Estate Attorney and Advisor Chris Berry of Castle Wealth Group answers questions on retirement and estate planning every Wednesday at 1 pm, 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.

Castle Wealth Group helps families with their legal, financial and tax planning for their retirement and legacy.

With the use of legal structures like revocable living trusts, Castle Trusts (asset protection trusts), Chris Berry and Castle Wealth Group can help your family plan, protect, and preserve what is important through their Retirement and Legacy Blueprint Process.

In this episode, you’ll learn…

  • Chris’ positive focus for the week
  • Roth conversions versus Index Universal Life
  • Finding tax-free sources of income, retirement income
  • Understanding the three tax buckets
  • Index Universal Life as a tool
  • Would you be better with a Roth or IUL after a 10 year period?
  • How to avoid the sequence of return risk
  • Will IUL outperform the Roth?
  • Does and IUL make sense for someone in their 70’s?
  • Advantage of refinancing or a mortgage right now
  • Investing in a 60/40 portfolio as you get near retirement
  • Downsides of lower interest rates
  • What happens when someone passes away and they have a legacy trust or a castle trust?
  • Where do assets that do not pass through joint ownership, beneficiary designation, trust go?
  • The idea of long-term care cost, nursing home, and Medicaid

Episode Transcript:

All right. So with that, I’m going to go ahead and share my screen here and let’s see if I can get my screen sharing to work. And hopefully, you had a great week. I always like to start with a positive focus, something positive that happened the previous week. And for me, with my kids getting a little back to normal, which was kind of nice. My son, he had Cub Scouts and then they both had soccer. My daughter has soccer practice again tonight, and they’re 10 and seven, and we’re doing four days of in-person school, one day of a virtual. So it’s been kind of nice that they’ve been getting back to a least a little bit of normalcy.

So the first question we have, and we have a couple good questions here. So a couple of questions really on which was interesting, Roth conversions versus Index Universal Life, Index Universal Life as a tax-free vehicle. So I guess a little bit of background has to go into these. The idea is that what we’re trying to do is find tax-free sources of income, retirement income. And most people think taxes have to go up in the future, and so given that the concern is if taxes are going up in the future, maybe if I have all these pre-tax accounts, that’s not the best way to manage or handle the assets. Instead, we want to move to more tax-free options.

So the idea is that we want to move money to something that can grow tax free. And so we’re limited in what our tax-free income sources can be. And it makes sense to understand the three tax buckets. So you can have taxable accounts like checking, savings, investments, post-tax investments. Second, you can have tax deferred accounts like IRAs, 401Ks, 403B’s, traditional IRAs. And then third, you can have tax free buckets. So this is investments that grow tax-free, like a Roth IRA, a Roth 401K. And this is where Index Universal Life is an option where it can grow tax free.

And so if you have money moved into Roth, it typically goes up and down with the market, but it does grow tax free. Money that you put into a cash value Index Universal Life, it grows tax free, but it’s tied to the index where if the market goes down, you don’t lose anything. If the market goes up, you participate in the upside of the market. So I’m a fan of Index Universal Life as a tool. I’m also a fan of Roth IRAs, Roth 401Ks. I think all of these tools have merit. It’s just using the tools appropriately.

So the question that was submitted was does it make sense to look at… I had it written down over here. Does it make sense to look at IUL as well as a Roth with the understanding that typically when you put money into an Index Universal Life, it takes some time for the cash value to grow in that tax-free environment. So typically we say that this is money that you shouldn’t be touching over the next 10 years, which makes sense if you think about it in terms of time horizon, because the idea is that this would be the last money you touch because it is already in that tax-free environment. So you would probably want to spend down the IRAs or the 401Ks before you spend down the tax-free vehicles, which would be the Roths or IULs. And so this person was asking, “Would a person be better with a Roth or IUL after that 10 year period?”

And the answer, unfortunately is it depends. It depends really on what your goals are, what you’re trying to accomplish. What are you investing the Roth in versus the IUL? So for example, my IUL, I’ve had it for a number of years right now, and this past year, it was up 7.8%, which was pretty good considering that there’s no downside, where if the market goes down, I don’t lose anything. It has the power of indexing. So I have a IUL that I’m contributing to, along with a 529, because I know in 10 years I’m going to have to pay for my kid’s college education. So I’m putting some money into the IUL, some money into the 529. Similarly, I have a lot of clients in a similar position where they’re putting some money into a Roth and some money into the IUL. Similar to my situation, if I put all my money into a 529, and then I know in 10 years I’m going to start pulling the money out for college, and the market goes down right as I start pulling money out, then we suffer from what’s called sequence of return risk. So that’s why I’m diversifying where I’m saving by putting some money into the 529 and some into the IUL.

Similarly, I’m saving the same way for retirement. I’m putting some money into Roth and some money into IUL, where that IUL, as I get older I’m less interested in that death benefit, but it can double as a long-term care benefit as well. So we’re kind of killing two birds with one stone. So long story short, I can’t really answer what a person would be better with a Roth or IUL after 10 years. What we can do is we can run the numbers, and what I find is a lot of times when we do run the numbers, if you’re looking at it from what’s called a internal rate of return, the IUL will outperform the Roth because there’s also a death benefit tied to it. Where if we were to say, “Okay, I’m going to put money to a Roth and put money into an IUL, and we’re going to live to age 90, when you factor in that there’s a death benefit kicker on top of it, a lot of times the IUL might outperform the Roth.

That said, I can run a report where if you’re interested in how much should I be saving inside of a Roth versus a IUL, or if I should be pulling money out of the IRAs to pay the tax, which for a lot of people that make sense right now, because taxes are going up in the future, there’s kind of two questions. One is first, how much do you pull out of the IRAs? And then second, where do you put it? And do you put it in the Roth? Do you put it in IUL or do you put it in a combination of both? It really, at the end of the day, that’s going to be a individual question that we would have to answer depending on what your goals are.

So hopefully that was helpful. And there’s a couple questions actually on IUL that I wanted to cover. And again, if you do have questions that you want me to answer, feel free to put them into the question and answer section. But kind of a followup question to that was, let me share my screen again. All right. So follow up question was, “Does and IUL make sense for someone in their 70s?” Oops, let me get this question and answer out of the way. So does a IUL make sense for someone in their 70s? Again, the answer is it depends. It depends on what your goals are. A lot of times when we’re structuring an IUL, we’re structuring it for income in retirement. And if you do have preexisting conditions, there’s a chance you might not necessarily qualify for a lot of death benefit, but if you’re looking at maximizing a legacy or leaving to the say the next generation, a lot of times with that death benefit, an IUL still may make sense.

What we’d have to do is ask some health questions and kind of see what the insurance company comes back with. But yeah, IUL can make sense because it can offer a tax-free income in retirement, the death benefit, which you might not be super excited about, can double as a long-term care benefit to cover home care, assisted living, and nursing home care. And then also, if you are looking at leaving kind of more of a tax-free legacy to the next generation, maybe that that benefit appeals. So does it make sense for someone in the 70s? Maybe, is what I’ll say.

All right. Number three. What about low interest rates? So interest rates. So right now, I don’t know if you know, but interest rates are pretty darn low and there’s some good things and bad things with that. One of the good things is if you’re looking at doing a refinance or a mortgage right now, you can get some really, really great rates. I’ve seen below 3%, where I think someone re-fied and they had like 2.75%, which if you look at it, that’s really cheap money. And so what some people are doing is refinancing, and then you could invest that money somewhere else where it could be earning 4%. So just from arbitrage, you’re making out, but then also you have the compounding interest effect as well. So that’s been nice for a lot of people. And they’re taking advantage of doing that refinancing the house.

Now with the low interest rates, there’s two things. One kind of negative thing is that a lot of people have invested in kind of the 60/40 portfolio as they get near retirement. And there was a recent Forbes article that actually talked about this, with idea that 60% is in equities and maybe 40% of that is in bonds. Well, the problem is with the low interest rates, bonds are really underperforming. And so that traditional call it 60/40 portfolio, if we know that 40% of it is really underperforming, maybe we look at bond alternatives. And there’s a variety of different ways that we can kind of analyze this, but the idea is that that 40% that we have sitting in bonds probably isn’t performing the way it should. And maybe we should look at some other options.

So that’s with the lower interest rates, that’s kind of one of the downsides with it. And then where this question came from, is that depending on how, say an Index Universal Life or a fixed index annuity is set up, they’re also looking at interest rates as well. And so with these different types of investments, when they’re looking at index, we have to be careful at which indexes we’re looking at, because those could be affect by the lower bond rates. So a little bit, I guess, kind of pulling back the curtain to a certain extent, a little in the weeds with that, but with the lower bonds, or bonds underperforming right now, with interest rates underperforming a little bit right now, there’s some risks and opportunities that we should be aware of. One is maybe looking at a refinance. Two is if you have a portfolio that’s heavy in bonds, that might not be the best option right now, and we can help you to take a look at that. And then third, understand that if you are looking at a product that has indexing like Index Universal Life or fixed index annuities, you have to be careful on which indexes you’re selecting, because again, based on the low interest rates, that’s going to have a lot of odd effects on some investments.

All right. That takes me to the fourth question. So what happens when someone passes away and they have a legacy trust or a castle trust? So one of the things is in our office we have certain types of trusts that say that it doesn’t go outright to the individual right when they pass away, but instead it’s held in trust for their benefit. So a lot of my clients, they trust their kids or beneficiaries, but they don’t necessarily trust the outside environment. They don’t trust the in-laws, who we call the out-laws. So in a lot of situations, we don’t want it to go outright to that kid, even though we trust them to make the decisions. But instead, what we can say is that it’s held in trust for their benefit. So whatever we decide to leave to them would be protected from a divorce, lawsuit, creditor action, bankruptcy.

And so that brings us to then the question that was submitted, and the question is. “What happens when someone passes away with a legacy trust or castle trust?” And really the process is always going to be the same, and really it boils down to what we call estate administration. So how do you administer estate when someone passes? Well, first we have to organize the assets and figure out how do assets transfer out of someone’s name? So first, if there’s anything joint, and a lot of times with a married couple, they’re going to own a lot of things through joint ownership, whether it’s a house, whether it’s checking, savings accounts. So when one spouse passes, it goes to the survivor. Second would be through beneficiary designations. So this is if you have a IRA, 401K, life insurance, goes to whoever you’ve named as a beneficiary.

A lot of times when we set up a trust, we name the trust as the beneficiary or the owner of these different things. So if an asset doesn’t pass through joint ownership, beneficiary designation, trust, then it ends up going into probate. And that’s what we want to try to avoid at the end of the day. So the process for doing this is really always the same, is that you go to the funeral home or wherever that it’s handled through, they’re going to get you some death certificates. Typically you get say 10 best certificates, or as many assets as you have. And then you’re going out to the different financial institutions, or if we’re helping you manage the money, we’ll obviously take care of it for you, but you send in the death certificates to different financial industries.

And then if you have a trust, you have to follow the terms of the trust. And if it is a legacy trust or castle trust that says it doesn’t go outright to that individual, but instead it’s held in trust for them, well, instead of it being held in John Smith’s name, it’s now the Ed Smith trust for the benefit of John Smith. And so what the individual or trustee would do is open up a new account now in the name of the trust, and it would have a tax ID number. And this is all things that we could help you with. But instead of it being in like John Smith’s name, it’s now the Smith trust for the benefit of John Smith. And then as long as John Smith investing keeps it inside of that trust, it’s protected from divorces, lawsuits, et cetera.

So really it doesn’t complicate things too much to have it held in trust for the benefit of a beneficiary versus having it outright. And the advantages again, of having it in the trust, is that whatever they keep inside of the trust would be protected from divorces, lawsuits, creditors, and then if they pass away, the money stays in the bloodline. It wouldn’t go to any in-laws, who we call out-laws, at the end of the day.

That brings me to the fifth question with a castle trust. “Can I get into any nursing home?” So what we’re talking about here is the idea of long-term care cost and more specifically nursing home and Medicaid. Right now in Michigan, a nursing home’s going to cost you about eight to 12,000 or sorry, eight to 12, 13, $14,000 per month. And the question is, how do we go about paying for that? And understand that the average stay in a nursing home’s about two and a half years. So that’s where we have Medicaid as a way to help pay for nursing home care. But to qualify for Medicaid, a single individual can only have $2,000 worth of countable assets, a married couple, they make you cut your assets in half, at most, you could keep 120,000. So what the castle trust, does that the revocable living trust does not, is that as soon as we move assets into the trust, it starts a five-year clock where once we make it five years, a 100% of what we put in that trust is protected from that nursing home or Medicaid spend down.

Now the concern or the question and the myth that’s out there is that if I’m on Medicaid, I’m in some rundown nursing home, but that’s just not the case. Basically any nursing home in Michigan that accepts Medicare also accepts Medicaid. Now they do play a little bit of a game and they say that well, if you were to call up that nice nursing home and try to go right in on Medicaid, they’re going to say, “Oh, I’m sorry. We don’t have any Medicaid beds available.” But the magic thing happens, if you private pay for a couple months, then you can get into that nice nursing home and then flip over and have Medicaid pay that base level of care. And they can’t discriminate based on source of payment. There’s federal guidelines that say they can’t discriminate based on source of payment.

So let’s say you set up things properly, you set up a castle trust, number of years go by you suffer a stroke. You need long-term care in a nursing home. You can private pay to get in that nice nursing home, and then flip over and have Medicaid pay that base level of care with a trust that has additional assets to improve your quality of life. Or if you’re a married couple and one spouse needs longterm care, that healthy spouse isn’t completely impoverished. Like I was having conversation with clients today, and there’s a six year age difference between the husband and the wife, and the husband wanted to ensure that if he needs long-term care, that healthy younger wife isn’t completely impoverished having to pay for that. And that’s where a castle trust can help alleviate some of the costs of nursing home care, which typically is running about eight to $12,000 a month these days.

So with that, let me just double check. That was all of the submitted questions this week. Let me know if you do have any questions, feel free to type them in. And then also if you want to see how any of this information applies to your situation, if you want to have a conversation and I know I answered, “It depends” to a couple of things today, but all you have to do is just go to the website, 15chris.com. And what we can do is just book a short little 15 minute phone conversation where I figure out where you’re at, figure out where you need to go, and figure out if we can help you get there.

So with that, we’ll wrap it up. Thank you so much. It’s been a pleasure. I look forward to doing this next week as well. Feel free to submit questions throughout the week. You can email me anytime at chrisatcastlewealth.com. Phil, you are welcome. All right. Well, take care. Make it a great week, everyone.