Estate Planning

Charitable Giving, Part 4: Tax-Smart Ways to Give to Charity (Part 2)

Tax Efficient Giving Strategies

In my last article, I shared a few charitable giving strategies that can help you be your generous self while at the same time being tax smart. In part four of this four-part series, I continue that theme and offer some final thoughts on tax-efficient giving.

Qualified Charitable Distributions

A Qualified Charitable Distributions (QCD) allows IRA owners above age 70 ½ to transfer up to $100,000 directly to charity each year. One of the benefits of donating via a QCD is that you can give to your favorite charity while potentially reducing your taxable income.

In addition, a QCD can satisfy all or part of your required minimum distribution (RMD) once you reach RMD age. This benefit makes it an especially tax-efficient giving strategy for people who have other income sources and don’t necessarily need their RMD.  

Keep in mind that you must satisfy a few key rules for a QCD to be a non-taxable distribution.

Most importantly, the IRS considers the first dollars out of an IRA to be your RMD until you meet your annual requirement. To get the full tax benefit of a QCD, be sure to donate the funds directly from your IRA to charity before making any other withdrawals from your account.

In addition, your IRA custodian will require you to complete and sign a form that details your QCD intention. Then, the custodian will send a check to the charity of your choice.

In some cases, your custodian may allow you to write checks against your IRA. Just be aware that your checks must clear before year-end, so it pays to plan ahead.

Charitable Gift Annuities

A Charitable Gift Annuity is a tax-efficient giving strategy where an individual makes an irrevocable transfer of money or property to a charity. In return, the charity pays the individual a fixed income for the rest of their life or a specific term. The fixed payment amount is based on several factors, including the donor’s age, the donation amount, and current interest rates.

In addition, the donor receives a tax deduction for the initial donation and potential tax-free income from the annuity payments. When the donor dies, the charity retains the remaining assets for its mission.

Here are some things to keep in mind when donating to a Charitable Gift Annuity:

  • The gift is irrevocable.
  • Annuity payments are fixed and don’t adjust for inflation.
  • The annuity payments may be lower than a comparable annuity that is not charitable.

Charitable Remainder Trusts (CRTs)

A Charitable Remainder Trust (CRT) is a “split interest” giving vehicle that allow donors to contribute assets to a trust and receive a partial tax deduction. The trust’s assets are then divided between a non-charitable beneficiary (who receives a potential income stream for a term of years or life) and one or more charitable beneficiaries (who receive the remainder of the assets).

There are two types of CRTs: Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs). Each has its own distribution method.

CRTs have several benefits, including the preservation of highly appreciated assets, income tax deductions, and tax exemption on the trust’s investment income. In addition, you can donate a variety of assets to a CRT, including cash, securities, closely held stock, real estate, and other complex assets.

CRTs can also be established by will to provide for heirs with the remainder going to charities of the donor’s choosing.

Final Thoughts on Tax-Efficient Giving Strategies

Qualified Charitable Distributions, Charitable Gift Annuities, and Charitable Remainder Trusts are all potentially tax-efficient giving strategies that can help you achieve your philanthropic goals. Yet they are also complex and may not be right for everyone.

If you’re considering one of these strategies or are looking for more tax-smart giving ideas, be sure to consult an attorney, tax expert, and/or financial planner to determine which strategies make sense for you. In the meantime, please visit our Resources page for more information on this and other financial planning topics.

If you found this information interesting, please share it with a friend!

Charitable Giving, Part 2: Which Charitable Organizations Should You Donate To?

Which Charitable Organizations to Donate To

This article is part two in a four-part blog series focused on charitable giving and will address the question: Which charitable organizations should you donate to?

Once you’ve decided how much money to give to charity each year, you can focus on the recipients. According to Giving USA Foundation, the types of charities that tend to receive the most donations are:

  • Religious organizations
  • Educational institutions
  • Human services such as food banks, disaster relief organizations, and homeless shelters
  • Health-related charities such as hospitals and medical research centers
  • Arts and culture charities such as museums, orchestras, or theatre groups

Many people tend to respond to end-of-year donation solicitations they receive by email or mail and give to the same organizations every year. But if you want to be more proactive about your giving, spend some time thinking about the issues or causes you care about and find the organizations that impact those issues or causes most.

Smaller organizations may have a greater need for your dollars than larger organizations. As such, you may want to take advantage of opportunities to give to local organizations, such as theatre or educational groups.

For example, I donate to a local organization called Foodwise, whose mission is “to grow thriving communities through the power and joy of local food.” Not only do I admire their mission, but I was also previously a board member and get a lot of pleasure from attending their events.

Another example is a client of mine who donates to a swim club she belongs to that’s organized as a 501(c)(3) organization. The swim club was renovating its clubhouse, so she donated dollars specifically to help get this project completed. Another client gives to a hiking club because she’s an avid hiker. 

A Word About 501(c)(3) Organizations When Deciding Which Charitable Organizations to Donate To

Suppose you’re eligible for tax deductions for charitable giving. (Ordinally, you must itemize deductions on Schedule A of your Federal Tax return to receive a tax benefit.) In that case, you should ensure that the organization you donate to is a 501(c)(3) organization.

A 501(c)(3) organization is a tax-exempt nonprofit in the U.S. that must operate exclusively for religious, charitable, scientific, literary, or educational purposes. It addition, the organization must not engage in political or lobbying activities or provide private benefits to any individual or group.

It’s also important to note that if you contribute money through crowdfunding platforms such as GoFundMe, Kickstarter, or Indiegogo, these donations are typically not tax deductible. That’s because the individual fundraising campaigns aren’t tax-exempt organizations. 

Investigating the Charitable Organizations You Donate To

There are several ways to investigate charities to ensure they’re using your charitable donations properly.

One well known charity evaluation organization is Charity Navigator, which provides ratings and financial information on thousands of nonprofits and assigns a rating based on their performance.

Another is GuideStar, which allows you to search for nonprofits by location, mission, or types of work. 

How Many Organizations Should You Donate To?

Lastly, many clients ask me if it’s better to give a large amount of money to one organization or spread their donations among several organizations. I’ve found that this is a personal decision.

Some people care about so many things that they want to spread their money widely. Meanwhile, others prefer to have a more significant impact on just a couple of organizations.

One thing I know for sure: try and give at times other than just the end of the year. The charities will appreciate it, plus you won’t get that anxious feeling that you haven’t done enough on December 31. In addition, if you write checks or take advantage of Qualified Charitable Distributions (QCDs), you’re more likely to meet the deadline to get a tax deduction in the year you donate.

Next: Giving Strategically

The first half of this blog series has focused on how much to give and which organizations to donate to. In part three, we’re going to explore various ways to give strategically, so you can make more of an impact with your donations while enjoying the associated tax benefits.

In the meantime, please visit our resources page for additional details on this topic, and stay tuned for more.

If you found this information interesting, please share it with a friend!

Charitable Giving, Part 1: How Much Should You Give to Charity?

How Much to Give to Charity

This article is the first in a four-part blog series focused on charitable giving and will address the question: How much should you give to charity?

There’s a great need for charitable donations from private sources these days, and with those donations, the world can be a better place. If you have a desire to donate money but aren’t sure how much, to whom, when, and how to benefit from applicable tax laws, this blog series is for you.

How Much to Give to Charity Each Year

As a financial planner, clients often ask me for my recommendation on how much they should donate to charities each year. Because I understand my clients’ financial situation thoroughly, this is not an unusual question. I can provide a suggestion based on their cash flow or tax situation.

But with something as personal and individual as charitable giving, I prefer they determine the amount themselves.

What I’ve found helpful in guiding clients is sharing statistics on how much others give to charity. And as it turns out, there’s a psychological explanation as to why this is helpful.

It’s called “informational social influence,” and it occurs when people do not know the correct (or best) action to take. Instead, they look to the behavior of others as an important source of information and act accordingly.

How Much Do Others Give to Charity?

Americans are charitable, donating hundreds of billions of dollars annually to needy organizations. Although there are significant differences in how much Americans give, higher-income households tend to give a higher proportion of their income to charity than lower-income households (unsurprisingly). However, demographic factors, such as age, education, race, and geography, also come into play.

According to data from Giving USA Foundation, the average individual donation among all income levels in 2020 was 2.5% of income. But individual households earning over $200,000 per year gave a more significant percentage—on average, 4.5%.

According to the same report, households in the Northeast and Upper Midwest gave, on average, 3% to 4% of their income to charity. Meanwhile, households on the West Coast gave approximately 1% to 2% of their income to charity.

Of course, these are averages, and the actual percentages of income people in these regions donate depend upon many factors.

How Tax Deductions Impact Charitable Giving

Once I become familiar with my clients’ charitable giving goals, I include the discussion of “how much” in my annual tax planning meetings.

Why? Because the tax code provides incentives for individuals to make charitable donations by allowing them to deduct these gifts from their taxable income. Indeed, if you’re charitably inclined, you may be able to meaningfully reduce your tax burden each year.

Of course, there are rules and guidelines as to who can deduct such donations and to what extent. I will expand on these nuances later in this blog series.

In the meantime, I hope you find this information useful in determining how much you’d like to give to charity each year. Please check out our other resources for additional details on this topic and stay tuned for more.

If you found this information interesting, please share it with a friend!

7 End-of-Year Tax Planning Tips for 2022

End of Year Tax Planning Tips for 2022

With the end of the year fast approaching, Tax Season may be the last thing on your mind. Yet in many ways, the final months of 2022 may be your last chance to reduce this year’s tax liability. To avoid overpaying Uncle Sam and preserve more of your hard-earned income, consider the following end-of-year tax planning tips for 2022.

To minimize your tax liability, consider these end-of-year tax planning tips for 2022:

Tip #1: Identify Changes to Your Tax Situation

In 2022, the standard deduction is $12,950 for single filers and $25,900 for married taxpayers filing jointly. The standard rule of thumb is if you can deduct more than the standard deduction amount in eligible expenses from your taxable income, you should itemize. Otherwise, it’s generally easier and more valuable to take the standard deduction. 

If your income and circumstances have been relatively stable since last year, you likely know already if you plan to itemize or take the standard deduction this year. However, if you’re on the fence, there are end-of-year tax planning strategies you can utilize to reduce your taxable burden.

For instance, consider pre-paying certain deductible expenses—for example, charitable donations or out-of-pocket medical expenses—this year so that itemizing makes more sense.

Let’s say you plan to donate $5,000 to charity each year for the next several years. If you have extra cash on hand this year, you may want to consider donating $10,000 or more to your charity of choice so you can itemize your deductible expenses. Then, next year, you can skip your regular donation and take the standard deduction.

The same is true for out-of-pocket medical expenses. If you know you have certain expenses looming for 2023, you can pay them this year to make the most of the associated tax benefit.

Tip #2: Harvest Capital Losses

Capital gains taxes can eat away at your investment returns over time—specifically in non-qualified investment accounts. Fortunately, the IRS allows investors to offset realized capital gains with realized losses from other investments.

That means you can realize profits on your top-performing investments while selling poor performers to reduce this year’s tax bill. If you have substantial losses, you may be able to completely offset your gains and potentially reduce your taxable income. And in years like 2022 when markets have struggled, you may have more losses than you think.

Keep in mind if you work with a financial advisor, you may not need to initiate this strategy on your own. Most fiduciary financial planners proactively take advantage of tax-loss harvesting to help clients with end-of-year tax planning.

Tip #3: Review Your Charitable Giving Plan

Currently, taxpayers who itemize deductions can give up to 60% of their Adjusted Gross Income (AGI) to public charities, including donor-advised funds, and deduct the amount donated on this year’s tax return.

You can also deduct up to 30% of your AGI for donations of non-cash assets. In addition, you can carry over charitable contributions that exceed these limits in up to five subsequent tax years.

When it comes to end-of-year tax planning, donor-advised funds (DAFs) can provide opportunities to meaningfully reduce your tax liability relative to other giving strategies. For example, if you plan to donate $10,000 each year to your favorite charitable organization, it may be more beneficial to take the standard deduction when you file your taxes.

On the other hand, you can front-load a donation of $50,000 to a donor-advised fund and request that the DAF distribute funds to your chosen charity each year for five years. In year one, you can receive a more favorable tax break by itemizing on your tax return. Meanwhile, you’ll still be meeting your charitable goals each year via the DAF. This strategy can be particularly beneficial in above-average income years.

And better yet, you can donate non-cash assets like highly appreciated stock to a DAF and avoid paying the capital gains tax. This strategy can also help you diversify your investment portfolio without triggering an unpleasant tax bill. Plus, you can take an immediate deduction for the full value of the donation (subject to IRS limits).

Tip #4: Look for Opportunities to Reduce Income

Maxing out your qualified investment account contributions is indeed important for meeting your future financial goals like retirement. However, this can also be a valuable end-of-year tax planning strategy.  

First, be sure to check the contribution limits on your employer-sponsored or self-employed retirement plans for 2022. You can also contribute up to $6,000 to an individual retirement account in 2022 (or $7,000 if you’re age 50 or over).  

In addition, individuals with qualifying high deductible health plans are eligible to contribute to a health savings account (HSA). An HSA can be a great way to save and grow your money on a tax-advantaged basis.

In fact, these accounts offer triple tax savings. Contributions, capital gains, and withdrawals are all tax-free if you use your funds for eligible healthcare expenses. And like qualified retirement accounts, you can deduct your contributions from your taxable income in most cases to reduce your overall tax liability.

Meanwhile, depending on your compensation plan, you may want to consider deferring part of your income to reduce your taxable income in 2022.

Employees with deferred compensation agreements typically pay taxes on the money when they receive it—not as they earn it. That means if your employer pays you a lump sum per your distribution agreement, you could potentially get hit with a hefty tax bill.

There are different ways to structure income from a deferred compensation plan. Your options typically depend on your agreement with your employer. The distribution schedule can usually be found in your plan documents. So, if you haven’t reviewed your plan details recently, you may want to revisit them during end-of-year tax planning to avoid any surprises.

Tip #5: Take Advantage of Lower Income Years and/or Down Markets with a Roth Conversion

The IRS allows individuals to convert a traditional IRA to a Roth IRA via a Roth conversion. A Roth IRA conversion shifts your tax liability to the present. As a result, you avoid paying taxes on withdrawals in the future. In addition, Roth IRAs don’t require minimum distributions.

With a Roth conversion, you pay taxes on the amount you convert at your current ordinary income tax rate. That’s why it can be a particularly powerful end-of-year tax planning strategy in tax years when your income is below average.

At the same time, a down market can be an opportune time to take advantage of a Roth conversion. Since account values typically decline in a negative market environment, so does the amount on which you pay taxes when converting to a Roth. Meanwhile, there’s greater potential for future appreciation and withdrawals that tax-free.

After you convert your traditional IRA to a Roth, any withdrawals you make in retirement will be tax-free. However, you must be over age 59 ½ and satisfy the five-year rule. And since Roth IRAs don’t have RMDs, you can leave your funds to grow tax-free until you need them.

While Roth conversions can be beneficial for many, they don’t make sense for everyone. Be sure to consult with a trusted financial advisor or tax expert before leveraging this strategy.

Tip #6: Strategically Transfer Wealth

If you expect to leave significant wealth to your heirs, proper estate planning is key. Fortunately, there are end-of-year tax planning strategies you can leverage to help minimize your estate’s potential tax burden.  

In many cases, gifting is one of the simplest ways to efficiently transfer wealth while reducing your estate. Each year, the annual gift-tax exclusion allows you to gift a certain amount (up to $16,000 in 2022) to as many people as you like without incurring the federal gift tax. Moreover, spouses can combine the annual exclusion to double the amount they can gift tax-free.  

Indeed, cash gifts are most common. However, you can also use the annual exclusion to transfer personal property or contribute to a 529 college savings plan. Alternatively, the IRS allows you to pay educational and medical expenses on behalf of someone else without incurring federal taxes. However, you must pay the institution directly.   

Trusts can also help you transfer wealth strategically while reducing your family’s taxable burden. However, trusts are varied and complex. It’s important to consult your financial planner or estate planning attorney to determine if a trust may be an appropriate end-of-year tax planning strategy.

Tip #7: Donate Your Required Minimum Distribution (RMD)

To keep people from using retirement accounts to avoid paying taxes, the IRS requires individuals to begin taking minimum distributions from certain qualified accounts once they reach a certain age. As of 2020, required minimum distributions (RMDs) kick in at age 72.

You can withdraw more than your RMD amount in any given year—but be prepared for the potential tax consequences. On the other hand, the IRS imposes a penalty of up to 50% if you fail to take your full RMD before the deadline.

Both scenarios can be costly. Fortunately, careful end-of-year tax planning can help you manage your RMDs to avoid high taxes and other penalties.

For example, if you don’t need the extra income, you can donate your RMD to charity. This is a tax planning strategy called a qualified charitable distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year.

QCDs can satisfy all or part of your RMD each year, depending on your income needs. You can also donate more than your RMD amount up to the $100,000 limit. And since QCDs are non-taxable, they don’t increase your taxable income like RMDs do.

It’s important to note that the IRS considers the first dollars out of an IRA to be your RMD until you meet your requirement. If you take advantage of this tax planning strategy, be sure to make the QCD before making any other withdrawals from your account.

For More End-of-Year Tax Planning Tips, Consult a Trusted Financial Advisor

This isn’t an exhaustive list of end-of-year tax planning strategies. However, these tips can help you determine if there are opportunities to reduce your taxable burden in 2022.  At the same time, a trusted financial advisor or tax expert can help you identify which strategies are right for you within the context of your overall financial plan.

To learn more about how Curtis Financial Planning helps our clients take control of their finances, please explore our services and client onboarding process.

If you found this information interesting, please share it with a friend!

Strategic Charitable Giving: How to Make an Impact with Your Donations While Minimizing Your Tax Bill

Strategic Charitable Giving

Americans are some of the most generous people in the world. In 2021, Americans gave over $484 billion to charity, according to Giving USA’s 2021 Annual Report. More impressive is that individuals represent 67% of total giving, giving nearly $327 billion in 2021.

There are many reasons to give to charity, from feeling good to creating a legacy. Yet charitable giving can also be important from a financial planning perspective.

In this article, I’m sharing three charitable giving strategies to help you minimize your year-end tax bill.

Charitable Giving and Your Taxes

First, let’s review how charitable giving impacts your taxes.

Currently, taxpayers who itemize deductions can give up to 60% of their Adjusted Gross Income (AGI) to public charities, including donor-advised funds, and deduct the amount donated on that year’s tax return.

You can also deduct up to 30% of your AGI for donations of non-cash assets. In addition, you can carry over charitable contributions that exceed these limits in up to five subsequent tax years.

You need to know your marginal tax rate to calculate your potential tax savings. Your marginal tax rate is the amount of additional tax you pay for every additional dollar earned as income. So if your marginal tax rate is 28% and you itemize, you’ll save roughly 28 cents for every dollar you give to charity.

How to Make a Bigger Tax Impact With Your Giving

Yes, you can write checks to your favorite charities throughout the year, and while your donations may be generous, this approach to giving isn’t the most tax-efficient. Here are some ways to give that are:

#1: Donor-Advised Funds

One of the most efficient ways individuals can donate to charity is through a donor-advised fund (DAF). A DAF is a registered 501(c)(3) organization that can accept cash donations, appreciated securities, and other non-cash assets.

One of the advantages of a DAF is that you can take a taxable deduction in the year you contribute to it, even if you haven’t decided which charities to support. You can then invest and grow your funds tax-free within your DAF until you decide how to distribute them.

And, even better than donating cash, you can donate non-cash assets like highly appreciated stock to a DAF and avoid paying the capital gains tax. This strategy can also help you diversify your investment portfolio without triggering an unpleasant tax bill. Plus, you can take an immediate deduction for the full value of the donation (subject to IRS limits).

#2: Bunching Charitable Donations

Bunching your charitable donations can be beneficial if your total allowable itemized deductions are just under the standard deduction. In 2022, the standard deduction for single taxpayers is $12,950 and $25,900 for married couples.

Example:

Let’s say you give $3000 a year to charity, and it doesn’t get you over the standard deduction amount. However, you could go over the standard deduction if you “bunched” your charitable contributions into one year. For example, in 2022, if you gave $9000 instead of $3000 you could itemize deductions and save tax dollars. Then, you would skip donating in the next two years and go back to the standard deduction. Then, in the third year, you would donate $9000 again.

The result will be more significant tax savings over multiple-year timeframes.

#3: Qualified Charitable Contributions

If you’re age 72 or older and have a traditional IRA, the IRS requires you to take a minimum distribution (RMD) from your account each year. In most cases, RMDs are taxable at your ordinary income tax rate. There’s also a steep penalty for not taking your RMD before the deadline.

Meanwhile, if you have other sources of income like Social Security benefits and possibly a pension, your RMD can push you into a higher tax bracket. That means you may pay more taxes than you would otherwise, even if you don’t need the extra income.

The good news is you can donate your RMD by making a Qualified Charitable Distribution (QCD). A QCD allows IRA owners to transfer up to $100,000 directly to charity each year and avoid taxation on the amount.

A QCD can satisfy all or part of your RMD, depending on your income needs. You can also donate more than your RMD, so long as you stay below the $100,000 limit. This strategy can be helpful if you want to reduce your IRA balance and RMDs in future years.

It’s important to note that the IRS considers the first dollars from an IRA to be your RMD until you take the total amount. So, make your QCD before you take any other withdrawals from your account if you want to realize the full tax benefit of this charitable giving strategy.

A Trusted Financial Advisor Can Help You Incorporate Charitable Giving Strategies into Your Financial Plan

Of course, this is not a comprehensive list of charitable giving strategies that can help you make a bigger impact with your donations while lowering your tax bill. Other giving and tax planning strategies may be more appropriate depending on your circumstances and goals.

A trusted advisor like Curtis Financial Planning can help you incorporate giving strategies into your financial plan, so you don’t miss out on valuable tax benefits. Please start here to learn more about how we help our clients and the other services we provide.

If you found this information interesting, please share it with a friend!

S3 E4: Understanding the SECURE Act and Inherited IRAs

Understanding the SECURE Act and Inherited IRAs with Megan Gorman

How the SECURE Act May Impact Your Estate Plan with Megan Gorman

In this episode, I interview Megan Gorman, Founder and Managing Partner of Chequers Financial Management, a high-net-worth tax and financial planning firm in San Francisco. An attorney by training, Megan is passionate about the problem-solving required to work in the world of complex financial planning. She is also a senior contributor at Forbes and writes on personal finance and income tax.

As you listen, you won’t be surprised to hear that Megan is an adjunct professor at Golden Gate University in San Francisco as well. She is a very clear communicator and a great educator. And I’m happy to call her a friend, too.

Megan’s expertise is invaluable for today’s topic, inherited IRAs, which is why I’m so excited to have her on the podcast. Specifically, we’re talking about how the SECURE Act of December 2019 changed the rules for certain beneficiaries of inherited IRAs. I think everyone can benefit from this information, whether you have an IRA or expect to inherit one.

Tweetable Quote

Megan Gorman on estate planning:

Episode Highlights

  • [08:11] Why the SECURE Act impacts so many people–not just the ultrawealthy
  • [10:28] Two major changes the SECURE Act made to IRAs an how it impacts certain inherited IRA beneficiaries
  • [14:54] Groups of beneficiaries excluded from SECURE Act inherited IRA rules
  • [18:22] Why everyone should take a holistic view of their estate plan in light of these inherited IRA rule changes
  • [24:29] Measures some IRA owners may want to take before they die to reduce their beneficiaries’ tax liability
  • [37:32] The importance of having a personal tax philosophy when it comes to estate planning
  • [41:34] Additional planning ideas to minimize taxes related to inherited IRAs

Links Relevant to this Episode

Enjoy the Full Episode

Other Ways to Enjoy this Episode

Do you love Financial Finesse? Please leave us a review on Apple Podcasts!

If you found this information interesting, please share it with a friend!

S3 E4 Transcript: Understanding the SECURE Act and Inherited IRAs

Intro

Hi, I’m Cathy Curtis. Welcome back to the Financial Finesse podcast. And if you’re a new listener, welcome. I am this podcast’s host and also an acting and working financial advisor. My firm, Curtis Financial Planning based in Oakland, is an independent firm. And the firm is unique because we specialize in the unique needs of women—particularly women who take the lead in their household finances and are looking for a fiduciary financial partner to help them with their current finances and to secure their future, so they get more enjoyment out of their money today.

In this episode, I interview Megan Gorman, Founder and Managing Partner of Chequers Financial Management, a high-net-worth tax and financial planning firm in San Francisco. An attorney by training, Megan is passionate about the problem-solving required to work in the world of complex financial planning. She is also a senior contributor at Forbes and writes on personal finance and income tax.

As you listen, you won’t be surprised to hear that Megan is an adjunct professor at Golden Gate University in San Francisco as well. She is a very clear communicator and a great educator. And I’m happy to call her a friend, too.

Megan’s expertise is invaluable for today’s topic, inherited IRAs, which is why I’m so excited to have her on the podcast. Specifically, we’re talking about how the SECURE Act of December 2019 changed the rules for certain beneficiaries of inherited IRAs, creating a potential tax headache for some, unfortunately, including tax rates possibly jumping in the years the inherited IRA’s being distributed, and the fact that if you don’t follow the rules, you could get hit with a 50% penalty tax. No thanks.

I think everyone can benefit from this info whether you have an IRA or expect to inherit one. Many who are affected will want to review their current estate plan to ensure it’s still the best plan for all involved. We cover a lot, and it can get dense. So, if you have specific questions about after listening, please don’t hesitate to send me an email. And as always check the show notes for more information and resources related to this episode. You can find more information about me and my firm at curtisfinancialplanning.com. I hope you enjoy the podcast.

[03:30]

Cathy: Hi, Megan.

Megan: Hi, Cathy. How are you?

Cathy: I’m great. Welcome to the Financial Finesse podcast. Thanks so much for agreeing to come on as my guest.

Megan: Oh my god, I’m so excited to be here. I’ve watched a few of your episodes and they’re really, really informative. We can talk about some interesting stuff with IRAs.

Cathy: Oh, we certainly can. Believe it or not, there’s interesting things about IRAs. I first wanted to say where I first noticed you was on a Citywire cover in about 2019. You were profiled, and I was so impressed. And you’re in my area—you’re in the San Francisco Bay Area. And I thought, why haven’t we met yet?

Cathy: And one quote that I really related to, I’m just going to read it real quick. “The thing that I’ve had to get comfortable with over the course of my career is that being a woman with a strong sense of ambition and a strong personality, the best system for me was one that I created on my own.” And I so related to this, because I founded my own firm, and I know you founded your own firm, Chequers Financial Management. And I know it was hard in the beginning, but you’ve been doing it for six years now, is that right?

Megan: We just had our sixth anniversary. Yeah.

Cathy: That’s great. Congratulations.

Megan: Sometimes I wish I’d done it earlier. When you made your career transition from marketing to finance, you just jumped in. And I love that sense of courage and how you took on your practice. Because I think a lot of what we do on a day-to-day basis with clients, is really try to give them the confidence to jump in and embrace their money and embrace what they do.

Megan: It’s hard. It really is. I mean, when people ask me what I do, I often say, look, a lot of times, I’m doing a lot of coaching. I might know the technical rules, but it’s really about pushing you in the right direction for the answer that’s appropriate for you.

Cathy: And you know, that combo of having the technical skills and that other skill set of being able to listen and support is really powerful. And that’s, that’s really what we do as financial advisors. We combine those two things. And personally, I know on the technical side, you are a whiz. Because the other times I’ve seen you is when you’ve been on podcasts, explaining the CARES Act, and you have a really great way of making things understandable—very complex things, which most tax things are—very understandable. So that’s why I’m really thrilled that you’re here.

Cathy: Before we get going on the technical stuff, though, I wanted to ask you. So, Chequers Financial Management—and I know Chequers is the prime minister’s summer residence, right? I wanted to ask you this before. Is there a story behind you picking that name for your firm?

Megan: Yeah, so I’m a British History major, and always focused on the history of England. And when I went to name the firm, I wanted to pick a name that had a couple of meanings. So the term Chequers, the Chequers House was built in the 11th century in England, it was the Chancellor of the Exchequer, his house, the CFO. And for 800 years, it passed through family wealth transfer. And then at the early 20th century, men were starting—and unfortunately not women—but men were rising in society, self-made men, and they needed a place. You know, originally, the country had been ruled by the aristocracy. And they needed to have a place where they could entertain and do business. So the last owners of Chequers House donated the house to the country, so that self-made men would be able to do business. So, it’s an intersection of family wealth and self-made wealth,

Cathy: Right.

Megan: It’s interesting, when you have a firm, you start to attract a certain type of client. And so my, a lot of my clients—not all of them, but I would say that 85% of them—are self-made. I don’t know if it’s because of, you know, my own background. I love stories like that. But I’ve always found the clients I’m working with tend to be the first generation with sizable wealth.

Cathy: Oh, I love that. And so that’s why you named the firm Chequers. It completely fits. And I have to tell you, we have something else in common. I wasn’t a British History major. But I was fascinated by British history when I was younger, and I read everything I could about it. So that’s so cool. I’m really glad that I asked you about that.

Megan: Yeah, no, I love British history.

[08:11]

Cathy: Okay, so let’s get down to talking about the technical stuff. So, the reason I want to talk about the inherited IRA, specifically, is because I have a lot of clients who are inheriting IRAs and/or are growing large IRAs that they are going to give to their heirs. And I’m beginning to realize—you know, the SECURE Act changed the rules about distributions starting January 1, 2020—and that this needs to be paid attention to. Because of the changes, tax bills could really go through the roof. And there are things you can do to mitigate. And I thought, who can I talk to about this? You came first in mind.

Cathy: And so, we’ll start with the basics, so everybody understands where we’re going. Let’s start with what is an inherited IRA? What changed? And we’ll go from there.

Megan: Yeah, so a good place to really put this in context of why this is becoming such a big issue for a number of Americans is, pre-pandemic, Fidelity did a study. And they found that over, I think it was close to a half a million Americans, have IRAs that have balances in excess of a million dollars. Now, they were just doing a study, but put into context is the fact that this is a big issue.

Megan: And so, you know, an IRA is an individual retirement account, whether it’s your traditional one or a Roth IRA. And when you put money into the account, you’re saving it for your retirement. But the thing is, most people don’t spend their IRA down to zero. And so when they pass away, it passes to a beneficiary. And so that’s what we’re talking about here, is when you have your IRA, passing it to the beneficiary, they are inheriting an IRA. And that’s sort of the tricky part of planning. And why I say that is, when we think about estate planning as a whole, we think about our assets—our houses, our brokerage accounts, our jewelry, our cars, things like that. But one of the biggest assets that most people pass on to their family members or friends, and so on, is their IRA.

Cathy: So true.

[10:28]

Megan: The planning you do with your IRA is key. Now, if we go back to before the SECURE Act, and it’s funny, because the SECURE Act came into being in December of 2019, so less than 15 months ago. But truth of the matter is, it feels like a lifetime ago because of the pandemic.

Megan: And it made two really important changes to IRAs. The first is it changed required minimum distributions, the age at which you must take your distribution from your IRAs. It was at 70 ½, and it moved to 72. So that was the first thing it did. The second thing it did is it eliminated this concept called a stretch IRA.

Megan: So, what was the rule before? So basically, let’s say, Cathy, I had an IRA, and I named you my beneficiary, and I passed away, and you inherited my IRA. Before the SECURE Act, you could do something called a stretch IRA, which is, you would be leveraging the IRA tax deferral by just taking the IRA required minimum distributions. You’d take it out over a long period of time, stretching out that IRA. And so, if you lived another 40 years after I passed away, you could be taking distributions over those 40 years if you handled the IRA correctly.

Megan: Now, Congress didn’t like this. And the reason they didn’t like this is Congress wants to get paid. And if you think about it, with an IRA, we put money in pretax, it grows tax deferred, and when you get the distribution, you pay ordinary income tax on it. And so if you inherited my IRA, and you lived another 40 years after I died, right, you might not be paying all the income tax till 10, 20, 30, 40 years after I die. And Congress was like, well, that’s not cool. That benefits rich people.

[12:36]

Cathy: That is so not true, it just blows my mind. Because everybody, like you just named that stat about IRAs. In America, it’s not only rich people.

Cathy: So, you know, I want to give an example. I talked to a client today—just to talk about what you’re saying, to illustrate it—he’s going to inherit, he’s going to split it with his brother, a $500,000 IRA. Under the old rules, he would have to take about $18,000 a year.

Cathy: Under the new rules, he’s going to have to take about $50,000. Although you don’t have to take it each year, you could take it—well, you’ll get into that. But if he did take it each year, it would be $50,000. So think about the difference between $18,000 and $50,000 in tax, and also adding that on to your other income, what’s it going to do to the tax bracket you’re in, etc.

Megan: So I mean, and that’s the—you’re hitting the nail on the head. So that’s what the big change is. So the law was previously, you could stretch it out. And it was, I thought it was a great thing for a lot of Americans because it gave them measured income, like in your example, where the $18,000 a year.

Megan: So Congress changes the rule. And after January 1, 2020, the new rules apply. So for anyone who had an IRA that they inherited pre-January 1, 2020, old rules still apply. People who got, who were now going to inherit after January 1, 2020, what Congress did is basically what you’re talking about. They’re saying, except for a certain group of eligible designated beneficiaries—which we’re going to get into in a moment—everybody else who inherits has to inherit and take the money out over 10 years. They don’t care how you take the money out over 10 years, but 10 years after the date of death, IRA has to be done. U.S. government has to get its money and be paid its taxes.

Cathy: And that is a difference. Before it was a required amount every year. So the difference is now they’re not requiring you to take out an amount every year, you have to just empty it by the 10th year.

[14:54]

Megan: Correct. And so one of the things that’s going to be really key here, right, is the fact that, you know, you need to think about who your beneficiaries are going to be. Because this 10-year rule applies to a lot of beneficiaries. But there are a group of beneficiaries that Congress and the IRS have excluded from the new rule, okay. And so it’s really important to focus on this.

Megan: So the first group, which is sort of obvious, is surviving spouses. So if I have an IRA, and I walk outside, and I get hit by the proverbial bus, and my husband inherits the IRA, he can still draw it out over his lifetime. In fact, spouses have two ways to take a distribution from an inherited IRA. The first is, my husband could step into the shoes of me and withdraw the balance over my life expectancy. Or he could just roll it into his IRA and get sort of a fresh start with it.

Megan: Okay, so for spouses nothing has changed. And that’s important here. Because for a lot of people out there with their IRA planning, the original beneficiary, the primary is going to be their spouse, and the rules are the same. It’s going to be on the contingent side. But let me give you the other groups of people that are given sort of this special designation now. Eligible designated beneficiaries, EDBs.

Cathy: EDBs, let’s call them that from now on.

Megan: Okay, so EDBs. We’ve got the surviving spouse. We’ve got the IRA owner’s children, or child, who are under age 18.

Cathy: Minors.

Megan: Yeah. Just to give you more clarification, if I had a child who was 13, and I named them as my beneficiary, and I walk outside and get hit by the proverbial bus, they could inherit my IRA. And they could stretch it until they hit age 18. And then the 10-year rule applies.

Cathy: Right. And it does depend on the age of majority in the state, right? In some states it’s 21, and that would be the date then. Is that true?

Megan: You know what, I believe it’s 18 because this is federal law. So I don’t think there’s anything different about that.

Cathy: Okay, good to know.

Megan: Now, keep in mind, if you’ve had a grandchild, they do not come under the child provision. So this is child only. The other groups of EDBs are disabled individuals, chronically ill individuals, and any individual who is not more than 10 years younger than the deceased. Okay. And really, that is siblings. Okay. They’re trying to say siblings without saying siblings.

Cathy: Or parents. But that wouldn’t make any sense for a lot of reasons.

Megan: No, because they’re not 10 years or less in age, unless the parents are really precocious.

Cathy: Right.

Megan: So, if you think about it, right, it’s a very specific group. And the two groups that make the most sense, right, are the disabled and the chronically ill. Because if you think about it, they’re trying to add protection there. The major groups—surviving spouse, child under age 18, and an individual who is not more than 10 years younger—you have to really think about this group. The group is a very small group of people.

[18:22]

Megan: So I think the thing that we’ve got to be thinking about here is, how do you want your estate plan to flow? Right? Because what I find when we do estate planning is we do a nice little flow chart when it comes to the will or the trust here in California, right? How it all will pass, how will the assets pass. But I think the beneficiaries, right, you need to be doing the same thing.

Megan: So for instance, if I was to take my situation, I would look at my situation holistically. And I don’t have children. But I have two brothers. One is two years younger than me, and one is eight years younger than me. And in my estate plan, I do want them to have some of my assets. But if I was to look at the whole thing, right, to look at my entire asset base and figure out—how am I going to slice up the pie?

Megan: And I know I want to give a piece of the pie to my two siblings, and I know that they’re less than 10 years younger than me. What I might do is say, well, because they can stretch it out, I might name them as my contingent beneficiary to my husband. Because they can still take advantage of these stretch IRA rules, right? Other people in my estate plan, right, like my mother, my best friend, some of those groups, right, they might not meet the stretch IRA definitions, and they might be better served taking under my estate plan.

Cathy: Right.

[19:45]

Megan: I think the thing is, and I know Cathy, a lot of people who listen to this are, you know, clients of yours and also advisors. I think that given the changes in the law, the first step everybody really needs to make is pull it all together holistically between the estate plan and the beneficiary designation. And really think about mapping assets.

Cathy: And let me let me stop for a second because I think I want to clarify something. So, for the listeners, when you’re talking about the beneficiary designations of the estate plan, the estate plan includes anything that isn’t an IRA with a beneficiary or a life insurance policy with a beneficiary. It’s your taxable assets, your house, things like that. But those are the things that go in your trust. And then on the other side is the IRAs and the life insurance policies that have designated beneficiaries. So, Megan is saying you need to have a holistic plan to combine those two. Just explaining the term estate plan.

Megan: Yeah, no, I think that’s really helpful. And I think one of the things that’s happened over the past decade is estate attorneys have gotten more focused on beneficiary designations. So, you know, I think for everybody, right, the best way to look at your estate plan in general is that it’s a living thing. I always tell clients that this is living, breathing estate plan. And anytime there’s a life event, we should get back in front of the attorney, right? Whether it’s you’ve had a child or grandchild or you got married, all of those things bring us in front of the estate attorney. But the SECURE Act and the changes to the beneficiary rules is also a good point for us to then reach out to our advisors.

Cathy: That’s a good point.

Megan: This is the time that maybe we should refresh this. And I think one of the things that the advising community has gotten very good at is doing a whole balance sheet approach. So Cathy, I’m sure with your clients, you know all of the assets, even if you’re not managing it, right, and I think that’s so important. And I think the ability to go through the balance sheet and say, okay, this is covered by my trust, but this is covered by beneficiary designations is really important. Because I’ve always been surprised at times to realize that people don’t understand how powerful beneficiary designations are.

Cathy: They don’t, they don’t. And so are you saying that you think estate attorneys didn’t focus on that as much, and now they are helping clients more to figure out that holistic approach?

Megan: I think that they’ve always been helpful on it. But what I’m seeing more when I get client estate plans is there’s often a great letter or a summary in the front of the estate plan, and you probably see this as well. You know, saying look, retitle your assets this way, but also say, listen, for your beneficiary designations, this is what it should likely read. And copy that on there.

Megan: But here’s the thing. For a lot of Americans, right, naming the spouse followed by their children might be the easiest solution. But for people who have these very big IRAs, this is where you really have to get into the planning, get into thinking about how you want it to work and how it’s going to flow. Because things sometimes don’t flow the way you think they might until you map it out.

Megan: My first piece of advice here is, because of this change, it’s a great time to connect with your advisor. Go through the balance sheet, understand what goes by the trust and what goes by beneficiary designations, and then work with your advisors to refresh the beneficiary designations, to really, really look at them and make sure it makes sense in context to the balance sheet.

Cathy: Love that advice. Perfect.

Megan: So that’s sort of the first thing because the problem we have, right, is we get into a weird world of taxation. And, you know, I think one of the things that’s been so overwhelming for people is this idea that if they inherit an IRA, right. So if I inherit an IRA from my mother, I have to take out the distributions over 10 years. And it’s a complex rule, because I’m facing income tax consequences when that comes down the path, and it’s how do you manage that? Are there certain tricks out there or ways to think about it that will help you manage the tax piece of it?

[24:19]

Cathy: Let me interrupt for one second. And I totally agree that I want to go into the taxing. So, you’ve been talking about what the owner of the inherited IRA should do, right? And one of them is definitely look at the estate plan and look at the beneficiary designation as a whole. Before we get to the inheritor, the heir, the beneficiary, is there anything else that the IRA owner can do before they die, to reduce tax for their heirs? And is that a wise thing? Do you think that’s a wise planning move to do?

Megan: It’s funny you bring that up. I think that when you, one of the things that you have, as you build your asset base, you have to figure out is what are your priorities. So I have a large group of clients, that the priority there to mitigate taxation, regardless. They just want to make things easier for their children and grandchildren. And then I have other clients that sort of say, look, my spouse and I, we’re protected. It is what it is, whatever happens plays out. So I think there’s a little bit of developing a philosophy on what your priorities are in your asset base.

Megan: Now, if you are one who said, look, I want my kids and my grandkids to inherit. I don’t mind if I have to take some of the pain up front. Some of the things that they should be thinking about is, can you convert your traditional IRA to a Roth IRA? Now, what does that mean? So, as we said, a traditional IRA, you put in pretax money, it grows tax deferred and comes out as paid at ordinary income tax rates. Roth IRAs, you put after-tax dollars in, typically, I’m just giving the broad scenarios. The money grows tax deferred. And when you take your distributions, it comes out tax-free. So if you’re sitting on an IRA, and you’re looking at your beneficiary saying, I don’t want them to pay a lot of income tax down the line. I don’t mind paying the tax. I might convert my IRA to a Roth IRA. Meaning I might pay all the income tax upfront, so that the money in the account becomes a Roth.

Megan: That doesn’t mean we get around the stretch IRA rules, the 10 years. But what it does for your beneficiaries is they can keep them, you know, if you pass away, and your children who were over 18 inherit, the money can stay in the Roth IRA for 10 years growing tax deferred, and then in the 10th year, you can take it all out and therefore mitigated some of the income tax over time.

Cathy: And this is assuming that the person that’s Roth-ing their IRA can afford to pay the tax. That’s why it really depends on what your goals are with your money. Do you want to pay the tax for your kids or your heirs? Or can you afford to do that? Do you need the money to support your lifestyle or whatever?

Megan: Right. Now, I’ll tell you my own personal situation. I mean, obviously, I’ve named my husband. But I’ve named friends. And my attitude is, look, you’re inheriting this. So what you have to pay the tax? It’s more than you had, right, like you’re lucky to be inheriting it. And that’s my sort of personal philosophy on it. You know, you don’t have tax practitioner.

[27:53]

Cathy: You don’t have kids, though. I know I’m thinking of some clients in particular, if you explain this to them—what’s going to happen when their kids inherit. They’re going to go, oh, really? And so then I start thinking, this is the next thing to think about. Who’s in the higher tax bracket? The person with the IRA that might do the Roth, or the kids? Are they high income earners? So, it always gets very complex, these types of decisions, in the end.

Megan: It’s very specific to the to the personal situation. And I just want to add one more element to that. I had someone do this in 2008, during the crisis. But sometimes the best time to be doing this type of planning for whether or not you should convert an IRA to a Roth is when the markets are down. So a year ago right now, right? We were almost at, I mean, right now we’re in April. But last March, March 2020, markets at an all-time low there—that would have been a brilliant time to convert your IRA to a Roth. The thing you got to think about is timing matters.

Megan: So if you’re one of these people who are sitting there saying, look, I’m going to be passing my IRA on to someone who’s not a spouse, who doesn’t qualify as an EDB. And I want to make sure I mitigate all potential income tax for them. And I want to convert my IRA to a Roth, and I have the money to do so, I’d wait till the market dropped.

Megan: In 2008, I remember we did it. I think we did it in like January—it was like December of ’08, January of ’09—and the market, as you know, hit bottom on March the 9th, 2009. And today, we’re at all-time highs. In retrospect, it was a brilliant move because he paid the income tax on a very low amount. But at the time, it was sort of like, I remember him asking me if I lost my mind. And I was like, no, because if you believe the markets will rebound, which you know, I think a lot of investors do, you know, at this point, moving it to a Roth over time, right now, saves you tax dollars down the line.

Cathy: And if they invested it, if they invested it right away in the Roth, they got to participate in the recovery fully, you know?

Cathy: Yeah, timing is super important. I mean, you can’t predict what’s going to happen with that. But you can certainly watch and be ready.

[30:21]

Megan: I would make the argument, you know, part of our job right now is when the markets are on a tear, we need to be talking about planning ideas with clients for when the markets drop. So next time we have a March of 2009, or a March of 2020—weird that it’s always iin March—when those moments happen, you don’t want to be paralyzed in your decision making. You will have wanted to have thought this through.

Megan: So I would challenge you to say if we went back to where we were on March 27th 2020, which was the bottom of the pike, technically, the bottom of the market when the CARES Act was signed. You know, looking back now, do you wish you had converted your IRA to a Roth and paid those tax dollars on it, given the growth in your IRA? And these are the questions people have to ask.

Megan: I don’t want to lose track of the beneficiary designation. So if you’re an IRA owner, my advice is flowchart out how your IRA is going to pass. Remember, if it passes to your spouse, you’re still under the old rules. If your contingent is not in the group of EDBs, then you really need to think about that group. And think about what is your philosophy on taxation? Do you want to pay the tax for them? Or do you not? Do you even care? I mean, are you saying, look, you’re inheriting something. God bless.

Cathy: And there’s nothing there’s nothing wrong with that attitude, by the way.

[31:47]

Megan: Right. Now, the tricker thing is, the person who inherits it. So you know, we’ve been using a scenario, right, where if you inherited my IRA, Cathy, you’re going to have a whole host of decisions that you have to make when I pass away. Because you get told, okay, you’ve inherited an IRA, what do you want to have happen? And this is where, as the beneficiary, you really need to work with a tax professional or another advisor who can lay out taxation for you. And to sort of map out the next 10 years, what does it look like, right?

Megan: Because you might be working for the first five years of the 10 years. And the last five years, you might be retired, and so your income bracket might be changing. And so what you want to be doing is roughly mapping out where you think your ordinary income tax bracket is going to be.

Megan: Now, some people would say, look, if your bracket’s going to remain the same the whole time, you just might want to take a piece out every year, and so be it. Other people might say, look, wait till the very end, wait till the 10th year, and then take it all out.

Cathy: There’s the other factor that predicting tax rates, like, right now we have an administration who might raise taxes. So you have to think, will I be taxed at a higher rate later, in that 10-year time frame? Or should I take it now? That’s another thing to consider.

Megan: Because there’s also a third group, right, of people who are trying to, they might have a high tax bracket, then a low, then a high, then a low. And you can intersperse the distribution that way. But I think, what I tell people about retirement planning is—we talked about me being a history major—I think of things on a timeline. Seventy-two, as we talked about. If they start taking the RMD before 62, they might still be working, but 62 to 72 is usually that first sort of decade of retirement.

Megan: And what a lot of them experience in that decade of retiring is they might be taking Social Security, but a lot of their income might be coming from their investment portfolio. And they might be municipal bonds, which are tax-free, or qualified dividends at preferential tax rates. And that might be the sweet spot to pull down a lot of the income to fill in the gap.

[34:03]

Cathy: Let’s repeat that, because that’s a really important point.

Megan: Yeah, I mean, I think the thing is, when you’re working with your advisor, they typically do a long-term cash flow. I think it’s the best tool out there. And Cathy, do you use them with your clients?

Cathy: Oh, yeah, I do this kind of planning, where in that that period you’re talking about—where you’re looking at—right when you retire before you take RMDs. It’s a really critical planning time.

Megan: It is, and it’s where your income tax, you know, if you do that sort of long-term cash flow, you typically can see between ages 62 and 72, there’s a reduction in taxation. Because most people go from paying a lot of ordinary income tax to preferential tax rates, right? They have municipal bonds that are tax-free, they have qualified dividends, and they often have Social Security, but their brackets drop.

Megan: And that’s where layering in IRA distributions can be incredibly powerful because you’re going to get more money out, but at a lower tax rate. And where I think anyone who’s inheriting an IRA really needs to think through sort of when they take it, and when they can take advantage of certain tax rates.

[35:11]

Cathy: Yeah. Could you talk a little bit about the whole Medicare and IRMAA charge thing, too? Because that’s something else that people need to think about.

Megan: Yeah, so there is a surcharge for Medicare. And I always find it, you know, it’s frustrating, because people don’t expect it. Medicare will surcharge you if you make a certain amount of income on your Medicare payments. So that’s frustrating for people, because first of all, Medicare looks back two years on your tax returns. And they add back any municipal bond income that you had. They’re really trying to figure it out.

Cathy: You know, the point you just made is so true. Why does—no one knows that. Everyone thinks that it’s that bottom line, monthly Medicare fee. And it’s not. And people are always surprised that they’re paying more.

Megan: I was on a call with a client yesterday. And I mean, she’s now 71. And I’ve heard for six years about the Medicare surcharge, because they add back for muni bond income. Because she’s like, look, I did the right thing. I structured my asset base appropriately.

Megan: But I think the thing is, those are the nuances you have to add in. And look, I’m going to be honest, sometimes tax is tax. You can’t mitigate it. And if you can’t mitigate it, you want to think about all the other planning levers that are around you.

Megan: So, one of the big things out there—and I know you’re a big fan of it—are donor-advised funds. So if you’re going to have to take the distribution, either over 10 years, or in a couple of years, from an inherited IRA, you may choose to take the distribution in a year that you can make a donation to charity. Or fund a donor-advised fund, where you put some of the money right to charity and mitigate the tax bill that way. And that might be another way to handle it.

Cathy: Another point with the donor-advised fund is for the IRA owner, if they decide to Roth part of their IRA, is to do a donor-advised fund contribution in that year. That would mitigate some of the tax on that Roth conversion.

Megan: There’s not a one size fits all solution. There’s a lot of different options out there, and you have to work through them, depending on your personal financial situation, and who you are as a person. What are your values, your value proposition?

[37:32]

Cathy: It’s so important that you’re bringing that up. Because, you know, when I wanted to do this podcast, I was really focusing on how can we help our audience save, learn how to save tax, given this new rule? And the truth is that paying tax isn’t really the worst thing in the world, you know. You’re paying tax on income, so you obviously have income coming in. And it really does depend on your own personal philosophy.

Megan: Yeah. And, you know, I’m sure you use investment policy statements. And I think whether you work with an advisor or not, you should have an investment policy statement for your asset base that lays out the mandate.

Megan: And we try to put in ours what people’s tax philosophy is. So, you know, I’ve got things like they hate refunds—they don’t want the government having that loan from them—to do everything possible to mitigate income tax and estate tax issues. And it’s trying to find that balance. Because, you know, anytime we have a law change, it might close one door, but it opens another door. And what’s why you want to go down that path of doing that type of planning.

Megan: And I have a lot of clients who have very complex situations, and they do complex planning. And then I have another group of clients where they’ll say, there’s elegance in simplicity. I’m not going to overthink it. I don’t know where tax rates are going to go. I’m going to let my beneficiaries figure it out.

Megan: But the beauty of the changes in this rule here for beneficiary designations is both the IRA owner and the inherited IRA beneficiary all have planning choices to make. Everybody is able to control some of the controllables. And so, the thing is, when you inherit an IRA, what’s really, really important is to seek advice. To reach out, get help, because people like you and me, we’re trained in thinking through these parts of the problem and understanding in context of the bigger picture. That’s important.

[39:30]

Cathy: Yeah. And some real mistakes can be made, like the contingent beneficiary. I mean, there could be some huge tax owed if people don’t understand how the beneficiary thing works and who’s the eligible designated beneficiary and who’s not. Someone doesn’t take anything out of their IRA dies and then their beneficiary ends up paying tax on a huge IRA.

Megan: Things like that can happen. It happens all the time. And yeah, you know, these are in a weird way—if you inherit an IRA, it’s a bit of a champagne problem. It’s a good problem to have, right? You’re working through it. But I also would say to people who, to all of us who have IRAs and 401(k)s and 403(b)s, this is the cheapest estate planning you can do, right?

Megan: Because in California, when we do an estate plan, we have to go out and get a revocable trust. But beneficiary designation planning, if you set your beneficiaries up, and in five years, your life has changed. Maybe you were married and then you got divorced. Or, you know, you’ve determined that one of your children doesn’t need the money, but your other child does. It’s all about just changing a form. And that’s the thing I like about beneficiary designation planning. It’s quick and easy to fix.

Cathy: I have some of my clients with simpler estates use transfer on death beneficiaries for their taxable accounts instead of doing the trust for that very reason. Because it’s simpler.

Megan: Yeah, I mean, I’ll tell you here in California, you know, when you get your revocable trust, they’re like change your bank accounts. And I’m like, oh, God. The first time you go to the bank and try to do that, the practical aspect of it is difficult. People inherently like to procrastinate on this.

Megan: So like you do, sometimes I’ll say just make it TOD or POD account at the bank. It just makes it easier than getting into the trust, because it’s, it’s just, it’s difficult.

[41:34]

Megan: Now, I do want to mention a couple other planning ideas. Because, you know, one of the things that people talk about was with stretch IRAs, you were creating this unique estate planning tool for your beneficiaries. Right? So one other idea out there—and it comes with a cost—is the IRA owner can also choose when they’re taking their RMDs. If they don’t need the RMD to live off of, they can pay for life insurance, and that life insurance can then go to the beneficiaries of their death. And they don’t have to deal with this income tax issue.

Megan: And that’s one of the things out there that people are starting to use to replace it. It’s not my favorite technique, because I find life insurance at times can be too expensive. But if you’re really, really caught up in making sure your beneficiaries get a certain amount, and get it income-tax-free, life insurance is one of the levers you can pull in your financial picture to make that happen.

Cathy: Yes. Yeah, that is a little more complicated and more expensive. But again, it depends on the person. For the right person, that could be the best strategy.

Megan: And I think that’s the thing where, you know, the beauty of working with an advisor is our roles are to bring to the forefront things that we don’t want to deal with. We force conversations that people put off. And I think one of the best conversations we should be having—and we do have—with clients is how does this all flow? How does it all play out? And I found when I start to show clients how the estate plan flows out and the dollar amounts, it can sort of take them by surprise.

Cathy: Yeah. And they’re certainly not thinking about that. You know, who spends time thinking about these things? I’ll give a good example of another planning technique that just came up today around inherited IRAs. One technique to reduce the IRA before the person dies—and if they’re older, this kind of makes sense. If they’re taking their RMDs on a monthly basis, you may want to take the whole RMD as early as possible, just in case. You know, if they’re in their 80s or 90s? So that the money is out of the IRA.

[43:56]

Megan: Yeah. That could work. You know, and also, you could just choose to take larger distributions. You’re in your 70s or 80s. And your main sources of income are your IRA and your Social Security check, right? Maybe you start taking larger IRA distributions. I mean, there’s no harm in it. Again, work with your advisors to make sure from a tax perspective you’re not getting burned. But it might make a lot of sense for a lot of people, you know. And how to do and how to structure it.

Megan: I can’t emphasize enough, you know, tax planning—and I know Cathy, you use a tool with your clients that you have found really effective. But, you know, I agree. Planning is so key as you project ahead, because there’s power in that knowledge in trying to be tax efficient. I can’t tell you how many times people are like, “woulda coulda shoulda.” If I’d known that’s how it was going to play out tax-wise, I would have done this differently. And so working with advisors like Cathy, who have those tools, I think it’s so valuable.

Cathy: I do too. You know, I always do tax planning. But I tell you, it was a lot of work when you were using spreadsheets to do it. And there’s new software available to financial advisors that’s incredibly powerful where you could do scenario planning for years out. And, I find in my role as a holistic financial advisor where I do financial planning and investment management, and I know everything about the client, that is so helpful and powerful for them. And because tax accountants, I don’t do tax returns, and many accountants don’t know the whole thing. So it’s really good to have somebody that does to help you, especially with these kind of issues.

Megan: Because you can then say, look, even though we’re going to take a larger distribution, let’s donate to charity more. I know you’ve been doing more to your alma mater, right? Things like that. And it’s that little nuance there that can make the difference.

Megan: And I think it’s important to quantify the tax savings, right? And remind people when we’ve done a strategy—over time, what has that strategy added to your portfolio? It’s like, I told you the story of my client who converted his IRA in ’08, ‘09. I mean, here we are 12 years later. I mean that’s, for him, a seven-figure difference. That has value.

Megan: It’s painful paying the tax, but a certain point, you cross over where you’re winning. And that’s so important when we’re managing our finances is—you want, I want clients to feel smart and clever about the choices they made. And even if the choice is, like I’m saying, I don’t care if you inherit my IRA, and you pay the tax. Good luck. Have at it. That’s a proactive decision. You know, look. Ultimately, the SECURE Act, I think it hurts more Americans than it helps.

Cathy: Wait, wait, what does the acronym stand for? It makes me laugh.

Megan: Setting every community up for retirement enhancement.

Cathy. Right! How is this enhancing? I don’t see—it enhances the coffers of the government. I’ll tell you that, you know.

Megan: So, but here’s the thing. What if the opportunity had been different? That if you inherited an IRA, you had an option that it was, you know, it was almost like a pension to you. And you got to, you know, talk to an advisor, who explained this thing could be like a pension for the rest of your life. Don’t pull it all out.

Cathy: Yeah. Which it was. That’s really what it was. It was an excellent tool for people.

[47:36]

Megan: Yeah, I’m disappointed that they did this. You know, I think that unfortunately, we live in a day and age that when they’re setting tax policy, there is such a need to be punitive to people who have been financial success. Right? That sometimes the typical American, right, the average American who have worked so hard to save this money. And they’re sitting there, and they have five, eight, $900,000 in the IRA. They’re getting penalized because there are a few wealthy people that also got benefits.

Cathy: Right. You know, good point. Because we didn’t, we haven’t talked 401(k)s in relation to IRAs. But you said people have big IRAs. One of the reasons is they’ve been saving in their 401(k)s their whole life or their 403(b)s or whatever. And then they retire, they convert it to an IRA, and then someone inherits it. I mean, that’s the way a lot of, in some cases, that’s the only way people are saving money. So, it really is penalizing a broad swath of people in the United States, not just uber-wealthy.

Megan: It is. And you know, I think the other thing is it’s one of these things where there’s also planning that can be done while you’re building the wealth, right? So, I have a lot of clients where one spouse is working, and the other one doesn’t. And we still fund an IRA for them. And if we can, we convert it to a Roth.

Megan: And a lot of times we’re doing it because, you know, one, it gives us the chance to create a vehicle that’ll create tax-exempt income. But also, two, even though they name their spouse as the primary beneficiary, and maybe their children as the contingent, they also are making the decision that the spouse could eventually disclaim the IRA, the Roth IRA, if it’s inherited, and go right to the kids. Granted, the kids have only 10 years to take it out. But it’s tax-free money, right? It grows tax deferred.

[49:30]

Cathy: Okay, let me let me ask you something. I thought about this before we talked. If someone disclaimed an inherited IRA, and it went to EDB, would they get to take it over? I mean, they get to stretch it?

Megan: So, yeah. If it was an EDB, like if my husband disclaimed it and it passed to my brothers? Yeah, they can stretch it.

Cathy: Okay. That’s interesting.

Megan: That’s, that’s some of the nuances there. Yeah. I think you know, it’s one of these things where, know who you want to give to in your family. Right? How far out do you want to give? Nieces, nephews? You know, and you might do nieces and nephews in your actual trust, but you do your siblings in the IRA because of the stretch privileges.

Megan: And that’s some of the stuff you just, and you can see just even in this podcast, some of it is just sitting around and kicking the can around. If you have a beneficiary who has spending issues, you might be better served putting them in your trust, in your estate plan, your trust part of it, and not give them access to an IRA. But that’s also problematic.

Cathy: Right. They might drain it all in the first year, right?

Megan: Yes.

Cathy: Yeah. And you can set up trusts where they get the money at a certain time. And you can’t do that with an IRA. It’s their money.

[50:48]

Megan: The other thing is, when you’re the IRA owner, think about dead—I love the term from the law—dead hand control. How much dead hand control do you want on your beneficiaries receiving something? Because if you had two siblings, and one of your siblings had a drug issue or spending issue and your other sibling didn’t, you could say, look. I’m going to give you my IRA. You’re going to have to pay some tax on it, right, but you’ll probably be able to stretch it.

Megan: I’m going to give our other sibling money in the trust. And they might get less from the trust than you’ll get in the IRA, because net-net, you’ll get the same after tax. That’s the type of nuancing that you want to be thinking through.

Megan: And estate attorneys, financial advisors, CPAs—these are all great people to have the debate with. And, you know, sometimes get them all in one room. You know, get everybody in one room and say, look, I want to do my beneficiaries. And I really want to think through this. Let me tell you about all the people I’m thinking about, and what I’m concerned about with each of them, or what I’m not concerned about with each of them.

[51:51]

Cathy: Right. Oh, I have a question for you. Nondeductible IRAs. If someone’s eligible, even a very wealthy person, would do you do those?

Megan: Totally. And I file form 8606. Which records the basis and tracks it.

Cathy: Do you put it into the same IRA? You don’t do a separate IRA for the nondeductible contributions?

Megan: In general. I mean, I keep it in the same IRA. And it depends, because some of the people we’re doing it with have such large pretax balances that they can’t do a Roth conversion. But then I have a group that every other year, we’re funding it and doing the Roth conversion.

Megan: And look, I’ll say this for what I have found—and maybe it’s because I’m a woman—but I will often run into situations where, you know, the husband is the working spouse and the wife has stayed at home. And I think it’s incredibly important for women to have their own money. And it might not seem like a lot at first putting the $6,000, or $7,000 away if you’re over 50. But, you know, as I say, over 10 years of doing that, plus the growth, that turns into six figures pretty quickly.

Cathy: No, I agree. Spousal IRAs are—definitely. So, you take advantage of any tool that is out there, no matter how small. Like with the deductible IRAs, it’s only six or $7,000 a year, right. But then those earnings grow tax free. If you keep it in, if you keep it in the nondeductible IRA.

Megan: What I tell clients is, look, if there was $20 on the floor, I’d pick it up before I left the room. You know? Every little bit. Because if you max out your 401(k), and you fund your IRA, and then you add to your brokerage account, and maybe you fund your kids’ 529, and you add it all up, all those little things become a big number.

Megan: And we need to celebrate that more, because it is so hard to save today. You know, I always tell people, what’s fascinating to me is the government determined that upper middle class starts at income of, I believe, $127,000. That’s where the government feels like you should be set. And I’m sitting here in the Bay Area, and that is still tough living on $127,000. How do you save?

Megan: And the system since the 80s has been made to work against you. So, if you are a beneficiary of an inherited IRA, it’s a blessing. And you need to think through it because it can be one of those things that makes the difference between a financial challenge and a financial success over the long term.

Cathy: Right. Because it is a gift. It’s a gift, right? An inherited IRA is getting a gift, and you want to take care of it.

[54:39]

Megan: And you know from all those studies. You know, Merrill Lynch does a study every year on this, the focus is on family. And I believe what the study has found is that there are so many boomers and Gen Xers who are building their entire retirement strategy on inheriting because they can’t fill the gap and they’re all living so long. So, that’s the tough part.

Cathy: No, it really is. Well, this has been just as interesting and thoughtful as I thought it would be. You’ve given me some new ideas around this topic. I really appreciate you coming on. Is there anything else you want to add on the top? I mean, we could probably talk forever about this.

Megan: One last thing I would just say to anyone who’s doing this is engage in your planning. These are big dollars. Whether your IRA is $50,000 or $500,000. It’s big numbers, and you want to have some control on how it plays out, so really get engaged. And talk to your advisor. It’s well worth it.

Cathy: I agree. And so, let’s tell our audience where they can find you. I know you write for Forbes, and you probably do some other things. So please, yes.

Megan: So you can find me at Forbes at www.forbes.com/MeghanGorman. And then you can also find some of my other planning pieces at thewealthintersection.com. So you know, I love to do webinars and write about this. I think my role in this space is about helping people thrive. It drives my husband a little crazy, because we’ll be out and about, and I’ll be trying to give people advice. But I love this stuff, though. If you want to read my articles, feel free and feel free to reach out.

Cathy: And give people your Twitter handle for those that are on Twitter.

Megan: Sure. It’s @megan_e_gorman. So feel free to reach out on Twitter as well. But thank you for having me on. This was great.

Cathy: I want to do this again on another topic, okay?

Megan: You got it.

Cathy: To be decided.

Megan: You got it. Sounds good.

Cathy: All right. Take care.

Megan: Take care.

If you found this information interesting, please share it with a friend!

S2 E3: Estate Planning Must-Haves For Single Women

Financial Finesse Estate Planning Must-Haves For Single Women

Estate Planning Can Be Daunting, But It Shouldn't Be Avoided

This year has reminded all of us how precious and fragile life is. It’s also highlighted the importance of having a financial plan–especially during periods of uncertainty. That’s why for my third episode of Financial Finesse Season 2: What Keeps You Up At Night?, I’ve decided to focus on estate planning and the documents every single woman should have in place. 

Many people avoid the topic of estate planning, thinking it’s too morbid to discuss or something that only applies to the ultra-wealthy. The truth is, everyone with assets to their name should have an estate plan, regardless of current net worth or marital status.

Estate planning is especially important for single women. While married couples have the assurance that their assets will remain with one spouse if the other passes away, a single person must specifically designate one or more beneficiaries or risk her assets going to someone she may not have chosen. In addition, single women have the added stress of appointing such roles as executor, successor trustee, healthcare or financial power of attorney, which often keeps them from moving forward with their estate plans altogether.

In this episode, I discuss which estate planning documents every single woman needs and offer suggestions for how to choose and appoint people for key roles if you don’t have a spouse or partner. I hope it will help put your mind at ease about the estate planning process and encourage you to end the year confidently, knowing your financial plans are in order. 

Episode Highlights

Links Relevant To This Episode

Looking for more advice? Contact us!

Here's The Full Episode

Enjoy!

Other Ways To Enjoy This Episode

Do you love Financial Finesse? Please leave us a review on Apple Podcasts!

If you found this information interesting, please share it with a friend!

S2 E3 Transcript: Estate Planning Must-Haves For Single Women

00:01

Hi, I’m Cathy Curtis. And this is Season Two, Episode Three of the Financial Finesse podcast. In this series, I’m talking about what keeps you up at night when it comes to your finances. And today, I’m going to discuss what estate planning documents every single woman needs.

00:22

This year has highlighted to all of us how precious and fragile life is, and also how important it is to have financial plans. Just as important as a financial plan for your life now is to have a plan for when you’re no longer here. This is called an estate plan.

00:42

If you don’t have an estate plan, the people you leave behind will have a much bigger job on their hands. First off, how will they know how to find all your different accounts,

00:53

who you want your things to go to, and things as simple as how do they get into your house? In addition, your assets, property and belongings that make up your estate may not go to who you want them to. Because if you die intestate, which means without a will, your state’s laws will designate beneficiaries for you in an order that you may or may not want.

01:21

Usually, first is children, then siblings, parents, grandparents, aunts, uncles, great uncles or aunts, nieces, nephews, cousins, etc.

01:32

If you don’t have any family at all, your property will go to the state. This doesn’t happen very often because the state will do all they can to find even distant relatives.

01:44

But the key point to remember is if you want a significant other, close friends, or charitable organizations as your beneficiaries instead of those before-named relatives, it won’t happen unless you execute a few documents. In addition, with no plan, the court will appoint an executor to manage your affairs after death. And this may not be a person you would have chosen.

02:16

So there’s two key documents that will transfer assets to your designated heirs—a will and a revocable trust, sometimes referred to as a living trust. I believe that everyone needs a will, while others will need both a will and a trust. You can do some things with the will that you can’t with the trust, such as name a guardian if you have minor children or forgive personal debts. A will can also have a pour-over provision so that things you forget to transfer to your trust will pour into the trust after your death.

02:56

In a will, you name your personal representative called an executor, who will manage all your financial affairs after your death.

03:08

So there’s two key differences between a will and a trust that may help you decide which is the right choice for you. One is that wills are always probated, meaning that a court of law is involved in supervising the transfer of your assets and payment of your debts and taxes. Revocable trusts, on the other hand, do not go through probate. The assets you have placed inside the trust while your living will go to who you want them to with the help of your successor trustee. This is another individual who you appoint. Probate takes time, requires many steps, and be and can be more expensive.

03:56

Secondly, the probate process is public, while trusts are private. If you have an interest in keeping your affairs, your estate content, and your inheritors private, a will isn’t your best option. Every legal will is made into a public record after it is accepted by the probate court. And this means that everything you own, pass on, and who you leave things to also becomes public record.

04:28

And if you have private sentiments or last wishes, these two will be made public.

04:35

As far as cost, wills are cheaper to get prepared, but trusts will save money later and make things much simpler for your chosen representative and heirs.

04:48

Okay, so hopefully, all of those points will help you to decide whether a will and/or a will and trust are best for you.

05:00

If you have a more complicated estate, many beneficiaries, you own a home, I would say a will and a trust are better for you. You may be able to get away with just a will if you have a much simpler situation.

05:14

Alright, so next I’m going to talk about assets that are not transferred by the will and trust. Not to complicate things, but there are several assets that are not transferred that way because you name a beneficiary, when you open the account, or you buy life insurance, or sometimes when you buy property. And the assets that aren’t transferred by will or trust are the following: life insurance proceeds, any asset or account that you hold in joint tenancy or tenancy by the entirety with somebody else. Like, let’s say you own a property with a friend in tenancy by the entirety, that’s already predetermined how it’s going to go after you die. All IRA accounts, your 401k or other company retirement accounts, funds in a pay-on-death bank account that you’ve set up, stocks held in a transfer-on-death account, or real estate or vehicles held with the transfer-on-death deed or title document. Just for example, you could go down to the DMV and add a transfer-on-death document to your vehicle. It’ll go to wherever you want it to after death, if they just present that certificate and their ID.

06:37

So, you need to coordinate all these things that aren’t transferred by will and trust with the things that are to make sure that your estate plan is how you want it.

06:47

So the most critical advice I can give for these assets I just mentioned, that aren’t transferred by will or trust, are to be sure and review your beneficiaries

06:59

at least every other year or when your life circumstances change. For example, there are many horror stories about ex-spouses getting assets that they weren’t meant to, because someone forgot to update the beneficiaries on these accounts after a divorce. So you want to make sure you look at those on a regular basis.

07:20

Okay, so the assets that do get transferred to your heirs by will or trust include just about everything else, your residence, second homes, other real estate that you own as a single person, business interests, bank accounts, investment accounts, stocks, personal property, pets, all these things transfer by will or trust.

07:46

In the will or trust, you’ll list who will receive each asset or the percentage of each asset. If you decide to create both the will and trust, your will can be very simple because most of the instructions will be in the trust. With your trust, you can dictate that your estate be distributed as soon as possible and closed out, or it can last for years if you decide you want to distribute your assets over time. This is where the term trust funders come in. Trust funders are people where trusts have been set up for them by parents or relatives, and they are able to get money out of them but not all at once. That’s what a trust fund is.

08:31

When you have a will created, you will need to appoint an executor. And when you have a trust created, you will need to appoint a successor trustee. This person can be the same person. And you could name more than one for each case, the will or the trust. In the case of wills, the executor takes over when you die. With a trust, if you aren’t able to take care of your own affairs, your successor trustee can take over while you are still living with your permission, and then manage your estate when you die. For example, I was the executor and successor trustee for my mother. And she was getting elderly and really didn’t feel like handling all her financial affairs anymore, paying her bills and managing her accounts. So she signed over

09:27

to me to be her successor trustee while she was living and then I was able to manage them while she was alive. And then when she died, I just continued to do that until I closed her estate.

09:39

I have found for many single people that trying to decide on who their executor and successor trustees are going to be, can be more difficult than a married couple or domestic partnership who just name each other, which is what most people do. So here’s some smart guidelines to follow when you’re trying to decide who these individuals will be.

10:00

It goes without saying, choose someone you trust. And you want someone who you know to be organized and detail-oriented because it’s a lot of paperwork. It’s helpful if they live near you, not completely necessary, but someone who lives in another state might have to travel to execute documents and things.

10:20

Try and think of someone who has the time to devote to the job because it can be time consuming.

10:26

And consider putting in writing in your will or trust that your executor or successor trustee can hire professional help if needed. It’s pretty much assumed that in a trust that they might need to hire professional help, but not necessarily in a will.

10:43

If you have a large, complicated estate with lots of beneficiaries, like I mentioned before, you may want to hire a corporate trustee, especially if you want to set up a trust account that your beneficiaries will get in future years.

10:57

So with less complicated estates, most people choose relatives or friends. But you can also find estate attorneys or accountants who are willing to do this job for hourly rates. There’s also professional trustees that are individuals with smaller firms. Hiring a professional trustee may be the way to go if you’re worried that your personal acquaintances or relatives won’t be up to the job, or you’re worried about conflicts of interest.

11:29

Both executors and successor trustees are bound to act as fiduciaries, which means they’re to carry out your wishes, and keep the beneficiary’s best interests in mind at all times, not theirs. But while the probate process pretty much supervises executors in handling the will portion, a successor trustee is not supervised. And so that’s something to keep in mind.

12:01

Revocable trusts are pretty much private affairs.

12:06

Another thing is, it’s really important to be kind and helpful to your chosen representatives, your executor and successor trustee, because it really is a big job, and you want to be organized and not leave them to have to figure out a lot of things. So here’s some tips on what you want to do once you get this all set up, is that you keep an updated list of your assets and debts including bank and investment accounts, insurance policies, real estate, everything, you let your executor know where your original will is in the asset list and how to access them or give them copies.

12:49

You let these people know the name and contact details of your attorney, attorneys, agents, financial advisors, etc. in case they need help.

13:01

Let them know your wishes for funeral or memorial service. Because yes, they do get involved in handling that, and give them copies of all your important documents.

13:14

Another question that many people have is, do you pay your executor and

13:20

successor trustee? And it becomes kind of complicated when these people are family members and also beneficiaries because a lot of people do appoint their beneficiaries as their representatives. Now, I feel like people should get paid because it’s a tough job. And it takes time, it’s a lot of responsibility. Some people who are beneficiaries decide not to take pay because they’re going to benefit from getting something from the estate. And also, these fees are taxable to the person receiving them. So the executor and successor trustee would have to report them on their tax return. But some people may want to get paid. So just to give you an idea, and I live in California, so the executor compensation is pretty much set by the state. And in California, under California’s probate code, the person is entitled to—it’s very complicated—but 4% of the first 100,000 of the estate’s value, so $4,000, 3% of the next 100, so that’s another $3,000, 2% of the next 800,000, 1% of the next 9 million, 5% of the next 15 million, and if the total value exceeds 50 million, the court decides on a reasonable amount.

14:52

So that’s just an example of what an executor could be paid.

15:01

Now, if you designate in your will that there should be no fees, which some people do, and it ends up that this job is exceptionally difficult or time consuming, the executor can request compensation for extraordinary services from the court. Because remember, wills go through probate, and they may be able to get some form of compensation, if it ends up that they’re taking a lot of time.

15:30

So that’s for the executor of your will. For the successor trustee, it kind of depends on what type of trustee. Corporate trustees are paid, usually on a percent of assets under management. And that could be 1-2% of the trust assets. So that’s if you have a complicated estate where the trust assets need to be managed over time and you don’t have a personal acquaintance or relative that you want to have to do that job.

16:04

Professional trustees that aren’t necessarily corporate trustees, they may be an individual or a small firm, usually charge by the hour, and that would really depend on where you live.

16:16

I read things like $100 an hour, but in California, I don’t know anyone that charges $100 an hour. So I think it would be a couple hundred or $300 an hour at least. And then there’s the private trustees, which are your relatives, friends that do it. And

16:35

I would say that unless they decide not to take a fee at all, they would take an hourly rate. And it’s really important that that person keep track of their hours and everything that they’re doing, because they have to do a complete reporting to the beneficiaries to show what work they did. So that’s, that’s how the fees work.

16:59

And again, like I said, I, I really believe, because I actually have administered three different family estates, people in my family, and I can tell you that it does take a lot of time, you need to be super organized, detail-oriented. And,

17:19

you know, time is valuable. So I would consider letting people know that it’s okay to take a fee. And also, if you’re worried about assigning one person, because they won’t be supervised anyway, you can appoint more than one successor trustee.

17:40

It does make it a little more difficult, because both people have to sign everything. So you have to keep that in mind. Also, keep in mind that a person does not have to accept this responsibility. So I would not just appoint them in your documents and not tell them. I would talk to them about it and find out if they want to do it. I would also appoint more than one, so you’d have a contingent person or even two contingent people in case the first person passes away or doesn’t want to do it. So this takes a lot of thinking. And I know sometimes it can make people not execute their documents. And I really want to, I want to just make it clear, do not let the choice of your executors or successor trustee stop you from getting these documents in place.

18:35

You could always appoint a professional or that could be the end result. If whoever you choose doesn’t want to do it, they can appoint a professional. And it’s just more important that you get these types of affairs in order. Okay. Then there’s two last documents that usually go in a group with an estate plan. And that is your healthcare proxy, or durable medical power of attorney. They’re both the same thing. So this document deals strictly with your healthcare decisions and medical treatments. And with your healthcare proxy document, you will appoint an agent to make healthcare decisions on your behalf if you’re incapable of making them on your own. So this is a while you’re living document. So again, this is someone that you trust and also that you’re really honest with about the specifics of your wishes. Then there’s one last document, it’s called the financial power of attorney. And while the medical power of attorney deals with healthcare, the financial power of attorney deals with your financial matters. This is when you are living. So your financial power of attorney document grants another individual the power to make financial decisions for you while you are alive but not

20:00

capable of handling things yourself. So if you get very ill, this, this would spring into power, this person would help you with your finances.

20:12

It’s if you get hospitalized or incapacitated in any way, they do things like manage your bank accounts, pay your bills.

20:20

And you can also designate a power of attorney that’s effective immediately or kicks in after a specific event like Alzheimer’s, mental disability, things like that.

20:31

You can, while you’re living if you don’t want to handle a certain financial matter, appoint a power of attorney,

20:40

let’s say for one transaction. This is not if you can’t do things yourself because you’re incapacitated, and this power of attorney ends at death. And that’s when your other representatives take over, your successor trustee or your executor.

20:59

So that’s a lot of complicated information. There were so many that I tried to consolidate it so that it was understandable. There’s lots of things to think about here. But the main point that I want to get across is that it’s really important to get these things done.

21:19

And all you have to do is think about if this happened to you, if a friend or relative passed away, and they did not have an estate plan in place at all, it’d be so hard to know where to even begin. And the person is grieving already, and then to have to deal with this can be a real burden.

So I hope you found this podcast helpful. And again, if you want to hear more from me, please subscribe to my podcast on iTunes and other places where podcasts are housed. And also I’m on Twitter, and my Twitter handle is @CathyCurtis. And I have a Facebook business page called Women and Money. Thank you for listening.

If you found this information interesting, please share it with a friend!

Estate Planning Documents Every Single Woman Needs

Estate planning documents for single women

Estate planning is an essential part of anyone’s financial plan. I’ll explain in this article why it’s critical for single women.

If you don’t have a proper plan in place, your state’s laws will dictate who receives the assets under your estate. State laws usually designate beneficiaries in this order: spouse, children, grandchildren, parents, grandparents, siblings, aunts, uncles, nieces, nephews, and cousins. If you have children and die without a will, the state will decide who the guardian will be. This is all true even if you’re in a relationship without being legally married. 

Suppose you’re hoping to designate your possessions to a significant other, extended relatives, close friends, or charitable organizations. In that case, it’s critical to put together an estate plan. And more importantly, to appoint a person for your children’s guardianship, creating a will is a crucial step. Thankfully, this is easier than it sounds. The following is a list of primary estate planning documents and their purpose: 

Will or living revocable trust

Although these titles are often used interchangeably, wills and living trusts are two different documents. The most significant difference: both transfer an estate to designated heirs, but only trusts skip over the probate court. Plus, a will lays out your wishes for after you die while a living revocable trust becomes effective immediately and can be revised anytime while you are living. 

Suppose you are a woman with significant assets. In that case, a revocable living trust will keep your assets away from court-supervised distribution. If you have a more modest estate, a will may suffice.

A living revocable trust also helps your beneficiaries avoid the hassle and expense of a lengthy probate process. Living revocable trusts have benefits, but they cost more to create and require management. The choice between a will and a living trust is a personal one. Whichever path you take, it’s always a good idea to seek the advice of professional advisors. 

Healthcare proxy/durable medical power of attorney

As the name suggests, this type of power of attorney deals strictly with your health care decisions and medical treatments. With your healthcare proxy document, you’ll appoint an agent to make healthcare decisions on your behalf if you’re incapable of making them on your own. This is an important responsibility, and it’s essential to choose someone you trust and be transparent with them on the specifics of your wishes. 

The financial power of attorney

While the medical power of attorney or healthcare proxy deals with health specifics, the financial power of attorney deals with financial matters. Your financial power of attorney document grants another individual the power to make financial decisions for you while you are alive but not capable of handling things yourself.

Your power of attorney is your legal representative for financial matters. Should you be hospitalized or incapacitated, they’ll handle financial tasks, like managing your bank accounts and paying your bills from a designated account. You can choose to designate a power of attorney that is effective immediately or kicks in after a specific event occurs (ex. coma, Alzheimer’s, mental disability, or an inability to communicate your wishes directly). 

The Challenge Of Naming Representatives

It is one thing to get the will, living trust, financial and healthcare powers of attorney created. The other challenge is to decide who will be your legal representatives. Married couples usually name each other, but being single, you need to decide who will handle your affairs and find out if they are willing to do it. If you have a will, you will need an executor, and if you have a living trust, you will need a successor trustee. Then you will need to choose your powers of attorney for health and finances. Most people choose from personal relationships, but it’s also possible to hire professionals for these roles. As you are preparing to start your estate planning, besides organizing your financial assets, it’s just as important to decide who will represent you.

If you’re a single woman and want to talk about your estate plan with a trusted financial planner, please connect with us. We are here to help.

If you found this information interesting, please share it with a friend!
Curtis Financial Planning