husband? Assets in my trust are based on a prenup. I’m collecting Social Security, can my husband collect against my Social Security at some point? He’s 57 and retired.” So, a little bit of a detailed question that I think, us having a conversation, talking about your specific situation would make the most sense, but that said, “Can I open a Castle Trust with my son as a trustee, excluding my husband?” You certainly can. You could, in fact, even be the trustee yourself. I had a situation and I’m not saying this is your situation, but I had a situation where we worked with just the wife, not the husband. We set up a Castle Trust, she was the trustee. A couple of years later, they ended up getting divorced and everything that we had inside of the Castle Trust was protected from that divorce.

Now, I’m not saying that’s going to happen every time, kind of a funky situation, but the Castle Trust did hold up. Likewise, I’ve had situations where we set up a Castle Trust with dad and son or mom and dad and son. So yeah, we can do that and we could set it up in such a way that we could exclude the husband. Just from an ethical standpoint, I have to be very clear who I represent in that situation, so I’d have to represent the spouse. I couldn’t represent the husband in that situation. And then, a follow-up question with that, “I’m 62 collecting Social Security, can my husband collect against my Social Security at some point, he’s 57 and retired.” So yes, your husband or even ex-husband could collect on your Social Security. I wouldn’t say it’s against your Social Security because it does not penalize you.

So, if they were to make a claim, whether through divorce or just that you were the income or breadwinner and your Social Security is higher, if they were to make a claim on your Social Security, I would say it’s on your Social Security, not against your Social Security, because your Social Security really would not be affected. And there’s some situations where it makes sense to get married for Social Security benefits, some situations where it makes sense not to get married, especially if you have a previous spouse that you’re collecting on. So again, that’s where Social Security … And I saw this statistic, I think there’s 857 different variations on how a married couple could claim Social Security, and that’s where we sit down with families and we can run a Social Security Optimization Report, looking at Social Security just inside of the vacuum of maximizing Social Security, but also we need to take into account how it fits into tax planning and everything else. So at the end of the day, it fits into that overall plan.

Okay. So, if you do have any more questions, please submit those because otherwise I’m going to wrap up here. So, really at the end of the day, again, just as a reminder, we help people put together a retirement and legacy plan. In addition to being an attorney, I’m a fiduciary financial advisor, and we have this process, we call it the Retirement Legacy Blueprint, where we focus on creating an income plan in retirement, like Social Security timing. Do we take a pension lump sum buyout? A lot of people are asking those questions. In an investment plan, given the market volatility, what happened in March, the fact that we’re on a 12 year bull run, we’re moving into an election period, expect some more volatility this year.

This is one of the biggest opportunities right now, is developing a tax plan based on the fact that we had the Tax Cuts and Jobs Act, the Secure Act, and then now we had the CARES Act, add another $2.2 trillion to the deficit. Something that needs to be … And I think that’s really the biggest risk and one of the biggest opportunities for individuals right now. Need to create a healthcare plan, so talking about Medicare, as well as long-term care costs, and then the final piece, and this is where our firm started, is creating that legacy plan and creating that legal structure so that everything that you’ve worked hard for is protected and passes to the next generation as efficiently and effectively as possible.

So, if you do want help with either all five of those areas or just one of those areas, please just go to the website 15chris.com, schedule a short phone call with me. We’ll figure out where you want to go, figure out what your goals and figure out the best way to help you with that. And again, join us every Wednesday. So, we’re going to keep doing this. I really enjoy this, very educational, where if you go to wisdomwebinar.com, if you’re already registered and watching this on Zoom, you’re going to receive those invites. Once you register once, you’ll continue to receive those invites. If you’re watching this on Facebook or anywhere else, please go to wisdomwebinar.com to register. And again, if you do have questions that you want me to answer throughout, just email me over. You can email those questions at contact@castlewealthgroup.com.

And then just in the subject line, just put wisdom webinar, and then whatever your question is, I’ll go ahead and answer those. So with that, I want to thank everyone for taking time out of their day to listen to me blabber on about death and incapacity and taxes. Someone just wrote in, “Thank you.” My pleasure. Really, I really do enjoy this. It looks like there’s another. Yep. Someone just scheduled some time tomorrow. Looking forward to it. And with that, thank you, everyone. Hopefully you enjoyed this, looking forward to next week, make it a great week. Take care.