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Ask Todd: Beneficiary designations on IRAs · The Financial Exchange Show

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  Speaker 1: This is Ask Todd on the Financial Exchange Radio network.
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  Speaker 1: If you have an existing estate plan or in the
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  Speaker 1: market for one, Todd Letsky is here to answer your
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  Speaker 1: questions and help you plan for a later life. Ask
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  Speaker 1: Todd is presented by Cushing and Dolan, serving Massachusetts and
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  Speaker 1: New England for more than thirty five years, helping families
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  Speaker 1: with a state and tax planning, medicaid planning, and probate law.
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  Speaker 1: Visit Cushingdolan dot com. Now here's Todd Lutsky.
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  Speaker 2: Todd Lutsky does join us now from the law firm
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  Speaker 2: of Cushing and Dolan. The segment here is Ask Todd,
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  Speaker 2: and this is your chance to ask Todd your state
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  Speaker 2: planning questions live on air right now. Phone lines are
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  Speaker 2: open at eight eight eight to zero five two two
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  Speaker 2: sixty three. Get calling early and often if you want
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  Speaker 2: to ask Todd your estate planning questions, because we do
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  Speaker 2: have limited space on those phone lines.
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  Speaker 3: Again, eight eight.
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  Speaker 2: Eight to zero five two two sixty three is the
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  Speaker 2: number one more time, that is eight eight eight two
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  Speaker 2: zero five two two six three, And this is your
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  Speaker 2: opportunity to ask Todd your estate planning questions. Mister Lutsky,
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  Speaker 2: how are you doing today.
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  Speaker 3: I am never better. How are you doing? I'm good?
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  Speaker 2: I uh. I was pretty intrigued by that story over
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  Speaker 2: the weekend about the duck that robbed the bank.
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  Speaker 3: I must have missed that story. Yeah, he quacked the safe.
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  Speaker 3: Well that's that's true.
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  Speaker 2: Yeah, pretty impressive stuff, Todd. I want to talk to
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  Speaker 2: you about beneficiary designations on iras and specifically, how does
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  Speaker 2: it let me ask you this? I guess, is there
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  Speaker 2: a conflict or a question in terms of potentially naming
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  Speaker 2: a trust as a beneficiary of an IRA in order
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  Speaker 2: to help manage estate taxes in the future with trying
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  Speaker 2: to navigate the tenure withdraw rule that you have when
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  Speaker 2: that trust is named to beneficiary and perhaps ending up
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  Speaker 2: with your bennies paying more in taxes than they would
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  Speaker 2: otherwise in income taxes, correct, more income taxes than a
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  Speaker 2: state taxes that they would have paid.
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  Speaker 4: I think you got a great question there, because there's
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  Speaker 4: a lot of balls in the air, right.
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  Speaker 3: So one would be, you know, we haven't when you're dealing.
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  Speaker 2: And someone asked me this the other day and I said,
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  Speaker 2: I don't know, but I have an estate planning attorney.
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  Speaker 3: I'm going to ask.
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  Speaker 2: So this is you know, a real question that I
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  Speaker 2: got from someone.
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  Speaker 3: Real life stuff. That's what we do, real life stuff.
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  Speaker 4: And iras are complicated, right, because they do have as
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  Speaker 4: you are alluding to, Chuck, they have both the income
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  Speaker 4: tax component built into it and as many people forget,
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  Speaker 4: an estate tax component built into it. Even like with rots,
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  Speaker 4: they think, oh, well they're roths are income tax free, Yeah,
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  Speaker 4: but they're estate taxable, sure, And so you got to
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  Speaker 4: remember that they have those two components built in it. Now,
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  Speaker 4: first and forem, when we're talking about naming a trust,
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  Speaker 4: a beneficiary, or in general dealing with an IRA in
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  Speaker 4: your estate plan, let's start primary beneficiary. If you're marriage
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  Speaker 4: should probably always be I don't want to say always,
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  Speaker 4: there's never an always, but mostly be surviving spouse.
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  Speaker 2: Why wouldn't you do the trust in that case, because
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  Speaker 2: that's specifically kind of what this is looking at.
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  Speaker 4: Yeah, so generally you want it to be the surviving spouse.
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  Speaker 4: Because of that RMD the required minimum Distribution rules, right,
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  Speaker 4: spouses are one of the few special beneficiaries under the
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  Speaker 4: Secure Act. When the Secure Act changed. So example, if
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  Speaker 4: I leave, if I name my spouse the designated beneficiary,
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  Speaker 4: and my spouse Let's say when I die is seventy five,
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  Speaker 4: my spouse gets to take it out over her life expectancy.
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  Speaker 4: If you look at a table, her life expectancy could
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  Speaker 4: be twelve, thirteen years, fourteen years. So that's a nice payout,
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  Speaker 4: better than if I name my children the beneficiary. It's
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  Speaker 4: going to come out over ten years most of the time,
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  Speaker 4: unless the child is a minor or disabled, So mostly
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  Speaker 4: this is going to come out over ten years. So
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  Speaker 4: there's a ten year rule, not a lifetime rule. The
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  Speaker 4: old rule used to be yeah, I would come out
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  Speaker 4: over the kids' life expectancy, but no more so. Now
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  Speaker 4: it comes out over ten years. So that's why the
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  Speaker 4: primary beneficiary is usually the spouse. Now that said, what
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  Speaker 4: if I'm the surviving spouse, Now, who should do the
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  Speaker 4: primary beneficiary be? Well, I need to look to my
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  Speaker 4: revocable trust. Let's say if that's what I've done. Well,
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  Speaker 4: if my trust, which holds a bunch of my assets,
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  Speaker 4: says I leave everything equally to my kids, but held
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  Speaker 4: in trust for their life, divorce proof, creditor protected, generation skipping,
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  Speaker 4: tax planning, all built in, well, maybe I don't want
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  Speaker 4: my million dollar IRA going out to my kids so
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  Speaker 4: I probably wouldn't name the kids. I would name the
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  Speaker 4: trust as the beneficial if I'm now the surviving spouse,
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  Speaker 4: our single and that way it gets into the trust,
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  Speaker 4: sheltering it from all of those negative creditors tax or
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  Speaker 4: creditor issues and even generation skipping tax problems. But to
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  Speaker 4: your point, Chuck, not causing a problem with the ten
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  Speaker 4: year payout, So no conflict with the ten year payout.
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  Speaker 4: It's still gonna come out over ten years. No better,
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  Speaker 4: but no worse.
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  Speaker 2: Talking with Todd Lutsky from Cushing and Dolan. If you've
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  Speaker 2: got a question for Todd, this is your chance to
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  Speaker 2: ask it. Eight eight eight two zero five two two
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  Speaker 2: have a little bit of room on the phone lines,
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  Speaker 2: sixty three to ask Todd your estate planning questions. That
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  Speaker 2: number again is eight eight eight to zero five two
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  Speaker 2: two sixty three. We're gonna take a quick break here,
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  Speaker 2: but when we come back it is going to be
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  Speaker 2: right to your questions with Todd. That phone number one
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  Speaker 2: more time is eight eight eight to zero five two
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  Speaker 2: two six three.
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  Speaker 1: Ask Todd with Todd Lutsky every Wednesday at ten thirty
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  Speaker 1: only here on the Financial Exchange Radio Network. Todd Letsky
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  Speaker 1: answers your questions about a state and elder life planning
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  Speaker 2: Still a little bit of room on the phone lines
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  Speaker 2: eight to zero five two two sixty three is the
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  Speaker 2: number again? It is eight eight eight to zero five
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  Speaker 2: two two six three. Let's go now to Bob in Charlestown. Bob,
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  Speaker 2: what's your question for Todd?
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  Speaker 5: Good morning? My question concerns the income tax aspects of
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  Speaker 5: the four oh one K when it goes through the
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  Speaker 5: testaments Retrust soap. So, if there's no surviving spouse and
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  Speaker 5: the four oh one K is the beneficiary, is the
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  Speaker 5: estate got it? None of the will? It passes into
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  Speaker 5: the testamentary Trust. So now I presume the trust will
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  Speaker 5: now own the four oh one k. And since the
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  Speaker 5: beneficiaries are the children and not a surviving spouse, is
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  Speaker 5: the trust required to pay out that money to the
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  Speaker 5: kids in the tenure SIP frame as if it had
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  Speaker 5: never gone to the trust.
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  Speaker 4: So we have to sort of clarify your question, because
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  Speaker 4: the question you're answering is one that I likely would
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  Speaker 4: never suggest. Okay, So when I talk about naming the
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  Speaker 4: estate the beneficiary, that's when you are married, you do that.
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  Speaker 3: Okay.
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  Speaker 4: So if you're married, and so we got husband and wife, right,
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  Speaker 4: and they both have you're saying four one K. But
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  Speaker 4: let's say they've retired and they've rolled their four oh
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  Speaker 4: one K into an IRA. It's the same deal, right,
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  Speaker 4: And so now we're married, and I've got this iras
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  Speaker 4: sitting there, and I'm over seventy three years of age
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  Speaker 4: or seventy three Okay, unless the IRA is small enough
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  Speaker 4: that a five year payout doesn't matter. But let's say
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  Speaker 4: it's large enough that I don't want a five year payout.
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  Speaker 4: So I got to make sure I'm seventy three years
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  Speaker 4: of age or older. That's the first requirement, and that
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  Speaker 4: makes it payable over the ghost life expectancy of the participant.
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  Speaker 4: So that's huge. So now I don't have a negative
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  Speaker 4: income tax consequences. Then I die, well, then the estate
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  Speaker 4: it would flow into a testamentary trust for the benefit
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  Speaker 4: of who my spouse right first and foremost. If my
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  Speaker 4: spouse has already died. Well, then I usually get a
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  Speaker 4: call from the surviving spouse saying I lost my spouse.
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  Speaker 3: What do I do?
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  Speaker 4: We update their estate plan because they're now single after all,
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  Speaker 4: and we need to make some changes to their plan.
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  Speaker 4: And one of those changes would be okay, well, we
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  Speaker 4: now need to rethink your designated beneficiary because you're single.
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  Speaker 4: So as a single person, I probably would go back
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  Speaker 4: to the idea of what Chuck and I were talking
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  Speaker 4: about a minute ago, and that is I would probably
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  Speaker 4: not name the estate the beneficiary. Well, why because I
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  Speaker 4: don't have a spouse, right. The whole point of naming
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  Speaker 4: the estate the beneficiary is so that I can provide
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  Speaker 4: for my spouse, just like I could if I named
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  Speaker 4: her the beneficiary. But at the same time, instead of
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  Speaker 4: naming her as the beneficiary, I am allowing her to
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  Speaker 4: not only enjoy it, but if she gets sick, it's
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  Speaker 4: immediately protected from the nursing home for her. To me,
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  Speaker 4: that's the big reason for doing this. Yeah, there's some
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  Speaker 4: mistate tax benefits as well, but to me, that's a
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  Speaker 4: really big reason, you know, for doing this. So if
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  Speaker 4: I don't have that spouse, well, I'm not so worried
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  Speaker 4: about it, right, because it's mine and if I get sick,
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  Speaker 4: it's outside the trust, it's subject to the nursing home.
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  Speaker 4: If I die, I wanted to go probably to my
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  Speaker 4: trust for the benefit of my kids, divorce, prove credit
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  Speaker 4: or protection and whatever other kind of controls I want
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  Speaker 4: to put over it to them. Now that's set. So
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  Speaker 4: my answer, so, I think your point is that you're hypothetical.
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  Speaker 4: I would never do so if I was single, I
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  Speaker 4: wouldn't be naming my estate the beneficiary in which the
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  Speaker 4: Testamentary Trust would be the children. Now having said that,
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  Speaker 4: I guess the question could be, what if we've done this,
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  Speaker 4: my wife's alive, it flows into this testamentary trust, then
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  Speaker 4: my wife dies, Well, well that's different. Well that could happen. So, Bob,
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  Speaker 4: I just wanted to help everybody understand that difference and
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  Speaker 4: how this could not generally be set up that way,
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  Speaker 4: but it could end up that it's now for the kids.
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  Speaker 4: The required minimum distributions will come out and hit the
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  Speaker 4: trust over the ten year rule that we talked about.
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  Speaker 4: So now the kids are the beneficiaries. If this trust
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  Speaker 4: says paid out to the kids divided equally and paid
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  Speaker 4: out to the kids. Well, then as the money comes
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  Speaker 4: into the trust, it comes out to the kids. The
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  Speaker 4: kids pick it up on their income tax return and
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  Speaker 4: that's the end of it. If it's completely a payout,
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  Speaker 4: then the whole entire ira could technically just flow through
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  Speaker 4: and go right to the kids, and then they can
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  Speaker 4: take it out over ten years at tax at their rate.
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  Speaker 4: If it's held in divorce proof credit or protection language like,
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  Speaker 4: hold it in trust for the benefit of the kids
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  Speaker 4: and you know, let them have income and principle and
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  Speaker 4: the trustees sole discretion, which I like. Well, then you
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  Speaker 4: have to make a decision. And you're absolutely right about this,
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  Speaker 4: Bob that if that money comes out the minimum distribution
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  Speaker 4: you reach in, take it out, put it in the trust.
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  Speaker 4: That's a taxable event to the trust. If the trust
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  Speaker 4: then distributes out that income to the beneficiary, well then
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  Speaker 4: they can carry an income distribution deduction, have a tax
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  Speaker 4: at the kids level. If the kid's going through a
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  Speaker 4: divorce and we don't want the money to come out,
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  Speaker 4: well then you know what, we're going to have to
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  Speaker 4: pay the tax at the trust level. So yes, you
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  Speaker 4: could have that issue, but it's kind of optional. So
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  Speaker 4: great question Bob lots going on in that question. Sorry
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  Speaker 4: it was such a long winded answer, but it's important
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  Speaker 4: because it really does deal with what this guide is
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  Speaker 4: talking about this month, right. This guide is saying, how
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  Speaker 4: do you name your IRA the beneficiary? Not only how
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  Speaker 4: do you do it? When do you do it? Why
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  Speaker 4: do you do it right? And same thing with life insurance.
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  Speaker 4: You can make the life insurance the beneficiary and age
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  Speaker 4: is not an issue, but with an IRA, as we saw,
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  Speaker 4: the age should be at least the required required beginning
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  Speaker 4: date of seventy three.
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  Speaker 3: That's all laid out in the guide.
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  Speaker 4: It explains the Testamentary Trust, how it's connected with these assets,
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  Speaker 4: and will then help you do a state tax planning.
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  Speaker 4: It will protect it from the nursing home without a
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  Speaker 4: five year waiting period and all without causing adverse income
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  Speaker 4: tax consequences, which I hope I just explained in this
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  Speaker 4: in this to Bob, in this in this call eight
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  Speaker 4: six six eight four eight five six nine nine is
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  Speaker 4: the guide, folks, or a legal exchange show dot com.
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  Speaker 4: This guide explains all of those things and how they
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  Speaker 4: work together. Call and Get It eight six six eight
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  Speaker 4: four eight five six nine nine or Legal Exchange show
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  Speaker 4: dot com.
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  Speaker 2: Todd just kind of looking at that situation that we
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  Speaker 2: outlined earlier, any other considerations, just for you know, how
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  Speaker 2: someone goes about making the decision for naming beneficiaries on
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  Speaker 2: retirement accounts given the complexities that we went through.
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  Speaker 3: Yeah, I'd say a couple of things. One, the size
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  Speaker 3: of the IRA.
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  Speaker 4: Right, So if someone's trying to do planning and they say, well,
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  Speaker 4: you know, I got one hundred thousand dollars in my IRA,
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  Speaker 4: Well one, you know, maybe I don't care about trying
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  Speaker 4: to protect that from the nursing home. Maybe it's small
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  Speaker 4: enough that I'll just leave my spouse the beneficiary and
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  Speaker 4: I don't need to go to probate for that. So
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  Speaker 4: that could be or the size could be you know,
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  Speaker 4: one hundred, two hundred, even three hundred thousand dollars. You know,
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  Speaker 4: if I got to pay that out over five years,
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  Speaker 4: that's not a huge income tax hit, right, you know,
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  Speaker 4: I'm not taking out a ton of money. If I've
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  Speaker 4: got three hundred thousand over five years, that's not going
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  Speaker 4: to blow me into a higher income tax bracket. So
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  Speaker 4: maybe I don't need to wait until I'm seventy three.
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  Speaker 4: I can just set that up right away. So those
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  Speaker 4: are some options. And I think if you're not doing
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  Speaker 4: nursing home planning, certainly we're never going to be doing
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  Speaker 4: a testamentary trust if we're not doing nursing home planning.
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  Speaker 4: But I still might name the estate. I still might
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  Speaker 4: name the trust the beneficiary on a revocable trust, I
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  Speaker 4: would say you would do that primarily only if the
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  Speaker 4: way you're leaving the assets to the spout to the
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  Speaker 4: kids is to protect it from divorces and generation skipping
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  Speaker 4: tax purposes. Otherwise, probably just named the kids. Mister Wutski,
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  Speaker 4: thank you so much for joining us today.
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  Speaker 3: Always a pleasure.
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  Speaker 1: This has been Ask Todd on the Financial Exchange Radio network.
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  Speaker 1: Ask Todd with Todd. Lutsky has been presented by Cushing
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