My wife left me Friday. She packed up the car and headed to Savannah, Georgia without me. One of my nieces is having a birthday and she wanted to be there. My daughters wanted to be there as well. I read an article this week about Bill Gates. Billy takes a week every year to go away somewhere without his wife and kids with no technology and no distractions. He does bring books to occupy his mind sand time. It is a week for him to simply be and think without the noise of the outside world. Just a man alone with his thoughts. This is my weekend alone. I had some work to do and pulled s late night Friday. I then went out for a steak and potato and saw some friends at the restaurant and hung out a bit. I woke up this morning disappointingly early but in defiance rolled over and closed my eyes, determined to catch some more zzzz’s. I ended up laying in bed for a couple of hours watching a Netflix movie on my phone. Of course, I do still have responsibilities. I had to turn on the heat lamp for my son Tucker’s turtle, Steve, and feed him. Then I headed out to the Cafe to eat a noontime breakfast. What a lazy day. Gates says that many innovations and new directions have sprung from his lonesome annual holidays. I’m calling this my weekend getaway.
It is hard for me to conceptualize my life without Stef and the kids. They are just part of who I am. When I think about decisions or plans they are just there, embedded in my process. That’s why I feel a bit lost if they are ever gone, even if just for a weekend. I think it is a great thing to spend time alone, thought… to let the dust settle to the bottom. To be able to think clearly and to hear your inner voice distinct from others but it just feels weird at first. It takes some getting used to.
My heart goes out to anyone who has lost a child or a spouse. May of my clients have gone through the death of a longtime mate and they talk to me about it. I empathetically tell them that time heals all only for them to tell me that it doesn’t. I feel like we help people move on. We assist with closure when a loved one passes away through handling their probate estates. We do that for many people. However, I know they will have to go through the journey alone and adjust to that life and that must be so hard. My eyes tear up thinking about it. I know I would be lost without Stef and the kids if one of them were really gone. I can’t imagine.
I like Bill Gate’s idea of a week alone for clarity, thought and planning. I may incorporate this into my year going forward. However, I don’t like to think about the day I might be without my wife. I just hope she is always there and I like to pretend that’s the way it will be. I also couples plan for the future by mapping out their estate plan in case one of them isn’t there anymore. I don’t like to think about that so I know my clients don’t either. However, like Gates, our lives will run better if we do take that time to plan. I hope that I can help them sit down and think about each other and their lives and develop their plans for those days we don’t like to think about.
So, I am going to try to put a plan together for today… maybe a workout, some planning, some work and some television. It’s back to work as usual on Monday and I plan to be well rested by then. If I can help with your plan give me a call at 704-749-9244 or online at mcelderlaw.com.
Long-term care is incredibly expensive. The average cost of long-term care ranges from $7,000 to $10,000 a month. Considering the average stay in a long-term care facility can be years, you’re looking at paying out hundreds of thousands of dollars if you need long-term care, which you most likely will. On average, 70% of individuals over age 65 will need some type of long-term care. And this number is slowly creeping up. As medical technology gets better, people live longer. However, the quality of life doesn’t necessarily increase. This means that more and more people live longer and require assistance in the form of long-term care.
Okay, you get that it’s expensive and that you’ll mostly likely need it, so how do you pay for it? Well, you have a few options: you could pay out of pocket. However, given the crazy cost, you couldn’t maintain that for long. Besides, that’s how you end up losing your hard-earned money and property. You could utilize a long-term care insurance policy. However, these policies are difficult to get, they can be expensive, and they are meant to supplement, not cover, long-term care (not that you shouldn’t look into getting long-term care insurance). Lastly, you can utilize the pot of money that you have been chipping into ever since you started working, Medicaid.
Medicaid is a lot like Social Security (SS). You pay into the system with every paycheck just like you do with SS. Except, with Medicaid, you have to apply and qualify. Most people tend to think that you cannot own anything if you want to qualify for Medicaid. That’s not true. In fact, you can own quite a bit of assets and still have your cost of long-term care covered. The key is to set a plan in place to 1) get Medicaid qualified while keeping your assets; and 2) protecting the assets you keep.
To get Medicaid qualified, you must think about preserving the value of what you own. There are assets that Medicaid considers exempt and other assets are considered non-exempt. Thus, an effective plan for preservation and qualification involves turning non-exempt assets into exempt assets—thereby preserving the value but removing those assets from the list of assets that Medicaid holds against you.
To protect your assets, you must set them up in such a way that they avoid probate. Probate is the process of transferring assets from an individual who’s passed away to their heirs at law. Probate is a default process that can be avoided by very useful estate planning tools. The reason why. You’d want to avoid probate is because 1) it is a long, expensive, and complicated process; and 2) probate is the opportunity for creditors—including Medicaid—to come after your assets after you pass away. If you avoid probate in the correct way, you avoid the creditors/Medicaid from coming in and taking everything you saved before it can pass to your loved ones.
Medicaid is a great option to pay for long-term care. With the correct plan, you can get your long-term. Care paid for and preserve your assets. If. You have a question about Medicaid or asset protection, give the experienced attorneys at McIntyre Elder Law a call at (704) 259-7040 or visit our website at www.mcelderlaw.com.
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I want to talk to you today about a problem many of my clients are facing. They want to protect their assets, including retirement funds, in a trust like an irrevocable or convertible trust. Many Americans have much of their savings tied up in traditional Individual Retirement Accounts (IRAs) or 401ks painting an asset picture that is “Qualified Fund Heavy”. That means their funds are locked in tax qualified funds like traditional IRAs or 401ks. These retirement savings products seem like a great idea at first. They allow you to set aside money each paycheck, pre-income tax, and allows that money to grow. You are not taxed on the gains or in other words, there are no capital gains taxes on the growth of the investments inside of the IRA package. However, you are penalized 10% for any withdrawals you make prior to age 59 and you must start taking distributions from the IRA at the age of 72. The distributions from your qualified retirement assets can provide much needed income well into your retirement. However, these types of assets (401ks and IRAs) cannot be legally protected with estate planning tools like trusts. Simply put, your traditional IRA or 401k cannot be moved into a trust to be protected; not in their current form, at least. To be placed into a trust they would need to be liquidated first… Why use a trust to protect assets like retirement funds?
Okay, we’re here for the elder law report, and we’re talking about IRA to trust conversion. This is part of our Attorney Advisor Series. I wrote a blog piece on this that you can find on our site, MCElderLaw.com/Blog. IRA to trust conversion. Or you can just watch this video. The reason I wanted to talk about IRA trust conversion is people come in all the time and talk about IRAs, and talk about retirement assets, and other assets. And they want to put those IRAs, 401ks, qualified assets into trust. Andy you can’t. Qualified assets don’t go into trust. So to start, what are qualified assets Brent?
Yeah, a qualified asset is just another term for an account that has money in it, and that money has not been taxed yet. So a very common form of a qualified asset is a traditional IRA. Where if you pull the money out, you have to pay tax on it.
What kind of tax?
What kind of taxes, income tax on the money. Because you didn’t pay income tax on the money in the first place when you put that money in there. You have required minimum distributions from these types of accounts at some point, because at some point they want you to pay the tax on this money, because you got the benefit of growing it, tax-free, which is really a mistake. I hear that a lot. “This is an IRA, you get to grow it tax-free.” I’m like, “No, that’s a lie.” Because you put the money in there, you don’t have to pay the tax at that time, but you will, or your loved one will have to pay that tax at some point.
What happens with income tax, your gains are tax-free, so you don’t have to pay capital gains tax on all the gains. And I guess the trade off is, you get to put a larger pre-taxed chunk in, so you get better growth.
Yeah. And that’s one of the main driving factors for a lot of people when they have a traditional or qualified account. Either they want to make sure that they can grow that money, because it has compounding interest. So you want to grow a bigger principal amount. So it’s good to put pre-tax dollars in there, because that’s more money. So when you have the interest rate that is applied to that money, it’s going to grow at a higher rate. But the other thing is, if it’s sponsored by an employer, and they kick in a certain amount, obviously that’s a thing to have as well. So those are some of the driving factors behind why some will do it. And obviously, it’s good to have tax-free growth, meaning that the gains aren’t taxed, but there’s other ways other than a traditional IRA, that you can have tax-free growth. For example, you could have a Roth IRA that’s after tax non-qualified funds, or certain insurance policies, for example, can do that.
That being said, it can be a good tool. There’s no lie that it can be a good tool to have a qualified account to grow that money. However, you can really run into some problems in the future that a lot of people don’t know about.
Agreed. And we see many, many Americans today, many clients today that are IRA pre-tax qualified fund heavy.
Oh, real heavy. Yeah.
And they want to know, maybe they don’t have long-term care insurance, and estate planning, and especially elder law, which is just a subset of estate planning. We really keep our eye on the fact that 70% of people over the age of 65 are going to need some type of long-term care, either in-home assisted living, or nursing home care. And that costs a lot. It could cost, everything you’ve saved in that IRA. It could cost everything that you have, just in you, and then maybe you and your spouse to long-term care or to provide for long-term care, whether that be in-home, assisted living or nursing home care. If you don’t have long-term care insurance, and the reason a lot of people don’t have long-term care insurance is I think several reasons. One, they put it off, because it’s not an emergency today, and why pay for something today that’s not an emergency? I’ve got other emergencies that I need to pay for today, or other things that are calling for my dollars today.
Another is a lack of planning, or foresight of what might come, and a lack of a sense of urgency. We as human beings are primarily motivated by fear and pain, and what’s urgent right now. That’s just the truth. And because of that failure to have that in place, we get hurt on the back end sometimes. So a lot of times we see people who want to use trusts. So Brenton, irrevocable trusts are a place where assets can be protected, correct?
We’ve defined the IRA. We’re going to talk about a protective tool, a couple of types of protective tools that can protect assets as you age against a long-term care spend down. And we’re going to talk about how you might be able to achieve the best of both worlds, which is protecting that money that you have in the IRA. So that’s where we’re going. We’re going three steps to get there. So what are the tools Brenton that we can use to protect our hard-earned money and property, our house, our money? As an attorney, what can you offer me to help?
Right. So a lot of people don’t know this, but your IRA is not protected or exempt from being counted as an asset for Medicaid purposes. Most states give you protection as far as if you get sued, you can have exemptions on your IRA, but not for when you need long-term care. And when we talk about protection, we mean both needing to pay for long-term care, you don’t want to have to use that IRA to pay for long-term care. You want to be able to preserve that for yourself, your family, and your loved ones. And the other thing is, you want to be able to, if you do get long-term care paid for by a benefit like Medicaid, you don’t want them to be able to come back and go after those assets.
So the best way to do that, the best tool to use to do that to just straight up protect everything is an irrevocable trust. It’s very important that you understand that it’s an irrevocable trust, and not a revocable trust. Because while revocable trusts can be amazing tools and have a lot of benefits, what we’re talking about is exempting those assets from counting against you for Medicaid purposes so you can qualify for Medicaid.
Why does the government, why does Medicaid count a revocable trust, things that I put into revocable trust, I mean, I see people all the time, “Hey, I’ve got a trust. I’m good. I’ve got a revocable living trust.” Why are they not good?
That falls to the importance of the difference between the two. So let’s define the two. So a revocable trust is a trust where you, the person who creates it, the grantor, you have power of that trust in a number of ways. Typically, it’s because you’re also the trustee over that trust. But the big point is that as the grantor, the person who created the trust, you may not be the trustee of the trust, the person who can control the trust, but you still have the power to revoke the trust, which is a huge power, if you think about it, you have the power to kill that trust. And essentially all those assets that are in there, that are in the trust, and ostensibly not in your name, you could change that in a heartbeat by revoking that trust.
So it’s not like you ever put those assets into different hands. An irrevocable trust is like its own entity in of itself. It’s like a whole different person, that you hand those assets over to, to take them out of your name so they no longer count against you as an asset. But it’s very important as well that you understand that you’re not giving away the assets at the same time, because there’s protections built in there. And that really is emblematic of the name of this tool, a trust.
So if I set up an irrevocable trust, I have a third-party trustee, I’m not the trustee. So somebody else is really in control of those assets in the trust, right?
However, I can still live off the interest and dividends off of the income generated in that trust from investments, things like that, right?
Right. And I kind of want to back up a little bit, because when we say that the trustee, the third-party trustee, the person who administered the trust is in control of those assets, they are, but then again, they also have a duty to the trust-
Within the legal construct of the trust.
That’s right. The way I like to explain it is, an irrevocable trust is scary for a lot of people because it sounds so definitive. It’s set in stone. But you get to set the rules of the game. And once the game starts, you don’t get to change it. But you get to set the rules of the game. And that’s a big deal. And so once you set those rules, your trustee has to follow those. And they have to act in the best interest of the beneficiaries of the trust, which you, as the person who created it will be a beneficiary of that trust. So they have that fiduciary duty.
Right. So they have a legal fiduciary duty to act in your best interest with those funds…
Okay. And so now we get to the bridge. So we’re going to marry these two things together. How do I take an IRA, which doesn’t fit into trust, which is pre-taxed funds. I haven’t paid income tax on it. In order to put any of those funds in the trust, I’ve got to cash out the IRA, and I’ve got a big tax hit that year that I cash out the IRA.
Yeah. So this is another sticking point that we run into with irrevocable trusts and this type of planning. The first one is the trust being irrevocable, people feeling like they’re giving up some sort of power. The next thing we usually have to get over is the concept of being taxed on this money. Now, a lot of the reason why this is a sticking point is because we think of IRAs the wrong way. If I have $100,000 in a traditional IRA, I don’t really have $100,000. I know that because I know how IRAs work, but if you have an IRA, and you check it every day and you see $100,000 in there-
You have $100,000 minus the income tax you’re going to pay.
That’s right. Built into that $100,000 is latent tax that has not been paid out yet. So you’re only going to be able to pull out $85,000 out of that account, the rest is going to go to taxes. It may be even more. And it’s important to know that when you look at your IRA, not to see the number on the balance, and think that that is your actual, the money that you could pull out.
Before we jump to that, I wanted to hit one more thing on the way, on the bridge to getting the IRA into the trust. And this is something as a client, I’m still stuck with the irrevocable trust, and I can’t control it. Is there something that’s the best of both worlds? I’ve heard about a trigger trust or a convertible trust.
That’s right, yeah.
[inaudible 00:13:17] Will that work in this case?
You can have the best of both worlds, especially if you really preplan. This is really good for people who have a sense of urgency, but not necessarily because they have an imminent need for some type of long-term care.
Sure. I know I’m going to know that down the road maybe, but right now, I still want to control it. Income taxes right now are historically low. The amount of tax I might have to pay. They’re historically low right now.
That’s right. And, you probably don’t want to pull all of that IRA money out in one year.
No, no, yeah. So let’s make a plan. So tell me about the convertible trust. With a convertible trust, is it the same as an irrevocable trust, is that the same as a revocable trust? What’s it do?
It’s the best of both worlds. It’s a really awesome tool, and I’m very happy that we have this tool, and we’re able to provide this type of service for our clients, because it is really the best of both worlds, because we married the two. The revivable trust that gives you the comfort of having total power over those assets. And it’s already in this protective shell. And I like the analogy that you came up with, Greg. It’s like putting everything in a safe, but leaving that door cracked. Because when everything is in that revocable trust, all you got to do to protect it is shut the door. And it becomes irrevocable, and therefore protected.
How would I convert that? Let’s say I hire McIntyre Elder Law to create a convertible trust for me and my family. And then you and I create say a five year plan where I’m going to remove money out of my IRA over five years to minimize my tax burden each year on what I have to pay taxes off of that come out. And I’m going to start putting that in an account inside, because I can set up an unlimited amount of accounts. I can set up investment accounts inside of a trust. Just can’t be an IRA, a traditional IRA or 401k. My investment guy, gal, they could still invest those funds?
Yeah. They can still handle them.
So over five years, we’re going to convert a fifth each year. I’m going to move that into the account. I’m going to minimize my tax burden because I’m going to take control, because I’m going to say today, taxes are historically low, and I’m going to take advantage of that. Are taxes is going to go up.
Oh, yes. The only constant in life has changed, but the other one is that taxes will rise. You know what I mean? That’s a thing that anyone who’s done even a little bit of tax law knows is you want to assume that taxes will go up, especially when they’re at historically low rates, as they are.
Why do you we think taxes will go up based on current events?
Well, one of the things is with the TCJA, the Tax Cuts and Jobs Act, that was enacted in 2017, 2018. That bill expires, the whole thing just goes away. It lowered tax rates, significantly. It simplified, quote, unquote, the tax code in a lot of ways by just slashing rates for corporations. It raised the estate tax threshold. So you won’t have to pay estate taxes for seven years. And there’s other things that it did, but the point is, it goes away. All of that expires. So we know that taxes are going to rise after that goes away. But the thing is, is that-
[crosstalk 00:17:32] The places borrowing a lot of money, and giving away a lot of money here lately, too, I mean, we’ve been in the middle of a pandemic, trillions of dollars in bailout money given to airlines and other industries.
And when going gets tough too, I mean, they can lower that required minimum distribution age as well. That’s been thrown around, different ways of tax IRAs and 401k’s have been thrown around when it gets tough as well.
The government has control of what your IRA is actually worth. You don’t right now, unless you take advantage of tax rates that are low. The government can raise the income tax, thereby lowering the value of your IRA.
They can also lower the age of required minimum distributions to force you to take it earlier.
They have already in the Secure Act that was passed, forced your non-spouse beneficiaries, so your children, to take it within 10 years. Whereas prior to last year, they could have taken it over their lifetime. Now this year, they have to take it within a 10 year period. So it forces higher tax payments to get to get that money out and those taxes paid.
Yeah. They’re working too, the difference is for a lot of people at the tax rate they’re going to experience when they have to have and pull out required minimum distributions, they’re going to be retired and living off social security for the most part, they’re not going to be working and having a higher income like their children will when they have to take that money out. And also over a shortened period, that 10 year period.
What you’re saying is, by not taking my IRA during my life, I’m really passing that tax burden down to my children.
Right. A tax burden too. I mean, that’s an important term for it, because while it is a tax burden for you, it’s going to be more of a burden for them.
And it’s more of a burden for my children as well, because they have to take that distribution within a 10 year period. I don’t.
That’s right. And at a higher tax rate.
Okay. So I get it, so I can set up a plan over five to 10 years to move my IRAs into an account in an irrevocable trust, or maybe this convertible trust. So the convertible trust, do I have control of it when I set things into a convertible trust?
Yeah. So initially you have total control over the trust, but we built in triggers, okay? In this trust. So the trigger could be, you get diagnosed with some type of debilitating disease. Maybe you’re diagnosed with dementia. You have imminent placement in a long-term care facility. You become incapacitated for an indefinite amount of time. Something like that would automatically cause the trust, you wouldn’t have to do anything, it would automatically cause the trust to convert into irrevocable. And at that time, you need care, and you need to have the assets protected at the same time. So it’s very important to understand that when you’re quote unquote losing control, which you’re not, because we talked about that, but let’s just use that for now. You’re losing a measure of control, but it’s when you need that person to come in and start helping you, that’s when you need it the most.
Absolutely. Absolutely. So I could set up a plan with McIntyre Elder Law that helps me move my assets into the trust, lets me keep control of the assets, but is irrevocable and protects that money in that retirement when I need it.
Absolutely. That is absolutely correct. And what we’re trying to do here, is we’re trying to preplan, we’re trying to get you in while the gettin’s good, so that we can make this a long-term plan for you. So you’re not penalized in your old age, or in your retirement for working hard, and contributing to an account that everybody told you your whole life is a good thing to contribute to, and saving.
But what if your financial planner says, “Oh man, but moving this money over, you’re going to have to pay tax on it now.” And what if they’re scared that they’re going to lose management of this IRA?
What I’d say to that is, we’ve talked about the taxes. The tax thing is, someone, at some point, is going to have to pay the tax on that anyway. That’s my response to that. And the other thing is, I mean, that financial planner shouldn’t sweat because that account you move it into, that the trust holds, they can manage that account.
And that’s motivation for the financial planner to really grow that other account tax-free.
Yeah. That financial planner needs to get on board with your plan, so that you can protect your assets, the legal side. Because if I’m a financial planner, I’m just trying to grow, grow, grow your assets, which is a good thing. You need to grow your assets as much as possible. But at a certain point, you need to look at protecting those assets, because it doesn’t matter how much you grew them, that risk that’s out there, that you or your spouse, or both could need some type of long-term care is so big that you have to switch your mindset to protection and growth, instead of just reckless growth with no protection. It’s so important that we’ve literally created a new type of trust to help our clients start planning very early to do this sort of thing.
Absolutely. So I think that that was an excellent breakdown of one, what tax qualified assets are, two, the vehicles that you could move those into over a period of time to minimize your tax exposure, such as an irrevocable trust, maybe a Medicaid asset protection trust, or a convertible trust, which gives you the control now. And then later it goes irrevocable, either when you choose to make it irrevocable, or because you become incompetent or incapacitated to protect those assets, and then maybe… yeah. I think that’s a great breakdown..
Yeah. And I’d say that the convertible trust, the type of client that fits into really well is someone who’s about to retire, or has just retired, right around that age. Or maybe even contemplating retirement in the next, I mean, can’t start really too early with the convertible trust, to be honest with you. A convertible trust is a very useful tool at all stages of life. But once you start to get to beyond retirement age, 70s, mid-70s, things like that, we’re going to be looking at a convertible trust as a possibility, but we’re going to look at a lot of things as far as preexisting conditions, possible health issues, things like that. Because we want to consider that. And it might be that a pure irrevocable trust would be what we advise at that time. It depends on who you are, but both of those tools will be there for you.
So every plan is individualized. And if I come to McIntyre Elder Law, will you help me pick the plan that’s right for me?
Absolutely. We’re going to consider everything. So we’re going to look at your assets. We’re going to look at your goals. Your goals, we don’t want to forget what you want to do with your money, your property. We want to protect it, but we also want to make sure that whatever it is, whatever legacy that you’re building, we can fulfill that. And we’re going to look at your family, who your beneficiaries are, who your trustees are, all of that, to give you a individualized, personalized, customized plan to protect your assets, and hard-earned money and property.
Well, thank you very much, Mr. Begley, for helping me with this elder law report today. I know you work hard for your clients. I know I do as well. I’m signing off. This is Greg McIntyre with McEntyre Elder Law, Brenton Begley with McIntyre Elder Law. We’re both estate planning and elder law attorneys. And we’d love to help you. If you would like to sit down with us and talk about your estate plan, and asset protection plan, give us a call. (704) 749-9244. Or go online and book a free consult with us at MCElder Law.com/BookFreeConsult. MCElderLaw.com/BookFreeConsult, and stay tuned every week for our Elder Law Reports series, or visit our special Attorney Advisor series, which I think are next level topics that are going to just give you even more information and education on how to protect your hard-earned money and property. See you next week.
(The Plan for Peace and Protection Challenge. The Triple P Challenge for short.)
My wife and I recently bought a building in a local small town. The downstairs has 4 commercial tenants and the upstairs has a wide open space of 5000 sq. ft. I am excited! We are planning to develop apartments in that space and also upgrade the exterior of the building with new awnings, doors and a sign branding the building. What does this have to do with our estate plan? EVERYTHING!!! I am constantly creating. I love it. A book is a work of art but so is this building. It is our canvas. I want it to reflect my vision. I want it to be an amazing, attractive place to shop and live. Really, I just want to complete and realize my vision. After this building is completed I’ll move on to something else; another project to complete.I am constantly building my family’s legacy. We all are in one way or another. Either we get busy creating or we stay stagnant. Perhaps your creation is saving for your IRA or 401k. Maybe you are protecting your nest egg already in retirement. Or… are you? Have you taken the time to pause? Taken the time to reflect?
We are all so busy in our everyday lives that sometimes the toughest thing to do and thing we often forget or put off is to stop and smell the roses… to stop and reflect. I often work with a business coach. During one of our meetings my coach asked me to go back and document all the creative things I have done in my career. Books written, buildings remodeled, murals commissioned/painted, websites designed, articles written, videos shot and edited and seminars performed… This is a fraction of those things and it makes my belly full, so to speak, to think about those things and reflect on them. But… then I start thinking about the important creations and I feel ashamed for rebelling in the glory of those other earthly, superficial creations. What about my great marriage, my beautiful wife, my 6 amazing and healthy children, my great friendships, my parents, and my health? Those are the most important. All these relationships I have had to work hard to create. There have been great times and really tough times, mostly of my own making. Maybe we can all relate to that. I am truly proud of my creations but mostly of my relationships and family. To that end I want to protect them. I want to shelter them and take care of them. How do I do that if I never stop and reflect? How do I know how to take care of my family and of my possessions if I don’t pause and smell those roses, take inventory and really put some thought into planning.
What if I’m not here anymore?
What if I die? What if I am sick, incapacitated? Have I planned to take care of my family? Have I taken care of those I love the most? Most of us say no to this. Most of us are too busy. I was too busy for years helping everyone else plan and saving them millions of dollars to set up my own protection plan until my wife sat me down and had a frank discussion.
“Greg, the cobbler has no shoes. You have got to put some time and resources towards creating our plan and protecting our family.” Stef said.
…and she was right! So we did. We sat down and created our plan. It was a great experience. We talked about our lives, past, present and future. We talked about our goals and plan. Then we sat down and signed our plan.
How many of you have done this? How many of you have taken the time to talk to your family about your lives, your stuff, your plans? No plan is not a plan. The reason I use a business coach is because I know that some time spent reflecting and planning can lay plans for exponential growth. Stepping back from the grind and letting the dust settle while I work with a professional on my plan.
The Plan for Peace and Protection Challenge. The Triple P Challenge for short.
Today I am issuing a challenge. I am issuing a challenge to you right now. STOP, pause and take inventory. Talk to your loved ones about your plans. Ask them about their plans. Then call our office to sit down with a professional to get your plan in motion, your affairs in order and protect all that hard work. Protect those most precious to you and walk away with the peace that comes from having stopped, smelled the roses and admired them for awhile. Hang out there while a professional at McIntyre Elder Law guides you in creating a customized estate plan just for you. You deserve it. Your family deserves it. Call us today at 704-749-9244 to setup your FREE consultation with one of our planning attorneys or schedule yourself online at: mcelderlaw.com/bookfreeconsult.
That title is a bit of a misstatement. The death tax (aka estate tax) hasn’t gone anywhere; it just doesn’t affect you. Unfortunately, that’s probably going to change soon. Let’s explore what we could be facing in the future.
What is the Death Tax?
The “death tax” is a pejorative nickname for the estate, gift and generation skipping transfer tax. Basically, it’s the tax that is collected from someone’s estate when they die. The tax is calculated based on the value of the decedent’s estate and can include just about any asset they own upon death. If you think about all the assets someone can accumulate in a lifetime, it’s not hard to envision a hefty tax bill at the end of life.
While this type of tax may be a great method of redistribution of wealth. It can also be a huge burden on the family of a decedent. Thus, many preplanners actively work to set up their estate plan to avoid the death tax.
Why Does it Matter?
For the last decade or so, the death tax has not been much of a factor for most individuals. This is because it has not applied to most Americans for a number of years. Since 2011, the death tax has only applied to estates that gave over five million dollars’ worth of assets—those below are exempt. However, in 2018, that amount changed to over eleven million dollars, an amount that many Americans don’t even come close to. Built into that 2018 change in the law is a time limit. In the Tax Cuts and Jobs Act (TCJA), Congress compromised to allow the death tax exemption to be as high as it is today with the caveat that it automatically revert back down to five million in 2025.
But here’s the thing, just because it’s going back down to five million, doesn’t mean it won’t go lower. In fact, hitting the sunset date in 2025 means that the death tax exemption is on the chopping block. Given the recent economic turmoil and previous debates surrounding the TCJA, the death tax exemption could be lowered significantly. There is a possibility that the death tax could apply to estates valued in the hundreds of thousands (like it did in the early 2000s). Considering that the death tax takes into account the value of all of your asserts at death, many Americans may be affected by this tax that can range from 40% to 50% of a person’s estate.
Luckily, there are ways that you can plan ahead now to avoid the future depletion of your family’s inheritance. If you want to learn how to plan ahead to avoid taxes or protect assets, give the experienced attorneys at McIntyre Elder Law a call at (704) -259-7040 or visit our website at www.mcelerlaw.com.
You may have thought about estate planning for your future of your family, but haven’t done anything about it yet. Well, Greg McIntyre with McIntyre Elder Law, he is an estate planning attorney and he’s here to help. And Greg, thank you for being on the show. And Greg, let’s start right here. Why doesn’t everyone have an estate plan?
Lots of reasons. Maybe procrastination, maybe a global pandemic just hit and it hasn’t been top of mind. But it should be. And people get into tough situations where they haven’t done proper estate planning and it can really jeopardize everything they’ve worked so hard for. So I went through, Eugene, and I listed pros and cons. Pros on the left side, cons on the right side, just going through that thought process of why someone might not want to go get an estate plan done and maybe why they should. And I’d love to go through that thought process with our viewers today.
Well Greg, let’s go through this thought process of pros and cons. Take it away.
Sure. So, under the pro section we have, have a plan. What’s the advantage of having a planet? Well, when I have a plan, I simply have to work the plan. I know that I had that in place and I’m just working through that plan. I’ve already thought it through. To have a plan, I’ve got to think about the plan and that’s the opposite of the con on the other side, which is really dealing with uncertainty. I’m uncertain. I’m not sure what’s coming. I’m just as ship being battered around by the waves. Whatever may come. Which one would you rather be? I would rather have a plan and that’s what we help people do. We help people do what the next pro is, which is take control, Eugene. It’s the opposite of really being a victim. You take control, you manage what you can, and you say, “I’ve worked hard for my money and property. Let’s get with a professional, let’s develop that plan. Let’s be proactive and take control of our future.”
Otherwise we’re really, as the con says on the other side, at the mercy of government statutes that are in place that already are set up to pass our money and property or to whomever the government has deemed necessary. Taxes. So we’re at the mercy of a state taxes, gift taxes, without any thought of how that works. We’re really just at the mercy of circumstance and those around us that are going to make those decisions for us. I don’t know about you Eugene, but I would rather be in control. I would rather think about it and take control. I’ve worked hard for my money and property and I’d rather take control on it and have that reflect my wishes to my charities, to my children, to the things that I want to help and help myself during my life.
And then we want to protect property that we’ve worked so hard for from liens, protect assets from liens that’s our next pro. Estate planning can certainly help that. But I might have a fear on the con on the other side of talking to an attorney, Eugene. I think many people have to get worked up to go see the attorney or maybe they have a misconception or a bad taste in their mouth, experience they’ve had with an attorney. Well, I would say that at our office, we try to make it as easy and smooth as possible. And we really believe in the utmost customer service and care when dealing with our clients and helping them develop an estate plan. Because we want them to get that next pro, Eugene, peace of mind.
The peace of mind that comes from the fact that we knew we should have done our estate planning for years. We don’t have a will in place even. And from finally finishing that will, that thought process, exhaling, we’ve got it done. So that peace of mind going forward. And we know that we can avoid probate where liens attach if we really think about it and that lengthy and more costly process, Eugene. But we might be scared of the cost or the cost might be a deterrent. I can tell you that we have payment plans. We have flexible plans. We work with people. There’s rarely someone we can’t help you, Eugene. So we try to make it as easy as possible.
You guys do make it easy as possible, but you also have a new magazine that you want to talk about. Tell me about the magazine and where can people get it?
This is the new 2020 edition of the Elder Law Report, print edition. We also have a digital edition. We’re making that available for our viewers today at mcelderlaw.com. It’s a great magazine that talks about estate planning. Boils about everything down into a magazine. Really nice, great pictures. Great, great content. So please, mcelderlaw.com/magazine.
And what else are you guys offering, to?
Free consult. So if you go to mcelderlaw.com/magazine, it’s our civic duty right now during this time that we’re giving free legal advice and consults. We’ll sign you up for that when you go to that link.
So don’t forget the website is mcelderlaw.com. The magazine that you can get it at mcelderlaw.com/magazine. Also, the telephone number is (704) 749-9244, (704) 749-9244. And Greg, thank you very, very much, sir.
Probably the largest concern that arises when someone wants to sell property is the possible tax implications of such sale. Luckily, the tax code is set up in such way that incentivizes property ownership and transfer. This means that there are procedures by which tax can be avoided that have been built into the tax code. We will explore some of those procedures, but first we will lay some foundation.
Types of Tax
There are many types of tax (e.g. excise tax, estate tax, etc.). The type of tax you’re likely most familiar with is income tax. The tax that this article is most concerned about is capital gains tax. Similar to income tax, the amount of capital gains tax you may incur is based on the amount of gross income you earn each year. Such rates can be found at IRS.gov, specifically look at Tax Topic No. 409 Capital Gains and Losses.
Capital Gains Tax
So, what is capital gains tax? Capital gains tax (or cap gains for short) is the tax you incur as a result of selling a capital asset. A capital asset is most anything you own: your house, your car, your toothbrush. The best way to think about capital assets is that everything you own is a capital asset—unless it isn’t. An example of things that aren’t capital assets are patents or copyrights, accounts receivable, and inventory held in a trade or business. Refer to 26 U.S. Code § 1221 for the exact definition.
Calculating Capital Gains Tax
To calculate the amount of capital gains tax you owe on the sale of a capital asset, you must first determine your basis and your gain.
The best way to think of basis is that it’s the baseline value you’ve invested in the asset. There are many ways to establish basis; however, we will discuss the most intuitive method: cost basis. Cost basis is equal to what you pay for an asset. So, if you buy a car for $25,000, your basis in that car is $25,000. Cost basis can increase with further investment. Let’s say you decided to put some after-market parts on the car worth $5,000, your basis in the car is now $30,000.
Your gain, if any, occurs when the asset is sold. The gain is equal to the difference in the basis and the sales price. For example, if I pay $25,000 for a car, my basis is $25,000. If I then sell that car for $30,000, I have a gain of $5,000 ($30,000 – $25,000 = $5,000). In much the same way, if you sell the car for less than your basis, you have a loss equal to the difference in your basis and the sales price.
After you’ve found your gain, you will then apply the applicable capital gains rate to your gain. For example, let’s say your gain is $5,000 and, based on your annual gross income, your rate is 15%, your capital gains tax will be $750 ($5,000 x 15%).
Avoiding Capital Gains Tax
Procedure 1: Sale of Personal Residence IRC §121
The largest capital asset for most of is our home. Real estate tends to appreciate in value, which is a good thing if you own a home. However, when you go to sell that home, you don’t want the appreciation in your home’s value to lead to a giant tax bill. Thankfully, there is a provision in the tax code that allows you to exclude a certain amount of gain from the sale of a personal residence (see IRS Publication 523).
Per section 121 of the Internal Revenue Code, you can exclude up to $250,000 worth of gain from the sale of a personal residence if you’re a single individual and $500,000 if you’re a couple. To qualify for this exclusion, you must have owned and resided at the property for 2 out of the last 5 years leading up to the sale.
Procedure 2: Like-Kind Exchange IRC §1031
In the past, section 1031 applied to many types of assets. Since 2017, and the adoption of the Tax Cuts and Jobs Act, a like-kind exchange can only be done with real property. A like-kind exchange (or 1031 exchange) is essentially a way to defer taxation on the sale of a piece of real property.
Let’s say that you own a rental home that you purchased for $100,000 in the year 2000. Over the last 20 years, the property has appreciated to $250,000. The rent from the property is not what you want, so you decide to sell the property and trade up. However, it’s an investment property, so you can’t use the personal residence exclusion mentioned above. If you sold the property, you’re looking at a $150,000 gain. If your capital gains rate is 20%, your tax would be $30,000. You definitely don’t want that.
You can avoid this tax altogether by rolling the gain into another piece of real property. When you roll the gain into the new property, you won’t have to pay the tax on your gain until the sale of the new property—unless of course you use another like-kind exchange.
A like-kind exchange can be done in an unlimited amount and frequency. Although, just like any good tax planning tool, it has its rules. The rules boil down to this: you must identify the new piece of real estate into which you’re planning on rolling the gain within 45 days of the sale of your property. This designation must be done in writing. Then, you must close on that new property within 180 days of the sale of your old property. Note, you can also back into a like-kind exchange if you’ve already sold property and purchased new property.
Don’t let the fear of taxes keep you from investing in real estate or selling your real property. Real property is too good of an asset to be deterred by taxes. After all, it’s the one thing they’re not making more of.
If you have question about tax planning or planning in general, give the experienced attorneys at McIntyre Elder Law a call at (704) 259-7040.
There’s nothing more certain than death and taxes, or so it’s been said. And, while there’s nothing I can do about the former, I’d like to talk to you about how to best avoid the burden of taxes in retirement.
Let’s first discuss what I mean by “tax-free retirement”. A tax-free retirement means planning with the goal of tax avoidance but most importantly planning with the goal of getting taxes behind you. A retirement free of the dark looming cloud of potential tax, is a free retirement.
A tax-free retirement is not a retirement that is totally devoid of tax. Rather, a tax-free retirement means that your retired years will not be spent restricted in an attempt to avoid tax that has been deferred over the years, but still needs to be paid. Tax avoidance should mean avoiding taxation period, not deferring taxation and trying to avoid it in the future. Pure tax avoidance is rare. And, while pure tax avoidance should also be a goal, we are going to look at avoiding the restriction of future or delayed taxation.
For example, if you put money in a traditional IRA, you won’t have to pay tax now, but you will have to pay tax later. “Later” is when you retire and start pulling that money out. And, while it feels nice to pay zero tax in the present, all you’re doing is burdening your future self and restricting your ability to plan or protect assets in retirement.
There are a few amazing tools that you can utilize to ensure that you can save for retirement and avoid the restriction of future taxation. Below are three of those tools:
a. Roth Retirement Accounts
Unlike a traditional retirement account, Roth retirement accounts are accounts where you invest money that has already been taxed rather than pre-taxed money. The result is that you invest a lower amount (because the tax has been taken out) but the money that sits in the account is tax free. Because of the after-tax nature of the account, there are many fewer restriction on a Roth as opposed to a traditional account that I will list below.
You will not be penalized for early withdrawal of funds from a Roth account.
There are no required minimum distributions with a Roth account.
You are not subject to the whims of Congress’s treatment of traditional retirement accounts i.e. Congress can accelerate the tax on traditional accounts. This is something that is discussed every time the US heads for a recession.
Lastly, you can more plan, spend, and protect your money without the restriction of future tax.
Even if you have already started a traditional account, you can slowly roll-over the funds into a Roth account, spreading out and minimizing the tax burden. This will consequently also lead to the elimination of the restriction of future taxation.
Much like a Roth account, you can use insurance as a tax-free investment. The money in the investment grows tax-free and you similarly will not be faced with a huge tax bill if and when you want to pull the money out. Insurance policies geared for retirement are especially useful for those high-earners who may be disqualified from using a Roth account because of their income.
Another “future tax” you may want to consider is inheritance tax. Currently, the federal inheritance tax is not a factor for most Americans. That’s because an individual’s estate must give over eleven million one hundred eighty thousand dollars ($11.18M) before it will be subject to inheritance tax. However, this amount is subject to change. The current threshold will automatically revert to the previous amount, a little over five million ($5.56M), in 2025. And it can go lower from there. The federal estate tax or “death tax” has been applicable to estates with a total worth of as little as six hundred thousand dollars ($600,000).
Trusts can be a great tool to help individuals to avoid burdening their heirs with a hefty tax bill. Certain trusts may be use at not only avoiding the estate tax but also protection of assets and qualification of benefits to pay for long-term care.
Tax avoidance means not burdening yourself with future taxes. The time that you will need the most flexibility and when your assets face the most risk is after you retire. Don’t restrict yourself with the straight jacket that is delayed taxation. Get taxes behind you.
Getting Taxes Behind You
Damocles was an admirer of his King Dionysius. He pandered to his King, complimenting him on his great status and wealth. In his gratification, it was clear to Dionysius that Damocles was jealous of the King, so Dionysius decided to offer an opportunity to Damocles. Damocles would take the King’s place, his status, his power, and his riches. The only stipulation was that the position would also come with the danger of being King. To demonstrate the precarious position of monarch, Dionysius suspended a sword over the head of Damocles, being held by the hilt by only a single strand of horse hair. This way, Damocles could feel the true nature of the power and wealth of the ruler, knowing that at any time the sword would inevitably fall upon him.
The “Sword of Damocles” is not only a “heavy is the crown” type analogy. It is also emblematic of the manner in which government sponsored retirement accounts work.
IRAs are almost too good to be true—almost being the key term there. They have a lot of benefits that are touted by probably every financial planner ever. The reason why is that they seem like a no-brainer. The funds you put into a traditional IRA are pre-taxed and grow tax free. That’s right, you don’t have to pay the tax on the money when it goes in and when it grows. But just like the wealth and power of kingship, the traditional IRA has its own looming danger.
When you’re young and working hard toward a retirement there’s nothing better than seeing than number in the account grow, regardless of its taxable nature. However, when you’re at retirement age, the number you see no longer simply represents years of hard work and saving. It also represents a giant tax bill that someone at some point will have to pay.
The reason why this is so important is best explained within the context of asset protection. Funds in a qualified or pre-taxed account are not protected from the risk of long-term care costs. And if seventy (70%) percent of people over the age sixty-five (65) will need some type of long-term care (costing hundreds of thousands a year), then protection from long-term care is important.
The catch here is that to protect the funds in these accounts, you must take the money out—generating a taxable withdrawal. This seems bad on its face. After all, no one wants to pay tax. However, someone at some point will be required to pay the tax on that account regardless.
Let me give you an example. Let’s say Donald has five hundred thousand dollars ($500,000) in a traditional IRA. He wants to protect this money because he’s getting up there in age and knows of the likelihood for needing expensive long-term care. He also knows that he would rather protect his money and leave behind for his family, than to give it to a facility. He could use something like a Medicaid Asset Protection Trust to protect the money, but he would have to take the money out of the IRA, generating a taxable withdrawal. Donald gets nervous, not wanting to face the inevitable, he avoids protecting the money and ends up needing long-term care. In the end, he pays the balance of the retirement account to a long-term care facility in addition to all the latent taxes.
If Donald would have acted rationally, he would have cashed the IRA out and protected the remaining balance, regardless of the tax consequences. Better yet, if Donald would have planned ahead, he could have started to slowly withdraw the money from the IRA in small increments, spreading out the tax burden over a number of years. Regardless, the best course of action for Donald is to protect his IRA and the only way to do that is to take the money out.
Getting taxes behind you means freedom. You will no longer have the proverbial Sword of Damocles hanging above your head. You can spend, invest, and protect your assets without the fear of the inevitable tax burden.
If you have question about protection of assets or enjoying a tax-free retirement, then it’s important that you speak with a professional. The attorneys at McIntyre Elder Law are happy to sit down and have a straight-forward discussion about the best strategy for you and your family, in a clear and understandable manner. Give us a call at (704) 259-7040 to schedule your consultation today.
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