What Every Retiree Should Know About the Step-Up in Cost Basis

A plain-English guide to inherited assets, joint accounts, real estate, IRAs, Roth IRAs, and when taxes should influence investment decisions.

One of the questions I hear often is whether it makes sense to hold on to an appreciated investment simply to preserve a future step-up in basis. It is a smart question, because the step-up in cost basis is one of the most valuable tax benefits available under U.S. tax law. But the answer is more nuanced than many people realize.

A step-up in cost basis means that when someone dies, certain assets may receive a new tax basis equal to their fair market value on the date of death. Suppose you bought an investment years ago for $100,000 and it is worth $600,000 when you pass away. If you sold it during your lifetime, you would generally owe capital gains tax on the $500,000 gain. But if the investment is held in a taxable account until death and your heirs inherit it, their new basis may be $600,000. If they sold it soon after, there may be little or no capital gains tax on that prior appreciation.

That is an extraordinary benefit. It can eliminate decades of unrealized gains. It can simplify estate settlement. And in some cases, it can save a family tens or even hundreds of thousands of dollars. But it is also easy to overgeneralize. Not every account receives a step-up. Joint ownership can change the result. Community property rules matter only in specific situations. And sometimes the desire to preserve a future step-up causes investors to make poor portfolio decisions today.

Here are the key concepts I think retirees and pre-retirees should understand.

The Step-Up Applies to Taxable Accounts, Not Every Account

The first thing to understand is that the account type matters more than the investment itself. Investors often ask whether a stock, ETF, mutual fund, or bond receives a step-up. That is not really the right question. The better question is: what type of account owns the investment?

Appreciated investments held in a taxable brokerage account generally receive a step-up in basis at death. The same investment held inside a traditional IRA, 401(k), 403(b), pension plan, Roth IRA, or non-qualified annuity follows a different set of rules and generally does not receive a step-up in basis.

That distinction matters. The exact same S&P 500 ETF might receive a step-up if it is held in a taxable brokerage account, but not if it is held inside an IRA. In the IRA, the beneficiary inherits the retirement account rules, not the taxable brokerage account rules.

Traditional IRAs and employer retirement plans usually remain taxable to beneficiaries as distributions are taken. In other words, the beneficiary does not inherit a new basis that wipes out the embedded income tax liability. Non-qualified annuities also generally do not receive a step-up in basis. The owner’s investment in the contract carries over, while deferred earnings are generally taxable as ordinary income when withdrawn. A common mistake: leaving money to charity from a taxable account. No, leave the charity money from your IRA. They will not owe taxes on it, but your children or heirs would. And the money in the taxable account is better given to heirs who get a step-up.

Roth IRAs deserve special mention because they are different. A Roth IRA does not receive a step-up in basis, but in most cases it does not need one. Qualified Roth IRA withdrawals are already income tax-free. Under current law, many non-spouse beneficiaries have up to 10 years to fully distribute an inherited Roth IRA, which means they may be able to allow the account to continue growing tax-free for much or all of that period before taking tax-free withdrawals. For heirs, that might make a Roth IRA the most tax-efficient asset to inherit.

For more detail on inherited IRAs, the 10-year rule, spousal options, Roth IRAs, and required minimum distributions, see my article: Stretch IRA & Inherited IRA Rules (2026): RMDs, Grandfathering, Spousal & Roth Rules.

Real Estate Can Also Receive a Step-Up

The step-up in basis is not limited to brokerage accounts. Real estate is often where this rule becomes especially powerful. Think about a house a grandmother bought 50 years ago for $40,000 that is now worth $700,000. If she sells the home during life, there may be capital gains tax depending on her basis, improvements, and whether the home qualifies for the primary residence exclusion. If her heirs inherit the property at death, the tax basis may be adjusted to the date-of-death value, potentially eliminating decades of unrealized appreciation.

There is also a separate tax rule for primary residences. The primary residence capital gains exclusion allows a homeowner to exclude up to $250,000 of gain from income, or up to $500,000 for many married couples filing jointly, if the house was their primary residence for two of the prior five years. This is not the same thing as the step-up in basis. It is a separate lifetime exclusion that may apply when someone sells a qualifying primary residence while they are living.

Because these rules can interact in important ways, be careful before selling a home, moving out of a long-time residence, gifting part of the home, adding children to the title, or changing ownership. A well-intentioned title change can create tax consequences that are not obvious at the time.

I have a separate article on keeping track of home improvements and home basis here: Tracking Your Home Improvements.

Your State Matters for Joint Accounts

State law is especially important when married couples own appreciated assets jointly. If an asset is individually owned, the community property versus common law distinction is generally not the main issue. But for joint accounts, it can make a significant difference.

Most states are common law states. In a common law state, jointly owned property between spouses generally receives a step-up on only the deceased spouse’s half of the account. The surviving spouse’s half typically retains its original basis.

Community property states are different. The community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska also allows couples to elect community property treatment in certain circumstances. In community property states, qualifying community property generally receives a full step-up in basis when the first spouse dies. That means both halves of the community property may receive a new basis, not just the deceased spouse’s half.

This is a major advantage for married couples in community property states, but the account title and legal character of the property still matter. A generic joint account title may not necessarily preserve community-property treatment in the way the couple expects. The optimal registration may be Community Property with Right of Survivorship when available and appropriate, because it can combine probate avoidance with the potential for a full step-up in basis.

In common law states, Joint Tenants with Right of Survivorship is commonly used because the account passes automatically to the surviving spouse and avoids probate. But from a basis standpoint, it generally results in only a partial step-up. Tenants in common may have different estate planning consequences because the deceased owner’s share may pass under a will or trust rather than automatically to the surviving owner. A Transfer on Death designation can also avoid probate while preserving individual ownership during life.

Be Careful With End-of-Life Retitling

When one spouse is terminally ill, it may be appropriate to review how appreciated taxable assets are owned. In a common law state, if the terminally ill spouse owns an appreciated taxable account individually and the surviving spouse is named as the Transfer on Death beneficiary, the entire account may receive a step-up in basis at death. By contrast, a jointly owned account may receive only a partial step-up.

That planning opportunity is real, but it is not as simple as transferring everything to the less healthy spouse at the last minute. There is an important one-year anti-abuse rule under Section 1014(e). In simplified terms, if appreciated property is gifted to a person within one year of death and then passes back to the original donor, or the donor’s spouse, the step-up may be denied for that property. This rule is designed to prevent someone from transferring appreciated assets to a dying person solely to reacquire them with a new basis.

That does not mean ownership planning is off the table. It means it must be done carefully, with the estate planning attorney and tax advisor involved. The right approach depends on who currently owns the asset, whether the transfer is a gift, how long the asset is held, who will inherit it, whether a trust is involved, creditor issues, Medicaid considerations, and state property law.

The lesson is not that retirees should avoid end-of-life basis planning. The lesson is that these decisions are too important to handle casually. A few minutes spent reviewing titling can create a major tax benefit, but a poorly executed title change can also create the opposite result.

Do Not Add Children as Joint Owners Just to Avoid Probate

One of the worst ideas is adding an adult child as a joint owner on a brokerage account or home to make things easier after death. It sounds simple. The child can help pay bills. The account avoids probate. Everyone assumes it is harmless.

But adding a child as a joint owner can create tax and legal problems. If the child becomes a current owner, part of the asset may no longer receive the full step-up at the parent’s death. There may also be gift tax reporting issues, creditor exposure, divorce exposure, family conflict, and loss of control. In many cases, a Transfer on Death designation, beneficiary designation, revocable living trust, or properly drafted estate plan can accomplish the same probate-avoidance goal without giving up the tax benefits of retaining ownership until death.

This is one of those areas where the simplest-looking solution is not always the best one. Probate avoidance is important, but it should not be pursued in a way that accidentally creates a larger capital gains problem for the family.

The Tax Cost of Selling an Appreciated Investment

Of course, the step-up in basis is only relevant if you hold the asset until death. Sometimes selling during life is the better decision. Before realizing a large gain, we evaluate the complete tax picture, not just the federal capital gains rate.

Long-term capital gains are generally taxed federally at 0%, 15%, or 20%, depending on taxable income. Higher-income taxpayers may also owe the 3.8% Net Investment Income Tax. For individuals, this surtax generally becomes relevant when modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married couples filing jointly. For Medicare beneficiaries, a large capital gain can also increase modified adjusted gross income enough to trigger higher Medicare Part B and Part D premiums through IRMAA. Because IRMAA is based on income from two years prior, a large gain this year can affect Medicare premiums in a future year. State income taxes may also apply.

That means the true tax cost of selling can be much more than a simple 15% capital gains rate. For one retiree, harvesting a gain might be very manageable. For another, the same sale might push them into NIIT, higher Medicare premiums, and a higher state tax bill. That is why these decisions should be modeled individually.

This is also why tax planning is such an important part of retirement planning. You can learn more in our Tax Planning for Retirees hub.

Do Not Let the Tax Tail Wag the Investment Dog

While taxes matter, they should not be the only consideration. Some investors hold on to concentrated stock positions, high-cost mutual funds, or weak investments because they do not want to pay capital gains tax. They are waiting for the step-up in basis to solve the problem someday.

That can be a reasonable strategy for someone with a short life expectancy and a well-diversified portfolio. But for a healthy 65-year-old, it may be a mistake. One or both spouses may live another 20 or 30 years. Over that time, a poorly diversified portfolio, excessive fees, or an underperforming investment can cost far more than the capital gains tax that was being deferred.

Avoiding a 15% capital gains tax today may feel good, but it should not be the sole reason to hold an investment for decades. The objective is not to minimize taxes at all costs. The objective is to maximize after-tax wealth over your lifetime while maintaining a portfolio that fits your goals, risk tolerance, income needs, and estate plan.

Investment decisions, withdrawal strategies, Social Security timing, Roth conversions, tax brackets, Medicare premiums, and estate planning all fit together. That is the heart of retirement income planning. You can explore those topics further in our Retirement Income Planning hub.

Putting It All Together

The step-up in cost basis is a powerful planning tool, but it is not a magic rule that applies equally to every account and every situation. Taxable brokerage accounts and real estate may receive a basis adjustment at death. Retirement accounts and annuities generally follow different rules. Joint accounts may receive a partial or full step-up depending on state law and titling. End-of-life ownership changes can create opportunities, but they can also trigger traps if handled incorrectly.

For retirees and pre-retirees, the key is balance. It is wise to understand and preserve valuable tax benefits. It is also wise not to let a future tax benefit prevent you from making good investment decisions today. A strong financial plan should coordinate tax planning, portfolio management, retirement income, estate planning, and family goals.

As always, before making major changes to account ownership, selling highly appreciated investments, transferring real estate, or changing beneficiary designations, consult with your financial advisor, estate planning attorney, and tax professional. The rules are too important—and too fact-specific—to rely on general assumptions.

Do I Need A Trust? (updated for 2026)

Posted On October 3, 2023 By Scott Stratton, CFP(R), CFA In Estate Planning /

Do I Need a Trust?

For many families, the honest answer is:

No — you probably don’t.

But for grandparents and families with several million dollars or more, a properly designed trust can provide long-term protection, structure, and multi-generational oversight.

The key question isn’t “Should I avoid probate?”

The real question is:

“Do I want my assets protected and professionally managed after I’m gone — or distributed outright with no guardrails?”

If You Have Under $1 Million and a Simple Situation

If:

Your estate is modest
Your beneficiaries are financially responsible adults
Most of your assets are IRAs or retirement accounts
You are simply passing assets to children

A trust may not be necessary.

Probate Is Often Overstated

Probate is frequently portrayed as disastrous. In many states, it is:

Straightforward
Reasonably paced
Not especially expensive

For smaller, uncomplicated estates, a will plus proper beneficiary designations often accomplishes the goal efficiently.

If you are primarily concerned with taxes rather than control or protection, broader retirement tax planning may be more impactful than creating a trust.

If Most of Your Wealth Is in IRAs

If most of your wealth is in traditional IRAs or retirement plans:

Those accounts already transfer by beneficiary designation.
Naming a trust can complicate distribution rules.
Trust tax brackets are highly compressed.

Unless there is a strong protection reason, routing retirement accounts through a trust can create unnecessary tax complexity.

You can read more about how retirement accounts are taxed in our article on Net Investment Income Tax (NIIT) and Medicare surtaxes, which often affect retirees differently than expected.

When a Trust May Make Sense

Trust planning becomes more appropriate when families have several million dollars or more and want to protect assets across generations.

The issue is not probate.

The issue is protection.

An outright inheritance exposes assets to:

Divorce settlements
Remarriage complications
Spendthrift behavior
Lawsuits and liability claims
Poor investment decisions
Special needs situations

Once assets are distributed outright, they belong fully to the beneficiary — and are vulnerable.

For example, if an adult child later remarries, inherited assets received outright may become entangled in a future divorce. We’ve written separately about the financial complexities of getting remarried later in life, and similar risks apply across generations.

A properly structured trust can:

Shield assets from creditors
Protect against claims in divorce
Prevent a new spouse from redirecting inherited wealth
Provide oversight for beneficiaries who struggle with money
Support special needs family members without jeopardizing benefits

For families with meaningful wealth, this protective structure often outweighs the added complexity.

What Is a Dynasty Trust?

A Dynasty Trust is designed to:

Last for multiple generations
Keep assets protected for children and grandchildren
Avoid repeated exposure to creditors and divorces
Maintain professional management long-term

Instead of leaving assets outright to children — who then control them completely — a Dynasty Trust keeps assets inside a protective structure for decades.

For families with several million dollars who expect wealth to last beyond one generation, this can be a powerful planning tool.

How Beneficiaries Receive Money: HEMS and Unitrust Standards

A common misconception is that trusts “lock up” money.

In reality, trusts define how and when beneficiaries receive funds.

Two common distribution approaches:

1. HEMS Standard

Trustees may distribute funds for:

Health
Education
Maintenance
Support

This gives flexibility while maintaining protection.

2. Unitrust Distribution

The trust distributes a fixed percentage (for example, 3–5%) of the trust’s value each year.

This creates:

Predictable income
Long-term sustainability
Ongoing asset protection

These standards balance access with discipline.

The Tax Reality of Trusts (2026)

Trusts are generally less favorable for income taxes than individuals.

In 2026:

Trusts reach the top 37% federal income tax bracket at $16,000 of taxable income (2026)
Trusts may also be subject to the Net Investment Income Tax (NIIT).
Trusts can owe state income taxes depending on structure and location.
Trusts pay tax on retained (undistributed) income.

This means:

You must have strong non-tax reasons to create a trust.

Tax savings alone are rarely the reason.

Protection, control, and continuity are.

For families focused primarily on minimizing lifetime taxes, coordinated retirement income planning and tax strategy often deliver more immediate value.

A Trustee Solution for Multi-Generational Planning

A trust requires a trustee to administer it.

A Registered Investment Advisor (RIA) cannot serve as trustee due to conflict-of-interest concerns.

However, we can serve as the investment advisor to a trust while working with an independent corporate trustee such as:

Charles Schwab Trust Company

Schwab Trust Company is based in Nevada.

Nevada trusts:

Do not pay Nevada state income tax
Offer strong asset protection statutes

(Although beneficiaries may still owe taxes on distributed income depending on their state of residence.)

This structure provides:

Independent fiduciary oversight
Long-term continuity
Professional administration for generations
Coordinated investment management

So, Do You Need a Trust?

You may benefit from trust planning if you:

✔ Have several million dollars or more
✔ Want assets protected from divorce or creditors
✔ Are concerned about remarriage risks
✔ Have a spendthrift or financially inexperienced heir
✔ Need structure for a special needs beneficiary
✔ Want professional oversight across generations

You may not need a trust if you:

✖ Have a simple estate under $1 million
✖ Have financially responsible adult heirs
✖ Have most wealth in retirement accounts
✖ Are primarily concerned about probate

Trusts are powerful tools — but they introduce complexity and stricter tax rules.

They should exist to solve meaningful problems, not to follow estate planning trends.

If you are a grandparent with several million dollars and want to explore whether a trust fits into your broader retirement and tax strategy, we can help you evaluate the tradeoffs clearly and objectively.

You can request an introductory conversation here:
👉 https://goodlifewealth.com/appointment/

These meetings are educational and focused on planning — including trustee structure, asset protection considerations, and long-term investment management — so you can decide what structure best supports your family.

What Is the Estate Tax? (2026 Update) — Exemptions, State Taxes & Planning

Posted On October 1, 2023 By Scott Stratton, CFP(R), CFA In Estate Planning /

Estate tax affects the transfer of wealth at death for large estates. Thanks to recent tax law changes, the federal estate tax exemption has been made permanent at historically high levels and indexed for inflation. Even so, state-level estate or inheritance taxes — with much lower exemptions — remain a relevant consideration for many retirees.

Understanding how the federal estate tax works — and how it interacts with state taxes and retirement planning — can help you make informed decisions about wealth transfer, gifting, and legacy planning.

Federal Estate Tax in 2026

As of 2026, the federal estate tax exemption has been codified as permanent and continues to be indexed for inflation. For 2026:

Single individuals: roughly $15 million exemption;
Married couples (with portability election): effectively $30 million exemption.

Amounts above these exemption levels are potentially subject to the federal estate tax, which can impose a top rate of 40% on the taxable portion of the estate.

Note for retirees: Many households fall well below these federal exemption thresholds today, but future growth in assets and changes in law can still make planning worth considering — particularly if your retirement planning involves concentrated wealth, closely held business interests, or high-basis assets that may appreciate significantly over time.

Estate Tax vs. Probate vs. Inheritance

It’s important to distinguish:

Estate tax is paid by an estate on the value of its assets above the exemption threshold before distributions to heirs;
Probate is a legal process for settling an estate and is not the same as the estate tax;
Non-Probate Assets, such as IRAs, 401(k), Transfer on Death accounts, or Life Insurance may still be included in your taxable estate;
Inheritance tax (where it exists) is imposed on beneficiaries after assets are distributed.

State Estate & Inheritance Taxes

Even if your estate is below the federal threshold, many states may still impose their own taxes with much lower exemption amounts. Examples (as of late 2025/early 2026):

State	Estate Tax Exemption	Estate Tax?	Inheritance Tax?
Connecticut	~$13.99M	Yes	No
Hawaii	~$5.49M	Yes	No
Illinois	~$4.0M	Yes	No
Maine	~$7.0M	Yes	No
Maryland	~$5.0M	Yes	Yes
Massachusetts	~$2.0M	Yes	No
Minnesota	~$3.0M	Yes	No
New York	~$7.16M	Yes	No
Oregon	~$1.0M	Yes	No
Rhode Island	~$1.80M	Yes	No
Vermont	~$5.0M	Yes	No
Inheritance only (e.g., Kentucky, Nebraska, New Jersey, Pennsylvania)	—	No	Yes

Many other states do not impose either tax, but tax landscapes can change. Checking your own state’s rules is important.

For a detailed explanation of how retirement income and distributions interact with taxes overall, see our Retirement Tax Planning hub.

Ways to Reduce or Manage Future Estate Tax Liability

The following strategies — many of which also align with broader retirement income and tax planning — can help manage potential estate tax exposure:

1. Lifetime Gifting

Use the federal gift tax annual exclusion (indexed yearly) to transfer wealth gradually outside your estate. Gifts reduce the size of your taxable estate and can benefit heirs while you’re alive.

2. Charitable Giving & QCDs

Charitable gifts reduce your taxable estate and may also offer income tax benefits. Qualified Charitable Distributions (QCDs) from IRAs at age 70½+ can further support this approach. See our article on QCDs from your IRA for more.

3. Irrevocable Trusts

Irrevocable vehicles such as Irrevocable Life Insurance Trusts (ILITs), Grantor Retained Annuity Trusts (GRATs), and Generation-Skipping Trusts (GSTs) can transfer assets out of your taxable estate.

4. Family Limited Partnerships (FLPs)

An FLP can allow you to pass interests in family businesses or investments to heirs, often at a valuation discount for gift/estate tax purposes.

5. Shifting Asset Titling & Beneficiary Designations

Proper titling and beneficiary designations (e.g., TOD/199A, payable-on-death accounts) can help ensure assets pass outside probate and align with estate goals, though they don’t directly reduce estate taxes.

6. Roth Conversions

Converting traditional IRAs to Roth IRAs can reduce future taxable assets in your estate and leave heirs with tax-free accounts, potentially lowering overall tax burden. Note: This strategy involves paying income taxes now for potential estate tax benefits later.

7. State Residency Planning

Relocating to a state without estate or inheritance tax can remove that state tax exposure for your heirs (see list above). However, overall tax implications — including property and income taxes — should be part of the decision.

8. Trusts and Other Advanced Planning Tools

Beyond ILITs and GRATs, specialized trusts (e.g., Dynasty Trusts, Charitable Remainder Trusts) can further tailor how assets are preserved or transferred across generations.

Frequently Asked Questions (Retiree-Focused)

Q: Who pays estate tax — the estate or the heirs?
The estate generally pays any federal estate tax due before assets are distributed to beneficiaries. Inheritance taxes (in certain states) are paid by the beneficiaries on what they receive.

Q: Does leaving assets to a spouse avoid estate tax?
Yes. Transfers between spouses (if both are U.S. citizens) are usually fully exempt from federal estate tax under the unlimited marital deduction.

Q: Do retirement accounts count toward the estate tax?
Yes — Traditional IRAs, 401(k)s, and other pre-tax retirement accounts are included in the value of your taxable estate, even if they pass outside probate.

Q: Should I update my estate plan now even with high exemptions?
Yes. High exemptions don’t replace the need for thoughtful planning. Estate plans also govern incapacity, guardianship wishes, distribution timing, and beneficiary protections — issues independent of tax levels.

For how retirement income sequencing and taxes correlate in later life, see our Retirement Income Planning Hub.

Estate planning is not just about taxes — it’s about how your savings support you and your loved ones. If you’d like a planning-first discussion about how federal and state estate tax considerations fit into your long-term retirement goals, you’re welcome to Request an Introductory Conversation.

Stretch IRA & Inherited IRA Rules (Updated for 2026)

Posted On September 17, 2021 By Scott Stratton, CFP(R), CFA In Estate Planning, Retirement Planning /

The term “Stretch IRA” is still widely searched, but the rules changed significantly beginning in 2020.

However, an extremely important distinction must be made at the outset:

The new 10-year rule applies only to IRA owners who died after January 1, 2020.

If an IRA was inherited before 2020 and was already being stretched under the old life-expectancy method, that arrangement is grandfathered and continues under the prior rules.

This article explains:

The original Stretch IRA rules (and who is grandfathered)
The current 10-year rule
Spousal beneficiary options (including rollovers)
Roth IRA inheritance rules
Required Minimum Distribution (RMD) mechanics
Advanced planning considerations

This is a comprehensive technical overview.

Grandfathered Stretch IRAs (Pre-2020 Deaths)

If the original IRA owner died before January 1, 2020, and a designated beneficiary began taking Required Minimum Distributions (RMDs) using the life expectancy method:

That beneficiary continues under the original stretch rules.
Annual RMDs are calculated using the IRS Single Life Expectancy Table.
The distribution schedule continues as originally established.

These accounts are not subject to the 10-year rule.

This distinction is critical. Many families assume the new law retroactively applies — it does not.

The 10-Year Rule (Post-2020 Deaths)

If the IRA owner died after January 1, 2020, the SECURE Act rules apply.

For most non-spouse beneficiaries:

The inherited IRA must be fully distributed by December 31 of the 10th year following the year of death.
If the original owner died before reaching RMD age, then there are no required annual minimum distributions in years 1–9 in most cases. The entire account must be empty by the end of year 10.
If the original owner passed away after reaching RMD age, then the beneficiaries must continue to withdraw RMDs annually in years 1-9 as well as empty the account by year 10.

This applies to:

Traditional IRAs
SEP IRAs
SIMPLE IRAs
Roth IRAs (with important distinctions discussed below)

Eligible Designated Beneficiaries (Who Can Still Stretch)

Certain beneficiaries may still use life expectancy payout rules.

These “Eligible Designated Beneficiaries” include:

Surviving spouses
Minor children of the IRA owner
Disabled beneficiaries (as defined by IRS rules)
Chronically ill beneficiaries
Individuals not more than 10 years younger than the IRA owner

For these beneficiaries, annual RMDs are calculated using IRS life expectancy tables.

Important: Minor children lose the stretch option upon reaching the age of majority, at which point the 10-year rule begins.

Spousal Beneficiary Options (Comprehensive Discussion)

Spouses have the most flexibility when inheriting an IRA.

A surviving spouse may:

1. Treat the IRA as Their Own (Spousal Rollover)

The spouse rolls the inherited IRA into their own IRA.

Advantages:

RMDs are delayed until the spouse reaches their own required beginning date (currently age 73 or 75 depending on birth year).
The account is treated as if it were always theirs.

Disadvantages:

If the surviving spouse is under age 59½ and needs access to funds, withdrawals may be subject to the 10% early withdrawal penalty.

2. Remain as a Beneficiary (Inherited IRA)

Instead of rolling the IRA into their own name, the spouse can keep it as an Inherited IRA.

Advantages:

Withdrawals are not subject to the 10% early withdrawal penalty, even if the spouse is under 59½.
May provide flexibility if income is needed before full retirement age.

Disadvantages:

RMDs may begin sooner depending on circumstances.

Choosing between a rollover and remaining a beneficiary depends on age, income needs, retirement timing, and tax strategy. This is not a mechanical decision.

Roth IRA Beneficiaries

Roth IRAs follow similar structural rules but differ in tax treatment.

For IRA owners who died after January 1, 2020:

Most non-spouse beneficiaries must withdraw the entire Roth IRA within 10 years.
However, Roth distributions remain income-tax free if the five-year rule was satisfied by the original owner.

Unlike traditional IRAs:

Roth IRAs do not require lifetime RMDs for the original owner.
Roth beneficiaries under the 10-year rule are not required to take annual distributions, but the account must be emptied by year 10.

Eligible Designated Beneficiaries of Roth IRAs may still stretch distributions over life expectancy.

Even though distributions are tax-free, the 10-year rule still accelerates account depletion compared to the old stretch.

Required Minimum Distributions Under Current Law

For inherited IRAs where the original owner died after 2020:

Non-eligible beneficiaries follow the 10-year rule.
Eligible Designated Beneficiaries follow life expectancy tables.
Grandfathered pre-2020 inherited IRAs continue under original life expectancy schedules.

For surviving spouses who roll over the IRA:

RMDs follow standard owner rules.
Required Beginning Date depends on birth year under current RMD law.

These distinctions matter significantly for retirement income planning.

Tax Implications of Inherited IRAs

Distributions from inherited Traditional IRAs are taxable as ordinary income.

This may:

Increase marginal tax brackets
Trigger Medicare IRMAA surcharges
Expose income to Net Investment Income Tax (NIIT)
Increase state income taxes

Because the 10-year rule compresses distributions, beneficiaries must plan proactively rather than waiting until year 10.

Inherited IRA distributions often intersect with broader retirement tax planning strategies and retirement income coordination.

Planning Strategies Under the 10-Year Rule

The loss of the traditional stretch means:

Income may be clustered
Tax brackets may spike
Medicare premiums may increase

Planning opportunities may include:

Spreading distributions over 10 years
Coordinating withdrawals during lower-income years
Evaluating Roth conversions during the original owner’s lifetime
Aligning inherited IRA withdrawals with retirement income needs

These discussions often integrate with retirement income planning and legacy coordination.

Important Clarifications

Pre-2020 inherited Stretch IRAs remain under original life expectancy rules.
The 10-year rule only applies to post-2020 deaths.
Spouses retain unique rollover flexibility.
Roth IRA beneficiaries are subject to the 10-year depletion rule but enjoy tax-free distributions.
Eligible Designated Beneficiaries may still stretch.
If the original owner did not complete their RMD in the year of death, the beneficiaries must take an RMD that year.

Final Thoughts

The term “Stretch IRA” still appears frequently in search, but today’s planning revolves around Inherited IRA distribution timing under the 10-year rule and applicable exceptions.

These rules are complex, and poor timing can create unnecessary tax exposure.

If you or your beneficiaries are managing an inherited IRA and want to coordinate distributions with retirement income, tax brackets, and Medicare planning, you are welcome to request an introductory conversation here:

👉 https://goodlifewealth.com/appointment/

These discussions are educational and planning-focused, helping families make informed decisions under today’s rules.

Strategies if the Step-Up in Basis is Eliminated

Posted On March 31, 2021 By Scott Stratton, CFP(R), CFA In Tax Strategies / 1

Today, we look at strategies if the step-up is basis in eliminated for estate planning. There were two new proposals in the Senate this week which will target inherited wealth. These two Acts, if passed, would completely change Estate Planning for many families. The two Acts are called the STEP Act and the 99.5% Act.

The STEP Act

The STEP Act (Sensible Taxation and Equity Promotion Act), proposed by Senators Booker, Sanders, Warren, Whitehouse, and Van Hook would eliminate the Step-Up in Cost Basis. A Step-Up in Basis means that upon Death, an asset has its cost basis reset to the date of death. This allows the heirs to immediately sell an asset and receive the funds without owing any taxes. Or, if they choose to hold on to the asset, they will only owe tax on the capital gains from the date of death forward. Otherwise, they would owe taxes based on their parent’s cost basis (or other decedent).

The STEP Act proposes to eliminate the Step Up in Basis, retroactively to January 1, 2021. In its place, the Act would allow a one-time exclusion of up to $1 million of inherited capital gains. It also allows the tax to be paid over 15 years if it is an illiquid asset like a farm or business. Many older parents have held on to assets, such as mutual funds or real estate, specifically to get a step-up in basis for their children. Allowing for the exclusion of $1 million in capital gains at death will help most families. But include real estate, and many families will have over $1 million in unrealized capital gains. And those families will now be paying a capital gains tax.

The 99.5% Act

The 99.5% Act, proposed by Senator Sanders, will increase the Estate Tax paid by many families. Currently, the Estate Tax Exemption is $11.7 million ($23.4 million for a couple), which has effectively eliminated the Estate Tax for Middle Class Families. Previously, the Estate Tax Exemption was $1 million, as recently as 2003. My clients have welcomed the increase of the Estate Tax Exclusion over the past 17 years. The 99.5% Act includes provisions to:

Reduce the Estate Exemption from $11.7 million to $3.5 million.
Reduce the Unified Gift Exemption from $11.7 million to $1 million per lifetime.
Raise the Estate Tax Rate to a range of 45-65%.
Reduce the Annual Gift Tax Exclusion from $15,000 to $10,000 per donee, AND impose an annual limit of $20,000 per donor.
Reduce certain tax benefits of Trusts, Generation Skipping Trusts, etc.

While I don’t cater to the ultra-wealthy, I do have a number of Middle Class families who this will impact. Ideas in Washington often stick around until they become reality. So, if these Acts don’t get passed now, don’t think that we will never hear them again. I don’t think there will be much empathy for families who have over $1 million in unrealized capital gains. However, in some cases, children will need to sell the houses, farms, and businesses they inherit to pay for these new taxes.

How Many Taxes?

Just to be clear, the Estate Tax is in addition to any Income Tax or Capital Gains Tax. Under the two proposals, an individual who dies with $5 million, would owe a 45% Estate tax on $1.5 million (the amount above $3.5 million). That’s a $675,000 Estate Tax Bill. Then, if their cost basis was $1 million and the unrealized capital gain was $4 million, the heirs would owe another 23.8% on $3 million of capital gains. That would be another $714,000 in taxes, for a total of $1,389,000. Presently, that tax would be zero, so we are talking about a huge increase. Let’s consider eight strategies if the step-up in basis is eliminated and other changes enacted.

Ways to Reduce Taxes under STEP and 99.5% Acts

1. If the Step-Up in Basis is eliminated, you may want to pay your capital gains gradually. Aim to keep your total unrealized gains under $1 million. For example, if you have $2 million in gains, perhaps you could harvest $100,000 of gains for the next 10 years. The goal is for you to pay the gains gradually at the 15% rate and save your heirs from being taxed at the 23.8% rate.

There is a separate proposal from Biden to increase the long-term capital gains rate for taxpayers in the highest tax bracket to 39.6%. Plus you would be subject to the 3.8% Medicare Surtax and state income taxes. And then, capital gains will be taxed at 43.4% to well over 50% in many states. The government would take more than half of your gains! If that happens, it will be vitally important to harvest gains regularly to avoid pushing your heirs into the top bracket.

Roth IRAs

2. Keep your high growth investments in a Roth IRA. Beneficiaries inherit a Roth IRA income tax-free. The Roth 401(k) looks better every year, versus a tax-deferred Traditional 401(k). If higher taxes are ahead, it may be preferable to use the Roth 401(k).

3. Gradually convert your Traditional IRAs to a Roth. By pre-paying the taxes today, you can both shrink the size of your taxable estate and reduce the Income tax burden on your heirs. The current tax rates will expire after 2025. The next five years is a good window to make Roth conversions.

Plan Your Giving

4. Give away your full Annual Gift Tax Exclusion every year. Reduce your Estate. Please note that the direct payment of someone’s medical or education bills does not count towards the annual exclusion. Do not reimburse your children for those expenses – make the payment directly to the doctor, college, etc.

5. If you make charitable donations, give away your most highly appreciated securities, rather than cash. This will reduce your taxable gains. If you do want to leave money to charity, make a charity a beneficiary of your Traditional IRA. If you are over age 70 1/2, you can make charitable donations of up to $100,000 a year from your IRA as Qualified Charitable Donations, or QCDs. QCDs can reduce your taxes so you have more budget to harvest capital gains from taxable accounts. You do not have to itemize to deduct QCDs.

Other Estate Tax Savings

6. Sell your primary residence. A couple, while alive, can exclude $500,000 in capital gains on the sale of their primary residence, as long as they lived there at least 2 of the past 5 years. ($250,000 for single filers.) Let your kids inherit the house and that capital gains exclusion may be lost. Better to sell it yourself and buy another house where you don’t have the big capital gains.

7. Maximize your contributions to 529 College Savings Plans for your children or grandchildren. These will pass outside of your taxable estate and will grow tax-free for the beneficiaries. 529 Plans will not be taxable under any of these proposals, and will become a more important estate planning tool.

8. Life Insurance proceeds are not subject to income tax to the beneficiary. Additionally, If we establish your insurance policy with an Irrevocable Life Insurance Trust (ILIT) as the owner, the life insurance will pass outside of your Estate and not be subject to the Estate Tax. This didn’t matter as much when the Estate Exemption was $11.7 million. ILITs will benefit a lot more families if the Estate Exemption is reduced to $3.5 million. Include the tax benefits, and Permanent Life Insurance looks even better as an asset.

Higher Taxes Ahead?

I am proud to be an American and pay my fair share of taxes. Still, these proposals represent a massive tax increase on a lot of families. Many professional couples have the potential to have over $3.5 million before they pass away, and easily over $1 million in capital gains, too. We will keep you posted on this legislation. It seems likely that the two Acts will be merged and some compromise reached before a final version is up for a vote.

Luckily, there is a lot we can do to offset some of these proposed taxes and reduce the burden on your Estate and Heirs. Last minute strategies won’t work here, though. Families need to be thinking about their transfer of wealth years and decades ahead of time. Have questions on strategies if the step-up in basis is eliminated? Feel free to drop me an email.

Do You Have a College Fund?

Posted On August 21, 2020 By Scott Stratton, CFP(R), CFA In College Savings /

Do you have a college fund set up for your children or grandchildren? It is back to school time and that’s a little bit different this year. No one knows if the online classes will permanently change the process of education in the world. Still, I think there will be no substitute for the career benefits of having a degree in an in-demand field from a top notch school. Not everyone needs college, but overall, a higher education is strongly correlated to future earnings and career satisfaction.

The cost of a college education continue to climb. Student debt has become a crippling problem for many young adults I meet. They were told it would be worth it to get their degree, regardless the expense or their future earnings potential. Every parent wants the best for their kids, for them to have the opportunities we did not have. We want for them to be able to pursue their dreams and find their own unique greatness. Helping to pay for college goes a long way to setting up your kids to find their own Good Life.

Like most big financial goals, I think the best way to create a successful college fund is by making it automatic. Establish a 529 college savings account and make automatic contributions each month. If you can only start with $100 a month, great, just get started. Later, you can gradually bump that up to $200 or $300 a month or more.

How Much Should You Save?

A 529 plan will allow you to invest into a diversified allocation. The 529 Plan I use has Vanguard, iShares, and State Street index funds, just like I recommend in our Premiere Wealth Management portfolios. While no one knows future returns, let’s consider how your money might grow at 1%, 3%, or 6%. And then let’s also consider if you start at age zero, 5, and 10 for your kids. This would equate to 18, 13, and 8 years of growth to age 18 and the start of college.

Here is how $250 a month would grow:

There are two main points I think this chart makes. First, it pays to start your college fund early for compound interest. If you wait until your kids are 10, you might have only one-third the amount saved, compared to starting at birth. Second, you aren’t going to grow much if your money is in a bank account earning one percent. (By the way, at $250 a month, or $3,000 a year, you would have contributed a cumulative $54,000 over 18 years, $39,000 over 13 years, or $24,000 over 8 years.)

How to Get Started

A 529 College Savings Plan is an efficient way to create a College Fund, as distributions for qualified education expenses are tax-free. You can even start a 529 for an unborn child and change it to their name once they are born. The important thing is to get started early. Each state sponsors their own 529 Plan. If your state has income taxes, there may be a benefit for using the In-State plan. For Texas, since we don’t have an income tax, there is no inducement to use the Texas plan versus one from any other state. You can use any plan at any college in the country.

While you could save in a regular account for college, there are valuable tax benefits in 529 Plans. Most investors prefer to have different buckets for different goals. This helps address savings goals. Even if your kids are 10 or older, it’s not too late to start your college fund. We are accepting new clients and want to help you get started.

If you’d like an estimate what it might cost to send your kid to a specific University, send me that information. I’m happy to prepare a report for you. We will estimate future costs and calculate a saving and investing plan. (Be prepared to be shocked if you plan to pay for 100% of four years at a private university.)

Learn More About 529s

Looking for details on how a 529 Plan works? Here’s what you need to know.

Want to compare different 529 Plans? Check out SavingForCollege.com

529 Plans are a way for Wealthy Families to create an inter-generational transfer of millions of dollars, potentially tax-free. This linked article calculates that parents who fund $1 million dollars into 529 Plans could be able to cover the college educations of four grandchildren, eight great-grandchildren, and 16 great-great-grandchildren. That’s because when you over-fund a 529 plan, you can always change the beneficiary to a younger generation later. The successor owners of your 529 Plans can keep the accounts open and change beneficiaries, even after you are gone.

Financial Strategies for Low Rates

Posted On August 6, 2020 By Scott Stratton, CFP(R), CFA In Financial Planning /

Opportunities for a Low Yield World, Part 3

Today’s low rates are challenging for investors and may require changes not just to your investment portfolio, but also your overall financial strategies. In Part 1 of this series, we looked at the potential of rising defaults in high yield bonds and why it’s problematic to buy high yield bonds. Then in Part 2, we looked at four concrete ways to increase your yield today without radically changing your risk profile.

For Part 3, we looking at the broader ramifications of low interest rates on financial planning. My goal is always to explain and educate, but most importantly, to offer tangible solutions. Even in a crisis, there are opportunities.

But before we get into specific financial planning strategies, let’s consider two important points. First, low interest rates penalize savers. But low rates help borrowers. So, this is a great time to be a borrower, especially if you can lock in a low rate for 15, 20, or 30 years. Hopefully the current crisis will be short-lived, but borrowing at these low rates could be beneficial for decades to come.

Second, we should consider inflation. Bonds may be earning only 1%, but if inflation is zero, you would still have a real return of 1%. Your purchasing power is growing by 1%. Now, if bonds were yielding 6% and inflation was 5%, your real return would be the same, just 1%. While real returns are indeed quite low today, inflation is also below the historic average. So, your real returns aren’t as bad as they might appear.

Now, here are nine specific financial strategies to use today’s low rates to improve your situation.

Borrow for Appreciation

1) Refinance Mortgage. This is a great time to refinance your mortgage and lock in a low rate. Try to avoid lengthening the term of your loan and instead use low rates to pay off your mortgage sooner. If you can save 1% or more and plan to be in your home for several years, it will probably make sense to refi. I would be careful, however, of using low rates to buy the most expensive home possible. A home is largely an expense, rather than a great investment. Even better: use low rates to buy new investment properties. If you can borrow money to buy a business, investment property, or other appreciating asset, money is the cheapest it has ever been. Think long-term today!

2) Pay down debt. As long as you have a good emergency fund and a stable job, how much additional cash do you need? If you have student loans, a mortgage, car loans, or especially credit card debt, maybe it makes more sense to pay down your high-interest debt. Especially, debt that is not tied to an appreciating asset. Paying down 5% loans with cash earning 0% will save you interest costs.

Portfolio Adjustments

3) Reallocate away from bonds. With the 10-Year Treasury yielding under 1%, a lot of investment grade bonds and funds are going to have piddling returns over the next decade. Unless you really need to be defensive (maybe you are 5 years from retirement), having 40-50% earning 1% will likely be a drag on your portfolio. I have no idea what the stock market will do over the next 12-24 months. But, I do believe that a 90% equity allocation will probably outperform a 50% equity allocation over the next 30 years. Not everyone should take on more risk, but young people should invest for growth. The historical returns of a 60/40 portfolio are pretty much out the window with today’s low rates.

4) Alternative assets start to look more attractive when bonds are yielding 1%. Perhaps a 50% equity/30% alternative/20% bond portfolio could provide more return with less risk than a 60% equity/40% bond portfolio.

Retirement under Low Rates

5) Delay Social Security for 8% gains. When you delay your Social Security starting date, you can increase your monthly benefit by 8% a year (from age 66 to 70). Where else can you get a guaranteed 8% return today? No where. It may be better to spend down your bonds earning 1% from 62 or 66 until age 70 for the increase in SS benefits. The lower the rate of return from your portfolio, the more valuable the 8% Social Security increase becomes.

6) Take a pension, not a lump sum. If you have a pension from your employer, should you take the monthly payments or a lump sum? The answer will depend, in part, on your rate of return if you invest the lump sum option. Pension benefits have stayed up, but interest rates have moved down, which means that the pension is on the hook for very expensive benefits now. Companies are sweating this. But for a participant, it is tougher today to assume that you can do better by taking the lump sum. If your goal is lifetime income for you and your spouse, let’s run the numbers before making this decision. (We will also want to consider the credit quality of your Pension, its funded status, and your health and longevity profile.)

7) Immediate annuity. You can try to fund your retirement with bond income, but that’s more difficult with low interest rates. Immediate annuity payouts have not declined as much. So today, they are relatively attractive compared to bonds and eliminate the risk of outliving your money. With bonds, you have only two options under low rates: decrease the payout to yourself or start eating into your principal.

Estate Planning for Wealth Transfer

8) Trust Planning and intra-family loans. The Applicable Federal Rate and the 7520 rate are the lowest they have ever been. These low rates create opportunities for advanced financial strategies in estates and trusts. Intra-family loans: if you want to loan money to children or grandchildren for a mortgage, to buy your business, or to buy life insurance on your life, the interest rate required by the IRS is presently only 1.15%, for loans over 9 years.

9) Grantor Retained Annuity Trust. This is an irrevocable trust, which will shift assets outside of your lifetime gift and estate exemption. As the grantor, you receive income from the GRAT, and the remainder goes to your heirs (outside of your estate). The GRAT assumes the current 7520 rate of 0.80%, which is a low hurdle to beat. If your GRAT can do better than 0.80%, the heirs benefit.

Why do this Estate Planning now? The 2020 Estate Tax exemption of $11.58 million is set to sunset and revert to $5.49 million in 2026. If you are above these amounts, now is a great time to plan ahead. Placing assets into a GRAT now would remove their future growth from your estate. So, if you have assets which you think are undervalued today or which you expect will have significant growth going forward, removing them from your estate today could save tremendous future estate taxes for your heirs.

Low interest rates are problematic for savers and for bond holders, but also an opportunity for different financial strategies. Would some of these nine strategies enable you to benefit from low interest rates? I’m here to help you uncover ideas you haven’t considered, examine if they might be useful for you, and implement them effectively. Let’s take a look at your liabilities, your portfolio, your retirement income, and your estate goals and create a comprehensive plan for you.

Giving Strategies, Now and Later

Posted On November 10, 2019 By Scott Stratton, CFP(R), CFA In Financial Planning /

If you have a significant estate and are thinking about how to give money to charity or individual beneficiaries, you might want to consider if it would be possible to make some of those gifts during your lifetime. Today, we are going to look at the tax benefits or implications of different large gift strategies.

A gift to charity from your estate will reduce your your taxable estate. However, with the estate tax threshold presently at $11.4 million per person, most people will never pay any estate taxes. This was not the case 15 years ago when the estate tax threshold was just $1.5 million. For married couples, the threshold is doubled to $22.8 million. So if your past estate plan was based on estate tax avoidance, it may be time to update your plans and revisit your charitable strategies.

Charitable donations remain eligible as an itemized deduction, although many tax payers will not have enough deductions to exceed the 2019 $12,200 standard deduction ($24,400 married). However, if you are contemplating a large charitable donation, you can deduct up to 60% of your Adjusted Gross Income (AGI) when making a cash donation to a public charity. (This was increased from 50% under the 2017 Tax Cuts and Jobs Act.) If making a donation of non-cash property, such as appreciated shares of stock, the limit is 30% of AGI. In both cases, you can carry forward any excess donation for five years.

Here are seven principles for giving to charities and to individuals, such as your children or grandchildren:

1. If you have stocks or funds with a large gain, you can give those shares to charity, get the full tax deduction and avoid capital gains tax. The charity will not pay any taxes on the shares they receive and sell.

2. If you leave an IRA to a charity, that is name a charity as a beneficiary of your IRA rather than a person, they will pay no tax on receiving your IRA.

3. For individual beneficiaries of your estate, they will have to pay income tax on inheriting your IRA. Presently, there is a Bill which has passed the House which will eliminate the Stretch IRA. However, beneficiaries will receive a step-up in cost basis on inherited taxable accounts. The most tax efficient split is to leave your Traditional IRA to charity and your taxable assets and Roth IRAs, to your heirs. Then neither will pay income taxes on the assets they receive.

4. If you are over age 70 1/2, you can make up to $100,000 a year in gifts from your IRA as Qualified Charitable Distributions, which count towards your RMD. You do not have to itemize to use the QCD.

5. You can give $15,000 a year to any individual; this is called the annual gift tax exclusion. A couple could give $30,000 to an individual. This includes your adult children. Additionally, you can directly pay medical or educational expenses for any individual without this limit.

Where many people are confused: exceeding the gift tax exclusion does not automatically require you to pay a gift tax. It simply requires filing a gift tax return, which will reduce your lifetime Gift/Estate tax limit, which again is $11.4 million per person (2019). For example, if you give someone $17,000 this year, the $2,000 over the $15,000 limit will be subtracted from your $11.4 million estate tax exemption when you die.

6. If you want to create college funds for your grandchildren or other relatives, you can fund up to five years upfront into a 529 Plan without exceeding the gift tax exemption. That is $75,000 per beneficiary, or up to $150,000 if coming from both Grandma and Grandpa. You can retain control of the funds, even change the beneficiary if desired, and the money grows tax-free for qualified higher education expenses.

7. You can make a large donation to a Donor Advised Fund to receive an upfront tax deduction and then make small donations in the years ahead. For example, it would be more tax efficient to make a $100,000 donation into a DAF and make $10,000 a year in charitable distributions for 10 years from the DAF, than to make regular $10,000 donations each year for 10 years.

Even if you know all of this information, I think many potential donors are still looking for more flexibility in their giving plans. What if you need money later? How much should you keep for your own expenses and needs? Creating a comprehensive retirement analysis is an essential first step, and then we can help you consider other more advanced giving strategies.

There are many ways of structuring charitable trusts which can split assets and income between the creator of the trust, a charity, and/or beneficiaries. Generally, the donor is able to receive an upfront tax deduction for the present value of a gift, based on their expected lifetime or duration of the trust. The present value is calculated using your age and a specific discount rate, known as the Section 7520 rate, which is published monthly by the IRS. It is based on intermediate treasury bonds and is currently 2.2% for trusts created in September 2019. This rate is down from 3.4% from last August.

With a very low interest rate being used for the discount rate today, it is quite unappealing to establish a Charitable Remainder Trust (CRT). The low rate means that the tax deduction is very small compared to trusts that were established when the rate was higher. That’s unfortunate, because a CRT is an ideal structure: the creator receives income from the trust for life (or a set period of years) and then the remainder is donated to the charity when you pass away (or at the end of the term).

A more effective structure for a low interest rate environment is a Charitable Lead Trust (CLT). In this type of trust, a charity receives income for a period of years (say 10 years) and then any remaining principal is distributed to your beneficiaries, free from gift or estate taxes. This might hold some appeal for tax payers who would be subject to the estate tax and who do not need or want income from some portion of their assets. But it doesn’t offer much appeal to donors who want income or flexibility from their trusts.

If you are thinking about charitable giving or where your money might eventually go, let’s talk about which strategies might make the most sense for you.

What Happens If You Die Without a Will?

Posted On April 27, 2018 By Scott Stratton, CFP(R), CFA In Financial Planning /

Last April, a long-time client passed away unexpectedly at his home. I ask all clients if they have an estate plan. If they do not, I recommend they get one and provide a referral if they do not have an attorney. Unfortunately, not everyone follows my advice, and this client passed away without a will or estate plan in place.

It has been over a year now, and his estate is still not settled. I was able to transfer his IRA to his spouse within days of receiving the death certificate. But, his individual account and his home and business assets remain tied up in Probate Court. His account, which I was managing, is frozen, and I cannot place any trades in the account or pay any bills (yet) for the estate.

Assets which have designated beneficiaries, such as life insurance policies, retirement accounts, or annuities, will go to the beneficiaries without the involvement of the Probate Court. Additionally, joint accounts with rights of survivorship, may go to the survivor, such as a spouse, almost immediately.

For all other types of assets, their disposition is determined by your Will. When you do not have a Will, it is said that your estate is “Intestate”. In these cases, your individual assets will be distributed based on state law. For real property, for example, one-half of your home would go to your surviving spouse, and one-half would go to surviving parents or siblings. But you wanted your spouse to receive all of your house or real estate investments? Too bad, you don’t have a will with those instructions.

Chart of Distribution of Assets in Texas Without a Will.

For parents of minor children, not having a will means that a court will determine who gets custody of your children. And since minors cannot own, inherit, or manage investments, any funds designated for their care would have to be placed in trust under the management of a court-appointed trustee (not of your choosing). Expenses for your children would need to be approved by the court.

Everyone does need to have a will and a few other estate planning documents. Typically, you will also want:

Durable Power of Attorney: authorizes a person to make financial decisions and enact transactions such as paying bills on your behalf, in case you are incapacitated or unable to make those decisions.
Health Care Power of Attorney: designates someone to make health care decisions if you are too ill or injured to speak for yourself.
Physicians Directive: instructions on what care or life support you would like to receive or not.

Here in Texas, we are a Community Property State, but even for married people you still need a will. If you die “intestate”, your assets could be tied up for a year or more, assets might not automatically go to your surviving spouse, and you increase your expenses and the potential for fights and lawsuits between family members. I have seen a LOT of families fall apart over disagreements about a parent’s estate, and yet parents never think it would happen with their kids. But it does, with sad consequences that no parent would want.

Do you need a trust? The majority of people do not. It used to be that a trust was needed to avoid the estate tax. But for 2018, a married couple has basically $22 million that can be passed on without any estate taxes at all.

I have an experienced attorney here in Dallas who will create a complete Will and set of Estate Documents for you. Like me, he believes this is essential protection which every family needs. He will meet with you face to face and determine your needs before making a recommendation. For families needing standard documents, the cost is a flat $750, which is less than some online services.

After my experience of having a client pass away without a Will, I wished I had been more adamant about insisting he had gotten this done. I realize it is a morbid topic that most people don’t want to think about. But the responsible way to take care of your loved ones is to make sure your Estate Plan is in place.

If you have a Will, you may need an update or a new one, if:

you have moved to a different state,
you have gotten married, divorced, or had children,
any of your beneficiaries have passed away,
your documents are more than five years old.

This is so easy to put off for another day because you are “too busy”. Please don’t wait. There is never an ideal time. Let me help you get this done, and I promise you will feel better once you have this settled.

The Rate of Return of Life Insurance

Posted On March 19, 2017 By Scott Stratton, CFP(R), CFA In Financial Planning /

Life insurance is a necessity for many families to protect them from the unexpected potential loss of income that could occur with a loss of life. For young families, term insurance is an excellent vehicle to address this risk.

As we get older, we hopefully have generated some wealth and we will have fewer future expenses. At some point, your kids will be out of college, you may have paid off your house, and accumulated a nice size retirement account. Each year, your need for life insurance is reduced, and eventually, you may be able to self-insure the risk of an unexpected death.

Still, I know that many pre-retirees like the idea of having a permanent life insurance policy to leave money for their spouse, heirs, or charity. Unlike a Term policy, “permanent” life insurance may provide a specified death benefit for as long as you keep the policy in force. Obviously, a permanent policy is much more expensive than term insurance. But is it a good rate of return?

It depends on how long you live! The longer you live, the more premiums you pay, and the longer your heirs have to wait to receive a fixed payout. Therefore the return is lower. Here’s an example.

For a 60 year old male in good health, you might pay $8,000 a year for a $500,000 policy. Even if you live for another 25 years, that means your heirs would receive $500,000 and you only paid $200,000 in premiums. That must be a good return, right? Let’s take a look:

$500,000 future payout, cost is $8,000 a year.
Rate of Return

10 Years	32.1%
15 Years	16.5%
20 Years	9.9%
25 Years	6.5%
30 Years	4.4%

I would say the return is excellent if you live for 20 years or less. If you live for 30 years or more, you may have more total wealth if instead of purchasing insurance, you had simply kept your $8,000 a year invested. Historically, it has not been very difficult to beat 4.4% over 30 years. So as a long-term investment, I don’t like life insurance. Which brings us back to the primary purpose of life insurance in my mind: to protect against the danger of pre-mature death.

To be fair, the rate of return on insurance is generous because so many policies lapse. When that happens, insurers will have received years of premiums and never have to pay out a death benefit. Other policy holders will borrow from their policies, causing them to deplete and never payout. I believe the majority of people who start a permanent policy will never receive a death benefit because of their own choices.

I should add that getting the best price on a life insurance policy is no easy task. Underwriting for a permanent policy will be rigorous, looking at your health, weight, blood tests, family and occupational history and more. Now, if your premium was higher than $8,000 a year for this hypothetical policy, the rates of return above would obviously be much lower.

My recommendation for most people: get term to cover you until your kids are out of college. For many people, that will be the only life insurance policy they will ever need. There are some good uses for permanent insurance, such as for business succession or estate planning. But it’s not the vehicle financial planners prefer for long-term wealth accumulation.