How To Disinherit Your Unnamed Beneficiary

This time the unnamed beneficiary gets zero.

              Getty Images

Jim Lorenzen, CFP®, AIF®

In my last post, I revealed that virtually everyone with a 402(k), IRA, or even an annuity has an unnamed beneficiary who may get the lion’s share of the money you’ve worked so hard to get.  If you haven’t read it, you can find it here.

That post showed you how you could offset that inheritance and give more money to your kids.   This post will show you how you can disinherit this unnamed beneficiary altogether – at least from the above-mentioned accounts.

I used a hypothetical example of someone who had three kids living in a high tax state like California and a $600,000 IRA.   If the kids are two-income households and successful, they could be paying 40% to the state and federal governments for the money they end-up taking from the inherited IRA.

$600,000 divided by 3 kids = $200,000 per kid.  At 40%, each kid would be paying $80,000 in taxes, realizing $120,000 after tax.   The state and federal governments would therefore receive $80,000 x 3 kids = $240,000  –  this would be DOUBLE what each kid would end-up with!

What if you could disinherit the government altogether?

You guessed it:  There’s only ONE tool I’ve found that can do this, if combined with the right strategy.

In my last post, I talked about using a life insurance policy and the children using the tax-free death benefit to pay the taxes, keeping their IRA inheritance in-tact.  This time we do it differently.

Starting with the same $600,000 IRA, we purchase a $600,000 survivorship life insurance policy (it pays after the last of two spouses dies).  This time, however, instead of using the death benefit to pay the taxes, the death benefit goes to the children tax-free. 

The strategy: 

  1. Name a tax-exempt charity as beneficiary of your IRA.
  2. Purchase a life insurance policy for full estimated IRA value (we’ll use $600,000).
  3. At death, the charity receives the IRA proceeds tax-free.
  4. Your kids receive the $600,000 ($200,000 each) tax-free.
  5. The state and federal governments get zero.

Your kids received $80,000 more than the $120,000 they would have received, a 70% increase using our hypothetical tax bracket – that’s $240,000 went to them instead of the government, who got nothing.

How much did the life insurance cost?   That depends on the policy and the company, but I think it’s less than $240,000, ya think?

Jim


Jim Lorenzen, CFP®, AIF®

 

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Your IRA Has An Unnamed Beneficiary!

And, this one could end-up with the lion’s share of all you worked for.

Fotilla Images

Jim Lorenzen, CFP®, AIF®

It’s one thing if you forget to name someone as a beneficiary – you have three kids and forgot to name one of them (oops!) – but, it’s even worse when someone you didn’t even name may end-up with the lion’s share of your retirement account!

Can’t happen?  Oh yes, it can.

Let’s assume you have a 401(k) or IRA valued at $600 000.   Who would you like to inherit it?  Chances are it’s your loved ones/kids.   So, why haven’t you given it to them already?  Simple:  You may need the money.   But, when you do pass away, your beneficiaries must include withdrawals in their taxable income.   It’s not uncommon for retirees to die sometime between ages 75 and 95… this is often the time the IRA passes to the next generation at or near their peak values.

Leaving timing and amounts aside, if you live in a high-tax state like California, the combination of other taxable income and withdrawals can easily put someone in a higher tax bracket.

Will assume the IRA is $600,000 and you have three successful kids.  It wouldn’t be unrealistic for a successful two-income family to end-up in a combined state and federal tax bracket of 40%

Here’s what each will end-up with:   $200,000 (1/3 of the IRA) less $80,000 (40% state and federal taxes) = $120,000.

Oh, yeah… your 4th kid:  Uncle Sam.   He received $80,000 x 3 kids = $240,000.  That’s THREE TIMES what each of your kids received!

Happy now?

How do we keep that extra $240,000 in your three kid’s pockets? You can use a tax-offset strategy.  It’s simple:  You transfer the risk.   Now, this isn’t something you can do with stocks, bonds, gold, or real estate.  There’s only one tool in the financial toolbox I know of that can do this.  

The strategy:  You purchase a $600,000 survivorship life insurance policy.  When the parents die, the children inherit the IRA.   They also each inherit 1/3 of the life insurance proceeds ($200,000) which, by the way, comes tax-free.  They can use the death benefit proceeds to pay the taxes they owe for inheriting the IRA.  They keep the entire IRA (each is now $80,000 richer) and your family has retained an additional $240,000.

Each received $200,000 instead of $120,000.   That’s a 70% increase!

They also now have choices.  Because taxes aren’t an issue, they could liquidate the IRA and invest the money where they’ll have complete liquidity and no future required minimum distributions or explore other options available to them.

Either way, they’re better off.   Thanks, mom and dad.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Changes To Medicare Plans to Begin Soon!

Jim Lorenzen, CFP®, AIF®

Beginning this January, Medigap plans will no longer cover the Part B deductible for those who are turning age 65.   Since the deductible is only $185, it won’t be a big deal for most people.

What’s worth noting is that Plan F – the plan that covered all of Part A and Part B, including deductibles – will no longer be sold to those turning age 65 beginning January 1, 2020.  Anyone who is 65 or older before that date can still apply for Plan F, but they may not want to.

Charles Paikert, writing in Financial Plannng’s September issue quoted insurance broker Stuart Millard who noted that even those who are already in Plan F, while not affected, may want to pay attention to this change.  Plan G, which is nearly identical to Plan F, is still available and older clients – and they may want to switch!   Why?  Sarah Caine, a specialist quoted in the same piece, points out that since Plan F is being discontinued, no new clients are coming in.  This means the pool of patients will diminish as people age out.  Since no new people will be replenishing the risk-sharing pool, it’s possible that Plan F may not be as stable as it once was.

For those who can afford it, Medigap plans may be appealing because they’re not restricted to doctors in a network or geographic location whereas Medicare Advantage plans may not be as beneficial for people who split their time between two homes or are active travelers.

Medicare health planning is a highly specialized field.  Too often people will simply shop online or deal with a jack-of-all-trades “financial advisor” who’s licensed to sell everything.  In addition, many people are unaware that there is income testing for Medicare, going back two years.  Those who have vested and restricted stocks, as well as those who are in COBRA plans may want to examine their situations carefully, including annual evaluation of their Part D prescription drug plan where prices change, as well as the offerings, each year.

Medicare has strict deadline rules, as well.  Miss a deadline and you can lose important rights, such as Medigap’s guaranteed issue right.

As I said, this is a highly specialized area and the services of an experienced insurance broker who is a health care specialist just might save you thousands of dollars.

Jim

Note:  The Independent Financial Group does not sell health insurance and Jim Lorenzen is not a health insurance broker.


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

I.R.S. RULING MIGHT CREATE TIMING ISSUES

Jim Lorenzen, CFP®, AIF®

On August 14th, the IRS ruled (Revenue Ruling 2019-19) that uncashed distribution checks from qualified retirement plans are taxable.

Oops!  That means that those requesting distributions, including RMDs should do it early enough in the calendar year to avoid any year-to-year carry-over confusion.   So, a distribution check issued in July, for example, will be taxed for that distribution in the year it is received, even if not cashed or rolled-over.

Those who leave companies and expect future distributions from their 401(k) from that company should update any change of address information – taxes, it appears, will be due on that money even if the check never reaches them.

Why did the IRS make this ruling?  According to retirement guru and CPA Ed Slott, the ruling was intended to address a question that has long been faced by retirement plan administrators – what are their withholding and reporting obligations when a check they issued goes uncashed?

So, the distribution is recorded in the year it’s distributed….  Good to know, huh?

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Getting Ready to Take a RMD? Here’s a 4-Point Checklist.

Jim Lorenzen, CFP®, AIF®

Remember the 1990s?  That was when every business channel had multiple programs with business gurus picking and ranking mutual funds.  It was a time when many mutual fund managers were becoming the ‘rock stars’ of financial meda.  Everyone wanted to know what Peter Lynch, Bill Gross, and others were buying, selling, and saying.

If you were one of those following all those shows back then, you were no doubt thinking about your financial future.  And, if you were born in the years following 1946, chances are you’re a ‘baby boomer’ – a term we’re all familiar with by now.

I read somewhere that there are 65,000 boomers turning age 65 every year!  And, those turning 70-1/2 have hit a big landmark:  It’s the year – actually it’s up until April 1st of the following year – Uncle Sam begins sticking his hand into your retirement account – after all, he is your partner; and, depending on your combined state and federal tax-bracket, his ownership share can be pretty significant, depending on the state you live in.  Yes, that’s when you must begin taking required minimum distributions (RMDs).

By the way, if you do wait until April 1st of the following year, you’ll have to take TWO distributions in that year – one for the year you turned 70-1/2 and one for the current year.  Naturally, taking two distributions could put you in a higher tax bracket; but, Uncle Sam won’t complain about that.

So, now that you’ve been advised of one trap that’s easy to fall into, what are some of the others?  You might want to give these concerns some thought – worth discussing with your tax advisor, as well as your financial advisor.

  1. Not all retirement accounts are alike.
    • IRA withdrawals, other than Roth IRAs, must be taken by December 31st of each year – and it doesn’t matter if you’re working or not (don’t forget, there is a first year exemption as noted earlier).
    • 401(k) and 403(b) withdrawals can be deferred past age 70-1/2 provided you’re still working, you don’t own more than 5% of the company, and your employer’s plan allows this.
    • As noted, Roth IRAs have no RMD requirements.  Important:  If you’re in a Roth 401(k), those accounts are treated the same as other non-Roth accounts.  The key here is to roll that balance into a Roth IRA where there will be no RMDs or taxation on withdrawals.
  2. Fotila Images

    Get the amount right!

    The amount of your total RMD is based on the total value of all of your IRA balances requiring an RMD as of December 31st of the prior year. You can take your RMD from one account or split it any or all of the others.  Important:  This doesn’t apply to 401(k)s or other defined contribution (DC) plans… they have to be calculated separately and the appropriate withdrawals taken separately.

  1. Remember: It’s not all yours!

You have a business partner in your 401(k), IRA, and/or any other tax-deferred plan:  Uncle Sam owns part of your withdrawal.  How much depends on your tax bracket – and he can change the rules without your consent any time he wants.  Some partner.   Chances are you will face either a full or partial tax, depending on how your IRA was funded – deductible or non-deductible contributions.  Important:  The onus is on you, not the IRS or your IRA custodian, to keep track of those numbers.  Chances are your plan at work was funded with pretax money, making the entire RMD taxable at whatever your current rate is; and, as mentioned earlier, it’s possible your RMDs could put you in a higher tax bracket.

It’s all about provisional income and what sources of income are counted.  The amount that’s above the threshold for your standard deduction and personal exemptions are counted.  By the way – here’s something few people think about:  While municipal bond interest may be tax-free, it IS counted as provisional income, which could raise your overall taxes, including how much tax you will pay on Social Security income.   Talk to your tax advisor.

  1. Watch the calendar.

    If you fail to take it by December 31st of each year – even if you make a miscalculation on the amount and withdraw too little – the IRS may hit you with an excise tax of up to 50% of the amount you should have withdrawn!  Oh, yes, you still have to take the distribution and pay tax on it, too!   There have been occasions when the IRS has waived this penalty – floods, pestilence, bad advice, etc.

Remember to talk with your tax advisor. I am not a CPA or an attorney (and I don’t play one on tv); but, of course, these are issues that come up in retirement planning and wealth management quite often.

Happy retirement!

Jim


Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an ACCREDITED INVESTMENT FIDUCIARY® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

Planning to Roll Your 401(k) to Your Own IRA?

Jim Lorenzen, CFP®, AIF®

Getting ready to retire?  Planning to roll your 401(k) into your own IRA?  It will pay to do your homework first.

To help you get started, you might find our 401(k) Rollover Review helpful.  It contains information on changing jobs, retiring, methods, rollover taxation issues, and more.

i303a_ira-rollover-review_overview-report_vsa_001Click Here for your 401(k) Rollover Review!

 

TO ROLL? OR, NOT TO ROLL….

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Getting ready to pull the retirement cord?  In a previous post, I had talked about pension options – worth reviewing if that’s an issue for you.  I also recently provided an IRA rollover checklist  for those evaluating the pros and cons of such a decision.

Whether or not to to do a rollover is not a simple ‘yes’ or ‘no’ question.  It depends on your particular situation.  There are good reasons both for and against rolling over your retirement plan to an IRA – the checklist can help sort those out.

Believe it or not, there may be a reason to take some of your retirement out in cash and pay taxes right now!  How can that be?

If you’re on of those now doing your homework – good for you – you may enjoy reading this report, Six Best and Worst IRA Rollover Decisions.  This report not only discusses those decisions, it will also provide some insight on additional issues worth considering.

I hope you find it worthwhile.  You can download it here>  Click here for your report!

Before you get to the report, however, here’s a bit of news I came across from Mark Dreschler, the president and founder of Premier Trust.  His words:

The US Supreme court ruled this past June, in Clark v. Rameker, that inherited IRAs are NOT protected from a beneficiaries’ bankruptcy. Previously, this was an open issue. Now, the only way to protect an inherited IRA from inclusion in the beneficiaries’  bankruptcy, is to have a correctly worded IRA Inheritance Trust named as the beneficiary. This will also protect the IRA principal from other creditors, or divorce proceedings.

However, if the distributions are paid directly to the beneficiary, they are NOT protected from bankruptcy or even attack in the event of a divorce. An IRA Inheritance Trust which also protects distributions from attack is called an “accumulation trust.”  The trustee cannot be the child. The trustee has full discretion to hold distributions from the IRA in trust to protect the child or pass them out, depending on the circumstances. The child beneficiary may benefit from the distributed assets that the trust holds, but does not own them individually. Obviously, if the child-beneficiary has no title or control of the IRA distributions, they cannot be taken by a charging order or other legal means of attack.

Hope you find that helpful.  And, don’t forget to download your report.

Jim

 


Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® serving private clients since 1991.   Jim is Founding Principal of The Independent Financial Group, a  registered investment advisor with clients located across the U.S.. He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

 

Thinking of Rolling your 401(k)? This checklist may help!

iStock Images

iStock Images

Jim Lorenzen, CFP®, AIF®

Getting ready to leave your company?  Considering doing a rollover?  This isn’t a decision to be taken lightly.  While rolling over your 401(k) or other qualified retirement plan to an IRA makes perfect sense for many people, it’s not an “automatic” decision.

I’ve put together a little checklist that may provide some help.  I hope you feel it’s helpful for you.

Jim

Click Here for your checklist!

 

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and an Accredited Investment Fiduciary® serving private clients’ wealth management needs since 1991.   Jim is Founding Principal of The Independent Financial Group, a Registered Investment Advisor providing retirement planning and investment advisory services on a fee-only basis.   He is also licensed for insurance as an independent agent under California license 0C00742. The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriately licensed professional.  All images used in this communication are in  public domain unless otherwise noted.

17 Unexpected Retirement Expenses

checkbook-penJim Lorenzen, CFP®, AIF®

The Society of Actuaries outlined 17 unexpected or shocking expenses during retirement in its 2015 Risks and Process of Retirement Survey.  I’ve put those into a small report that explains why two in particular happen to too many retirees.

I hope you enjoy it.  You can get yours by simply clicking on the button below.
Click Here for your report

 

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® providing private client wealth management services since 1991.

The Independent Financial Group is a registered investment advisor with clients located across the U.S.  He is also licensed for insurance as an independent agent under California license 0C00742. Jim can be reached at 805.265.5416 or (from outside California) at 800.257.6659.

Interested in becoming an IFG client?  Why play phone-tag?  You can easily schedule your 15-minute introductory phone call!

The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

 

Guarantees Against Loss Not A Panacea… but maybe still valuable.

6a017c332c5ecb970b01901dd12617970b-320wiJim Lorenzen, CFP®, AIF®

Active managers can’t beat their indexes consistently.   

Who cares?

During my 25+ years of helping people navigate financial waters, I can honestly say I have never had a single client who cared about beating an index – any index – except inflation.

Pretty amazing since most media tend to focus on only two things:  Active managers vs. a passive index and cost of ownership.   Little, if anything, is ever said about the value provided.  To them, apparently, value is ‘nil’.

Actually, our industry is at fault, as well.  Look at our quarterly or annual reports.  Performance is always measured against an index or some blend of indexes.  Industry custodians don’t get it, either.

 

The ONLY index that REALLY counts is long-term performance measured as progress toward your personal goals, measured in probabilities.  Probabilities, after all, are all we really have to work with since there are no guarantees in life.  Even our money isn’t guaranteed; it’s “backed by the full faith and credit of….”  

 

So, what approach offers the best chance of meeting your goals?  As you might guess, there is no one right answer.  The answer will depend on which approach is most appropriate for you.

 

Managing the downside

 

When active managers are chosen for a portion of a client’s portfolio, in most cases what the investor is really seeking are returns that outpace inflation while limiting downside risk.

Take a look at this purely hypothetical 10-year market environment.  You’ll see our hypothetical market begins and ends with 20-point gains.  There are six years of +20% and four years of -20%.

Image_Managing for Downside

Portfolio A begins with $500,000 and invests in that market.  To keep things simple for illustrating this concept, we’ll ignore expenses and taxes.  Those aside, you’ll note the average annual compound return and the ending value.  The numbers aren’t important except for comparison with the next chart.

 

IHere’s a hypothetical portfolio that’s been managed for downside risk.  Here our fictitious manager is very conservative, capturing only 80% of the upside of each up-market, and also very effective, capturing only 70% of the downside moves.  Despite the fact this manager never beat the market on up years, outperforming by limiting losses in down years lead to an overall outperformance.

 

It’s a made-up scenario, I know, but it does illustrate a concept:  Limiting the downside can be quite effective – maybe even more than trying to beat the market indexes and accepting big downside losses.

 

What if we eliminate the downside altogether? 

 

Insurance companies market their equity-indexed annuities and equity-indexed universal life products with this guarantee.  What if you could capture 100% of the upside up to a ‘cap’ of 12%, for example, and be guaranteed that you never lose money?  You’ve seen the commercials.

 

Here’s the same hypothetical market return, this time compared to the strategy that eliminates downside risk!  Wow!  Looks good!  Compare the ending values with our manager limiting losses in the prior example.  Now, even if you factor in expenses and inflation, it would still look pretty good.

Image_Eliminiating the Downside

But, does this method outperform in all markets?

 

In this third chart, I’ve created another hypothetical series of market returns starting at -10% and moving all the way up to +35% over ten years.  There are only two down years, yet despite that, this market return series outperformed the guaranteed return.  In fact, our downside guaranteed portfolio came in $477,000 BELOW the ‘market’ portfolio.

 

You could create a million market return sequences and come up with a million different variations.  The point is while these downside guarantees don’t necessarily mean you will make more money, they can provide a valuable ‘protected’ return.

Image_Protected Return

Again, who cares?  If the portfolio is advancing you to your goals, that should be all that counts.

 

But, how do you position these guaranteed products in your portfolio?   

 

What asset-class should they be assigned to?  Just because you may have participation with a stock index, do those assets get assigned to the stock portion of your allocation?   If not, why not?  And, how would you position them?

 

The answer might surprise you.  Many retirement plans may fail.  Some time ago I created a report on this subject – you might find it helpful.  You can access it here.

Enjoy!

 

Jim