#30 | Estate Planning

Jon “Jag” Gay: Welcome to Protecting and Preserving Wealth. I am Jon Jag Gay. I’m joined as always by Bruce Hosler, as well as Alex Koury from our Scottsdale office today. Bruce, Alex, how are you guys today?

Bruce Hosler: Great, Jon. Thanks for being with us.

Alex Koury: Yes, thanks again for having us.

Jon: Bruce, you’re bringing Alex on to talk about estate planning today is such an important topic. Why specifically do you want to talk about estate planning today, Bruce?

Bruce: I want to help our listeners understand that estate planning is the process of planning for, or not planning for their eventual death or incapacitation and how their assets will or won’t be transferred after their death.

Alex: We meet with a lot of people here in our office that have this preconceived notion that if they only have a will, that they’re protected, that their assets like their home, brokerage accounts, bank accounts is going to cover all their needs to make sure that their assets pass to their heirs successfully. Estate planning is much more than just a will or even a trust.

Jon: That is so true, Alex. I know attorneys draw up wills and trusts, but there are a lot more aspects that our listeners should consider besides just the will and trust. Right, Bruce?

Bruce: You’re so right, Jon. Estate planning is the process of creating a plan for how all of your assets, financial, tangible, physical, will be distributed when you die or are incapacitated, and who will make your healthcare decisions when you’re unable to manage them yourself. Or perhaps you’re incompetent to make such decisions.

Alex: No one likes to talk about their mortality or end of life. People will avoid those thoughts or conversations at all costs. I remember a few years ago when I was going through my own trust and estate plan, the thought or fear of what would happen to me or I should say what would happen to my daughter if we were no longer around really was the prevailing fear I had. Once I actually got those documents in order, my fears were really alleviated because now there’s a plan in place.

In order to be prepared for the unexpected, everyone should at least take certain steps in order to be prepared for their moment of truth when your estate planning can make all the difference. That moment might not be– Or it might be when you are incapacitated or in a car accident and you don’t even die. Having all your affairs in order can make all the difference.

Jon: Alex, that is so true. Bruce, starting with the basics, everyone should have at least a will to start with, right?

Bruce: Yes. That’s a foundational document certainly in setting up your estate plan, especially if you have young children that are minors because like Alex was talking about, it is the will that determines who will be the guardian of your children if you and your spouse were to die prematurely. Will it be your mother, or maybe will it be your wife’s sister?

Can you imagine the potential family nuclear wars that could erupt over that fight?

Jon: Oh, geez. Yes.

Bruce: You do not want that. You want to make these decisions while you can and while you’re in control.

Alex: Speaking of decisions, a lot of people think that if they make the decision of who gets what in their will or trust, that that covers everything, but that’s not really the truth at all. What you need to consider is all the different types of assets that transfer by way of beneficiary designation. For example, IRAs, 401(k)s, annuities, pensions, life insurance, 529 plans, long-term care, joint accounts, brokerage accounts that are payable on death or transferable on death as well. Those are just to name a few of the different types of accounts you want to consider.

None of these types of accounts will follow the directions included in your will, and they all transfer pursuant to the beneficiary designation form filed with the custodian for those accounts.

Jon: That’s a really good point, Alex, that what’s designated in those accounts will supersede a will. Have the laws changed recently regarding how people can leave assets to their children?

Alex: They have. Back in 2019, the first SECURE Act was passed and that removed the wealth transfer benefits of the IRA that could stretch the payout over the life expectancy for account owners’ children. Now, the rule says that over a 10-year period, an IRA must be distributed and emptied out in full.

Bruce: The same thing’s true for Roth IRA accounts right now. They must be distributed within 10 years of the death of the owner as well. The kids won’t have to pay any taxes because it’s a Roth distribution, but they must take the funds out and that kills all the tax-deferred tax-free growth of the account.

Jon: That’s a really good point. Are there any steps that people can take to protect their estate from the destruction that’s being caused by this 10-year limitation rule on Roth IRAs when someone dies, Alex?

Alex: Clearly, the Roth IRA is not the ideal wealth transfer tool that it once was, and because of that, we’re seeing a lot of interest by clients to put life insurance in place to assist them with their wealth transfer goals to their children and other beneficiaries.

Bruce: Life insurance has been used for decades by the wealthy. With the new tax-free benefits available, we see it becoming much more popular right now in the current tax and financial environment.

Jon: That’s a really good point as well. Gentlemen, how often should people get their estate planning documents updated?

Alex: The short answer is every two to five years, everything should be reviewed for updates, changes, especially material changes in your life. Usually, your trust or will are typically okay until there’s changes in financial affairs or in your family. For example, someone passes away or a new grandchild is born, maybe you sold a house and bought another house and forgot to transfer the property into the trust. Maybe you sold rental properties.

One of the children maybe is no longer talking to the family and they’ve done some mean things that means you don’t want to give them as much money any longer, or you want to take back the benefits or the assets you were going to pass along. You could have bought new real estate. You could decide that you want to change your charitable wishes or you want to become more charitably inclined. You want to leave a pile of money to one person and another pile to another person.

There’s really a lot of strategic planning that can go into place of who gets what assets and still make it equitable and fair. Maybe you want to start taking income from a specific account. We want to change who you’re leaving money to in the way of charities. We want to give money away right now while you’re alive and still enjoy that. You can see the benefits of how your money can benefit others. How best do you actually do that? The old trust may need to be updated if some wishes have changed, like we talked about as well. Any of these changes really generally require that a change might need to be made to your estate planning documents.

Bruce: I know I’ve talked to our listeners about this before, but I want to reiterate it today, Jon. If you’re charitably inclined, please, please make sure that if you are leaving money to a charity when you die, that you first plan to do that from your tax-deferred accounts like an IRA account or tax-deferred annuities, and not from taxable accounts like a trust brokerage or an individual brokerage account, or even a regular taxable bank account. Now, why am I saying this? Because it can provide great tax benefits to your family.

If you leave the IRA to charities, you received a tax deduction when you funded it. It grew tax deferred. When you leave it to the charity, they, the charity, do not have to pay any taxes on it. It’s a win-win-win. On the other hand, if you leave taxable investments to your family that you’re passing to them, that they will receive a Step-Up in Basis on the date of your death. That value, there’s a big capital gain avoidance that your family will receive.

They won’t have to recognize that capital gain and they can take the proceeds income tax-free of capital gains tax. That is a huge benefit. If you leave the IRA to your family, they can receive it, but it will all be taxable income, taxed at ordinary income tax rates at their highest tax bracket in the year distribution as it is additional income on top of their regular earnings that year.

Jon: That is a really expensive scale tipped the other direction. That’s a really good point, Bruce.

Bruce: Absolutely.

Jon: How do listeners make sure they set this up right, Alex? They don’t put these instructions in their trust or their will, do they?

Alex: That’s right, Jon. This planning is not included in the language of the trust or the will. That’s why much of your estate planning is accomplished outside of the trust or will using those beneficiary designations we discussed earlier. When we refer to IRAs, annuities, pension plans, 401(k)s, any other types of accounts that use a beneficiary form such as a payable on death or a transfer on death as the way that they are distributed at that time.

With all these types of accounts, the trust or will does not control who will receive the money when you die. The beneficiary form is the controlling document.

Jon: That’s really good to know. The estate plan with all these accounts, Bruce, it’s controlled by that beneficiary form Alex was just talking about?

Bruce: Yes. That can be a very beautiful thing because the account owner can change their mind at any time. All they have to do is fill out a new beneficiary form and sign it. No attorney’s fees, no delays, no legal mumbo jumbo. Easy peasy.

Jon: I like it. What are some of the mistakes, gentlemen, that you see people making around their estate planning?

Alex: The biggest mistake is assuming that you don’t have to do any estate planning at all, everyone needs an estate plan. This can potentially leave a big mess for you and your family. Next, I’d say that families that have not updated their planning and estate documents, or if beneficiary forms are outdated or have not been updated at all.

Bruce: Imagine a married couple that gets a divorce after 20 years of marriage, then one or both of them remarry. After another 30 years after they’ve been married to their new spouses, beneficiary forms or trusts or wills have not been updated.

Jon: I see where you’re going here.

Bruce: They’ve been divorced now for 30 years from their ex-spouse, but now they’re going to disinherit their loved one, the love of their life, their current spouse of 30 years, just because they failed to keep the estate planning documents. Imagine leaving your IRA to your ex-spouse or maybe an annuity or life insurance. This can be a really sad situation when it happens.

Jon: I feel like a lot of the things we’re talking about today guys are the stuff of soap operas, but when they happen in real life, you’re right. It can be a really, really sad situation.

Bruce: Absolutely.

Jon: I know people that are getting older and can’t really handle their financial affairs all on their own now, how should listeners plan for this?

Alex: Many people just don’t realize that estate planning also applies to the potential time in your life where you may be incapacitated in some way. It could be mental ability deterioration, even though your body’s healthy and strong, and in that situation, you may not be able to pay your own bills or even make medical decisions on your behalf, and that’s when a durable financial power of attorney or medical power of attorney becomes a very important document. The durable part of the power of attorney means that if you are incapacitated, that the power of attorney will still be in effect while you’re incapacitated.

Bruce: We see this from time to time, Jon, when someone is incapacitated, maybe they’re in the hospital or in a nursing home or some kind of care facility. They need to take a distribution from their IRA in order to pay their bills. If your spouse or your child does not have a durable POA, power of attorney, it becomes very difficult to be able to arrange for that extra distribution from the IRA to pay the expenses that are needed. Everyone should make sure that they have a durable financial and medical power of attorney.

Jon: Bruce and Alex, this has really been a great conversation today. You’ve got the gears turning in my head about some folks in my life that I need to certainly have a conversation with. If our listeners to the podcast want to reach out to your team at Hosler Wealth Management to talk about this, or anything related to their financial futures, what are the best ways for them to contact you?

Bruce: Certainly, they can reach us at the website at https://hoslerwm.com. If you want to reach out to Scottsdale, you can get to Alex at (480) 994-7342 or to our Prescott office, (928) 778-7666. Folks, we’d love to hear from you. We’d love to help you make sure that your estate is in order.

Jon: Really, really important topic today. Thank you both for the time today. We’ll talk again soon.

Bruce: Thanks, Jon.

Alex: Thank you.

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