Do I Need A Trust?

Do I Need A Trust?

If you’re thinking about your estate planning, you might ask Do I need a Trust? And to answer that question, we have to first ask why you might want a trust. There are many types of trusts and it is not as simple as a generic Yes or No. Many people do not need a trust, but for other families it may be valuable or even essential.

In this article, we are going to talk about the reasons for wanting or needing a trust. If you are clear on the reasons, you can help your estate attorney make sure you have the best type of trust for you. These can be slightly different from state to state. Or you can determine that you don’t need a Trust to accomplish your Estate planning objectives. The taxation of trusts is often overlooked and sometimes misunderstood, even by attorneys.

Every small town offers estate planning, but if you have a complex situation, I would suggest you seek out an attorney who is board certified in Estate Planning. They are often better up to date with all the trust pros and cons for your needs. You don’t see your family doctor for a hip replacement, you see a specialist. Do the same for your Estate Planning.

Avoid Probate

One of the most common reasons to establish a trust is to avoid having to go to Probate Court to distribute your assets upon your death. Probate can take a year or longer in some states and has a number of costs, including court fees and attorney expenses. A Revocable Living Trust (RLT) can sidestep the probate process, potentially saving some time and expense for your heirs.

These types of trusts are generally fairly harmless. But they are not always necessary. Remember that some assets already do not go through the probate process. Non-probate assets include:

  • Joint accounts with rights of survivorship
  • Retirement accounts (IRAs, 401k, 403b, etc.) with a named beneficiary
  • Life Insurance and Annuities
  • Transfer on Death or Payable on Death accounts

If you have a house, car, boat, etc., with a title or deed, those assets MUST be retitled so that the trust owns the asset. Otherwise, those assets will still have to go through Probate. So, unfortunately, what often happens is that someone has a RLT but has one or two items which were not titled correctly, so they still have to go to Probate for those items. Please note that real estate goes to probate in its home state. So if you have a home in Texas and one in Colorado, you would need to go through Probate in both states. That is also a good reason for a RLT.

Spendthrift Trust

Another reason to have a trust would be to have a Spendthrift provision. A “Spendthrift” is someone who spends in an irresponsible way. Sometimes that may mean a gambling, alcohol or drug problem, or a mental illness. If you are concerned that one of your heirs is going to waste the money and squander their inheritance, than you may want a trust. The trust can stipulate how much a beneficiary can withdraw or present them with an allowance rather than a lump sum. Or you can establish a trustee to oversee the distribution of money to ensure that the beneficiary is doing okay.

Family Considerations

There are other family reasons for establishing a trust. First, consider minors. If an minor is a beneficiary of an estate, they cannot receive the money. Instead, the probate court will appoint a trustee, based on their rules. Then when the child reaches the age of majority, 18 or 21 depending on the state, they will have access to 100% of the money. You might prefer a trust to hold this money and provide access at a later age or for specific reasons (such as education, medical, buying a first home, wedding, etc.).

Second, a trust may help keep money in the family in case of divorce. You may love your kids but not be certain about their spouses or future spouses. Some states, like Texas, can preserve inheritance money as a separate asset, not subject to division in a divorce. Other states do not. The risk is that the funds are commingled or squandered. So a trust may again be appropriate in these situations. Half of all marriages are ending in divorce and that may well include your kids.

Third, you may have future grandchildren or great-grandchildren. A trust could provide for a longer inter-generational transfer to unborn generations. It might also be helpful in preventing some heirs from deciding not to work and to spend the inheritance on lavish cars, houses, and vacations. Many successful entrepreneurs worry about how an inheritance could de-motivate their heirs from pursuing their own careers. Why go to Medical School if you are already a multi-millionaire at 18? A trust can set some rules.

Fourth are Special Needs Trusts. If you have an heir who has a physical or mental disability, you may want to establish a Special Needs Trust. Generally, these trusts are created to provide a supplemental benefit while still allowing the beneficiary to qualify for Medicaid or state funded care.

Fifth, What if you are remarried and have a blended family with children from previous marriages. You may want to leave income to your spouse but leave the remainder or principal to your children. Otherwise, there is potentially a possibility that your spouse could remarry after you are gone or decide to cut your children out later. One solution is a Qualified Terminal Interest Property Trust, called a QTIP.

Estate Tax and Asset Protection

We wrote extensively last week about the Estate Tax and how the exemption is set to be cut in half in 2026. A lot of families who are not thinking about the Estate Tax could be subject to a 40% tax in the future. And that risk is a very real reason to consider an Irrevocable Trust today – to lock in the very generous Estate and Gift exemption we have in 2023 through 2025. Today, a couple could put in almost $26 million into a Trust, without gift taxes, and avoid a future estate tax, even if Congress later lowers the Estate Tax Exemption.

Moving assets out of your name and into a trust could also protect those assets from creditors. If you are concerned about a lawsuit or bankruptcy, moving assets out of your name may be a good idea. For some professions and businesses, this is a very real risk.

Trust Taxation

Be sure to ask and understand how any proposed trust will be taxed in the present and future. Taxes can be misunderstood by families who thought a Trust was doing a great thing for heirs. Some trusts are pass-through entities, where the income taxes are payable by the grantor or the beneficiaries.

Other trusts are their own entity and have to file their own tax return. And this type, you need to be very careful. Trust and Estate tax rates are much worse than individual tax rates. Both trusts and individual have the same top rate of 37% in 2023. But the Trust reaches that 37% tax rate at only $14,451 of income versus $578,126 for an individual (2023).

Billionaires don’t care about trust tax rates because they and their heirs are always going to be in the top tax bracket. To them, the trust tax rate doesn’t matter. But for most beneficiaries, there will be a large increase in taxes if the trust is a taxable entity.

For example, consider $100,000 ordinary income to an individual versus a Trust (2023):

  • Individual taxpayer (after $13,850 standard deduction) = $14,261 tax
  • Trust with same income = $35,144 tax

It may be that the other goals: spendthrift, family, estate planning, etc., outweigh the additional tax costs. But you should fully understand what the taxes will look like while you are alive and also for your heirs.

Two other questions to ask about taxes before entering a trust:

  • Will my heirs receive a step-up in cost basis if the trust owns this asset when I pass away? In many cases, this answer alone may dissuade you from certain types of trusts.
  • What will happen if I name the trust as beneficiary of my retirement account or life insurance policy? In some cases, certain benefits may be lost if a trust is a beneficiary rather than a natural person.


Do I need a trust? To answer that question, we’ve outlined two areas of focus. First, be very clear about why you need a trust. Is it to avoid probate, for a spendthrift, for family reasons, to reduce estate taxes, or protect assets from creditors? These require different approaches. Second, be sure you understand how the trust will be taxed today and in the future. Some are simple and some are complex and can be costly for your heirs. There are no tax-free trusts, someone is always liable for taxes and you need to understand how this works.

Every family should have a Will and related estate planning documents: a Durable Power of Attorney, a Physicians’ Directive, and Health Care POA. Keep these up to date, especially if you have a change in your beneficiaries, executors, or trustees. If you don’t have a specific need for a trust, it’s quite possible that you don’t need one. I am not of the opinion that everyone must have a trust. In many cases, the majority of their assets can pass outside of probate, just through beneficiary designations or TOD accounts. There are pros and cons to that approach, too.

If you do establish a trust, please share it with your financial advisor. It may even be beneficial to set up a meeting or call with you, your attorney, and your financial planner to ask questions about account titles, beneficiary designations, and taxes. That way, we can work together to make sure your estate plan will work as intended. Our Wealth Management process is often planning for several generations and not just for this year or even for just your retirement. If you are thinking about how your money can benefit your family long-term, let’s chat.

What Is The Estate Tax?

What Is The Estate Tax?

Many investors are unclear about exactly what is the estate tax in the United States. Thankfully, very few people currently have exposure to the estate tax. However, for wealthy families, the estate tax can be significant. Even if you are not currently subject to the estate tax, you might be in the future, and you need to read this article. Here’s what you need to know about the estate tax and key planning strategies to reduce a future estate tax liability.

Estate Tax in 2023

Today, for 2023, the estate tax exemption is $12,920,000 per person. This is the amount that you can pass on to other people without paying any estate tax. If your estate is above this amount, your estate pays tax on the amount above the $12,920,000 threshold. The tax begins at 18% and increases to 40% once you reach $1 million above the threshold.

Spouses have separate exemptions, so a couple can effectively have an estate of $25,840,000 before owing any estate taxes. The exemption is indexed to inflation and is increasing each year. The tax must be paid by the estate before the assets are distributed to your heirs. There is no estate tax for leaving assets to your spouse, provided that your spouse is a US citizen.

Please note that the estate tax has nothing to do with “probate”. Items which are excluded from probate, such as retirement accounts, life insurance, TOD accounts, and revocable trusts, are still included in your assets for the calculation of the estate tax.

When I became a financial advisor two decades ago, the estate tax exemption was only $1 million. A lot of people were getting hit by the tax and planners were much more focused on the estate tax. Over the past 20 years, we’ve seen the exemption expanded greatly. Today, there are relatively few families who are subject to the tax, but that is likely to change.

The Future of The Estate Tax

The estate tax exemption is set to be cut in half in 2026. The current exemption amount is scheduled for sunset as part of the Tax Cuts and Jobs Act of 2017. On January 1, 2026, the exemption will drop to around $6.5 million or so (depending on inflation over the next couple of years). And immediately, people with over $6.5 million will be subject to the estate tax.

For example, if you have $11 million as an individual, your estate tax would be $0 today. But in 2026, if the exemption is $6.5 million, your heirs would owe estate tax on $4.5 million. The tax bill would be $1,745,800.

Of course, Congress could act to extend the exemption amount or even increase it. We don’t know what will happen. Personally, I don’t think there is much appetite in Washington for continuing or expanding the estate tax limits. Given the increased perception (and reality) of wealth disparity in our country, it seems unlikely to me, especially with our growing debt and deficits. It is easier to raise taxes on the 1%. There were candidates in the previous presidential election who proposed lowering the threshold to $3.5 million and increasing the tax to 45%. So, it will definitely depend on who is in control in Washington in 2025-2026, but the writing is on the wall. I think the estate tax threshold is likely going lower, maybe a lot lower. It’s a real risk.

Wealthy Americans who have $3 million to $26 million as a couple presently don’t have to think about the estate tax. But that seems likely to change, and families in this range could have a different situation in the future. Also, make sure to consider a calculation of future growth. With a hypothetical 7% annual return, $5 million will become $20 million in 20 years. Just because you don’t have an estate tax liability today is no guarantee you will not in the future.

Thankfully, there are a number of planning opportunities to reduce your future estate tax exposure.

State Estate Taxes

Before we get to estate tax strategies, there’s more bad news. A number of US states impose their own estate tax or Inheritance tax, on top of the US estate tax. And all of these states have a MUCH lower exemption, ranging from $1 million in Massachusetts to $5.9 million in New York, meaning that even if you don’t pay a federal estate tax, you could end up owing estate tax to your home state. Residents of these states will pay both the state and the federal estate tax.

States with an estate tax include: CT, DE, DC, HI, IL, MA, MD, ME, MN, NE, NY, OR, and WA. The following states impose an inheritance tax, which is similar, but imposed on the beneficiary rather than on the Estate: IA, KY, MD, NE, NJ, and PA. State estate tax rates are up to 20%. This is in addition to the Federal estate tax, so the combined estate tax could be over 50% in certain states.

Planning for the state estate tax can be very simple. Move to another state without an estate tax or an inheritance tax.

Ways to Reduce the Estate Tax

Below are ways to reduce the estate tax and it is by no means a complete list. Each of these strategies below could be a full article. There are many planning strategies we could use, depending on your individual situation.

  • Charitable giving. Your gifts to charity reduce your estate and if done in advance can also provide income tax benefits. Don’t forget Qualified Charitable Distributions from your IRA if you are over age 70 1/2. Better to gift over time, rather than at death, to maximize income tax deductions, which are limited to 50% of Adjusted Gross Income annually.
  • Use your annual gift tax exclusion of $17,000 (2023) per person. You can also pay an unlimited amount for medical and educational expenses. Pay for your grandchildren’s college directly.
  • Give your heirs $12,920,000 now and use up your lifetime unified exemption today. Or establish an Irrevocable Trust with this amount. When you give away or fund the trust now, the IRS cannot later charge you gift or estate taxes if the future exemption drops. You have locked in your gift at $12,900,000. And next year, if the exemption does increase, say to $13,050,000, you could give away another $150,000. This strategy is essential to do before 2026.
  • Establish a family limited partnership (FLP) and gift shares to your heirs. They may receive a minority discount on the FLP shares, reducing the value of the gift. This is especially helpful if you have a closely held business which is growing in value.
  • Establish 529 College Savings Plans for children or grandchildren. 529s pass outside of your estate, even if you control them. You can fund five years in advance ($85,000 from a single donor or $170,000 from a married couple) per beneficiary, without touching your lifetime unified exemption.
  • Irrevocable Life Insurance Trust. Purchase a permanent life insurance policy through the trust and the trust owns the policy. Then there is no estate tax (or income tax!) on the death benefits paid to your heirs. (If the life insurance is owned by you directly, the death benefits will be included in your Estate.)
  • Roth Conversion. Pre-paying the taxes on your IRAs will reduce your Estate by the amount of taxes paid. And you will leave a tax-free account to your heirs. It’s better than your estate paying 40% and then your beneficiaries having to pay another 39.6% in income taxes on the distributions from your IRA.
  • Other trusts can reduce your taxable estate, including charitable trusts and intentionally defective grantor trusts.

Hopefully now you have a better idea “What is the estate tax”. Unfortunately, there is uncertainty about what the future estate tax will be. And that is a big risk for families who are thinking that they are safe because today they are below the estate tax thresholds. It’s not too early for families to start planning for 2024 and 2025 before the estate tax exclusion is cut in half in 2026. If you have concerns about how the estate tax might impact your family, contact me to discuss.

Stretch IRA Rules

Stretch IRA Rules

What are the Stretch IRA Rules? The SECURE Act changed the Stretch IRA rules as of January 1, 2020. While this was a proposal, I wrote 7 Strategies If The Stretch IRA Is Eliminated, which continues to get read numerous times every month. Today, we are going to dive into the new rules for IRA Beneficiaries. This is important because if you are leaving a large retirement account to your heirs, there could be a large tax bill! And if you don’t know these rules, you could make it even worse.

First, old Stretch IRAs are unchanged and are grandfathered under the old rules. So, for anyone who passed away by December 31, 2019, their beneficiaries could still inherit the account into a Stretch IRA. That means that they only have to take Required Minimum Distributions each year. They can leave the money invested in a tax-deferred account. For many of my clients with inherited IRAs, their Stretch IRAs have grown even though they are taking annual withdrawals!

Under the new rules, there are three classes of IRA Beneficiaries. First, there are Eligible Designated Beneficiaries (EDBs) who will still be able to use the Stretch IRA Rules. Second, there are non-Eligible Designated Beneficiaries (non-EDBs), who are now going to have to withdraw all the money within 10 years. This is called the “10 Year Rule”. Third, there could be a Non-Designated Beneficiary.

Eligible Designated Beneficiaries

There are six situations where an IRA Beneficiary today could use the old Stretch IRA rules.

  1. A Spouse
  2. Minor Children (see below)
  3. Disabled Persons
  4. Chronically Ill Individuals
  5. Persons Not more than 10 years younger than the IRA owner
  6. Certain See-Through Trusts

These individuals could inherit an IRA and use the old Stretch IRA rules. For example, if you left money to your sister who is 8 years younger than you, she could do a Stretch. Or to a friend who was disabled. The old rules and benefits will still apply in these cases!

Spouses and Children

Minor Children are not given an unlimited Stretch IRA, unlike in the past. Today, Minor Children can stretch the IRA until the age of majority, 18 or 21, depending on the state. If they are a full-time college student they can stretch until age 26. When they reach that age, then the 10 Year Rule kicks in and they must withdraw the remainder of the IRA within 10 years.

Spousal beneficiaries have a choice in how they treat the inherited IRA. They can roll it into their own IRA and treat it as their own. This is helpful if they are younger than the decedent and want to have smaller RMDs. However, if they are younger than 59 1/2, they might prefer to put it into a Stretch IRA. That way they can take withdrawals now and avoid the 10% pre-mature distribution penalty. If a surviving spouse is older than the decedent, they could use the Stretch IRA so they can put off RMDs until the decedent would have been 72.

Non-Eligible Designated Beneficiaries

Any person who is not one of the six EDBs is a non-Eligible Designated Beneficiary. Non-EDBs are must withdraw their entire IRA within 10 years. This would include adult children, grandchildren, or any other relative or friend who is more than 10 years younger than the IRA owner. Most non-spouse beneficiaries will be non-EDBs.

The IRS created some confusion this year as to what the 10 Year Rule Means. One document suggested that beneficiaries would still be required to take out some of the inherited IRA annually. That turns out not to be the case, as the IRS clarified in publication 590-B, Distributions from IRAs. Under the 10 year rule, there is no RMD or annual requirement. Beneficiaries have complete choice in when they withdraw from the IRA. The only requirement is that the whole account is withdrawn in 10 years.

For most beneficiaries, you will still want to draw down a large account gradually. Taking small withdrawals each year is likely to result in lower taxes than if you wait until the 10th year. For example, it would be better to take $100,000 a year for 10 years than $1 million all at once. This does give us some room for customization. If you have a low earning year, that could be a better year to take out a larger amount. If your tax rate will go up in 2022 or 2026, you might want to accelerate withdrawals while under a lower rate.

Non-Designated Beneficiaries

The third category is Non-Designated Beneficiaries. An NDB could occur if you don’t name a beneficiary, if you name your Estate as the beneficiary, or a charity or certain trusts. NDBs have the worst outcome, the old 5-year Rule. NDBs must withdraw the entire IRA within 5 years. Many people who established Trusts prior to 2020 named their trusts as the beneficiary of their retirement accounts. This will backfire now because the Trust cannot Stretch the distributions. And with Trust tax rates higher than for individual beneficiaries, this could hurt your beneficiaries quite a bit. If you have a Trust from before 2020, it should be revisited.

It is important that we review your beneficiaries from time to time to make sure they are up to date. It is also a good idea to have contingent beneficiaries in case your primary beneficiary pre-deceases you. IRAs do not have to go through probate. But if there are no beneficiaries, then this money could be tied up from months to more than a year as the Probate Court decides how to distribute your money.

Roth IRA Stretch Rules

Roth IRAs are inherited tax-free. So, on day one, any beneficiary can withdraw the entire Roth IRA balance and owe zero taxes. However, there are some options available for Roth Beneficiaries, too. And these also changed under the SECURE Act.

First, for spouses. A spousal beneficiary of a Roth IRA could take a lump sum distribution. Or they could roll the inherited Roth into their own Roth. Third, they could roll the Roth into an Inherited Roth account. In an Inherited Roth, they have two options for distributions. They can take annual Required Minimum Distributions based on their own age. Or, they can use the 5-year rule and withdraw the entire amount in 5 years. For most spouses, rolling the inherited Roth into their own will be a good course of action.

Non spouse beneficiaries also have an option to continue tax-free growth of a Roth. For Roth owners who passed away before 2020, beneficiaries could have elected to take RMDs. Under the new rules (owners who passed away after January 1, 2020), Roth Beneficiaries can use the 10 year rule. They have up to 10 years to take money out of their inherited Roth IRA.

Other Considerations

An inherited IRA also has a beneficiary. What happens then? Let say Mom left her IRA to her son years ago. Son has a Stretch IRA. Son passes away and leaves the inherited IRA to his wife. What now? You don’t get to Stretch twice. So the wife, in this case, is going to be under the 10-Year Rule. This is called a Successor Beneficiary.

A second example: Mom passes away in 2020 and leaves her IRA to her son. Son is under the 10-Year Rule. Son passes away in 2025 and names his wife as Successor Beneficiary. Does she get to restart the 10-Year Rule? No, the old rule applies, and she must withdraw the full account by 2030.

If you have a Beneficiary IRA, and are over age 70 1/2, you can also do Qualified Charitable Distributions. Most people don’t realize that QCDs could count towards their RMDs from an inherited IRA, too.

While I often only have one or two clients who inherit an IRA each year, every IRA owner should understand what will happen when they pass away. That’s why I am writing this somewhat technical article on the new Stretch IRA rules. By planning ahead, we can determine the best course of action for your situation. It could involve leaving a your IRA to charity, to a spouse, to children, grandchildren, or a trust. It may make sense to convert your IRA to a Roth.

For many of my clients, their largest accounts are IRAs. And there is a significant tax liability attached to those IRAs, for the owners, spouses, and heirs. If we plan well, we can help reduce those taxes!

Strategies if the Step-Up in Basis is Eliminated

Strategies if the Step-Up in Basis is Eliminated

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?

Do You Have a College Fund?

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

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

Financial Strategies for Low Rates

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

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.

Read More: 7 Strategies If the Stretch IRA is Eliminated

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.

 Read More: Qualified Charitable Distributions From Your IRA

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. 

Read More: 8 Questions Grandparents Ask About 529 Plans

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. 

Read More: Charitable Giving Under The New Tax Law

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?

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

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.

Do You Know Your Spouse’s Beneficiary Designations?


Beneficiary designations are important. The people you list on your IRAs, retirement plans, and life insurance policies will receive those monies regardless of the instructions in your will. What happens when you don’t indicate a beneficiary or if the beneficiary has predeceased you? In that case, the estate is named as the beneficiary of the account.

It is usually much better if you have a person indicated as the beneficiary rather than the estate, for the following reasons:

  1. If a person is the beneficiary, they can receive the assets very quickly by completing a distribution form and providing a copy of the death certificate. When the estate is the beneficiary, you may tie up the assets in probate court for months, or even years.
  2. A person can roll an inherited IRA into a Stretch IRA and keep the account tax-deferred. The beneficiary is required to continue taking Required Minimum Distributions, but even doing so, the IRA can last for many years. When a spouse is the beneficiary of an IRA, he or she can roll the assets into their own IRA and treat it as their own. By spreading distributions over many years, taxes may be lower than if you took a large distribution all in one year and are pushed into a higher tax bracket.
  3. When the estate is the beneficiary, they do not have the option for a Stretch IRA. They can either distribute the IRA immediately or over 5 years. Either way, the estate will be paying taxes sooner than if the beneficiary was a person.
  4. The tax rate on estates can be much higher than for individuals. An estate or trust will pay the maximum rate of 39.6% on income over $12,400 whereas a married couple would hit this tax rate only on taxable income that exceeds $466,950 (2016 rates).

For many individuals, a substantial portion of their estate may be in IRAs, retirement plans, life insurance and annuities, where the beneficiary designation is vitally important. In the last two months, the IRS has issued two Private Letter Rulings (PLR) specifically on beneficiary designations and the right