Category: Estate Planning

images[4]There used to be a candy, back in the old days, called “Now and Laters”. I remember them being similar to today’s Starbursts, but slightly limited in (edible) flavors and much, much harder. So hard, in fact, that you’d enjoy them now, and since they were nearly non dissolvable, you would have no choice but to enjoy them – later. Aptly named. Presently, and obviously, the term now and later can be used to describe a bracket conversion strategy.

 “What’s a bracket conversion, and why might I need a strategy for one?”

Good questions. Let’s begin with a few suppositions:
Let’s suppose, in saving for retirement, you have contributed to a Traditional IRA. And you know the day is fast approaching when Uncle Sam will want the tax that’s owed on that money. That day might be when you’re forced to take your Required Minimum Distribution (RMD) at age 70.5, or when you voluntarily take a distribution from your IRA. Bottom line here: You have an IRA full of tax-deferred dollars and those taxes will one day be paid. That much is for sure. But to some degree, how much tax is paid on those dollars and from whom could be up to you…

 “Render unto Caesar the things that are Caesar’s…”

If you die with “X” amount of money in a tax-deferred IRA, and you’ve left that money to a beneficiary, then that inherited money will be taxed at your beneficiary’s tax rate – not yours. (An inherited IRA comes with the responsibility to begin “making good” on any taxes owed – and do note that there are different rules applicable to IRAs inherited by spouses and for those inherited by non spouses. That is a discussion for another post. The common denominator, however, is that taxes could play a significant role in this equation. See what I did there with “denominator” and “equation”?) And if you believe your beneficiary will be in a higher tax bracket than you’re currently in, even more taxes will be feeding Caesar’s furnace. So, if you have a Traditional IRA, you may be able to take advantage of a bracket conversion. In a bracket conversion, you convert a portion of your IRA – an amount that won’t push your taxable income into the next bracket – into a Roth account. That portion will be treated as ordinary income and you will have to pay the tax on it. (Caesar’s happy.) However, once it’s in the Roth, it grows tax free and will one day be inherited by your beneficiary. (Beneficiary’s happy.) And you, at your presumably lower tax rate, will have “rendered” the amount owed, and you now have a Roth growing tax free that will one day be inherited by your heirs. (And now all of you can be happy.)

Again, an assumption is being made that the tax bracket you’re in at the time of the conversion will be lower than that of your beneficiary at the time when the account is passed on. If taxes are likely higher for you now than they will be for said beneficiary, then Caesar may just have to wait. (Unless you can tell me when you’re going to die, assumptions will have to be made in such matters.)

The advantage to your heirs isn’t the only benefit, mind you. Having money in both tax-deferred and after-tax accounts provides a bit of flexibility in your tax planning. No one knows for sure what the tax rate or tax bracket structure will look like in years to come, and having money in both types of accounts allows you to hedge your bets, so to speak. Your tax preparer should be able to help you determine the amount to convert and still remain in your current tax bracket. Make no mistake about it, you will be paying the tax on the conversion, and you’ll need to account for that in your cash flows. Of course, you don’t have to convert it all at once. You can do it – now and later. If it makes sense tax-wise, and cash-flow wise, then it certainly should be considered. Speak with your tax preparer and financial planner to see if a bracket conversion make sense for you.

walk-in-the-light-300x199“Daddy, what happens when you die?” It happened. I got the question every God-loving father wants to hear from his child. And it happens when you least expect it, doesn’t it?  And of course, you pray that you’ll handle it as well as your father handled it and as well as his father before him. And just recently, it happened to me. Just walking in the park one Saturday morning, sweet little Callahan looked up and asked, “Daddy, what happens when you die?” Not breaking his gaze, I knelt down, took his hands in mine and told him what we all know to be true:

“Well son, with a properly written will, your estate will be distributed in accordance with your wishes – not at the discretion of the state.”   And there it was, with the full weight of truth. He was so moved by my response, apparently, he could only manage an inquisitive, “Sir?”

“Bless his heart,” I thought, “He’s at a loss for words.” As was I, right? I mean, it’s not every day someone asks about estate planning. But it should be. So now let me ask you, “What’s going to happen when you die?” Still not hitting home? How about this: Who will take care of your children? What will happen to your assets? To whom will they go? Some of you are so sharp and so on top of things, you had the answers to these questions before you’d finished reading them. More importantly, are those answers written down in a will? No? I had a boss, who may or may not currently be my boss, once tell me, “I’m not interested in what you say you’re going to do; I’m interested in what you’ve done.” Get your will in place. It’s as close to having a voice after you’re gone as you’re going to have.

5 reasons why you should have your will in place as soon as possible:

1)      You get to decide who’ll take care of your children – or to put it another way – you decide who won’t.  (OR…you could just forget about the will and leave it up to the court. After all, kids are resilient, they’ll be fine!)

2)      You get to decide how your estate will be distributed. (OR…forget the will, save the money, and just let your family duke it out. It’ll be a nice distraction from the grief.)

3)      Because as life changes, so can your will. Change your mind? Then change your will.

4)      You diminish the chance for legal challenges. “But mama told me she wanted me to have the __________ .“(Insert object of potential and likely family conflict here.)

5)      A will protects against a potentially lengthy probate process for all assets passing through the will. (Assets with a designated beneficiary, like an IRA or 401(k) for example, do not pass through the will or the probate process. Material for another blog.) The will serves as your “instructions” to the court and to your personal representative. And we all know how well things turn out without instructions.

There are several other reasons, too, ranging from possible estate tax implications, the ability to name an Executor who will handle the affairs of your estate once you’re gone, and the fact that tomorrow is not guaranteed. But if you could get past the first two without a pain in the pit of your stomach, then none of the rest will likely mean anything to you. But if a chord was struck as you read this post, please look into it. It doesn’t have to be Shakespearean, but it will have to be signed at the very least. And that’s easier to do while you’re alive.

What happens when you die?

The question is simple. The answer is a matter of life and death.  Be prepared for both. Get your will in place.

Before we answer the question posed above, let’s enjoy a short story, shall we?  Once upon a time, there lived a happily married couple. Let’s call them Jack and Diane. (They were two American kids growing up in the heartland..) Anyway, after two blissful years – life happens – and Jack and Diane are married no more. Two years later, both have remarried, both have kids from those new marriages and life is grand.
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Fast forward 45 years…

Sadly, Jack has a debilitating football injury that eventually takes its toll, and Jack passes away. He leaves behind a very large 401(k) that he started shortly after his first marriage to Diane.  Believing all is in order, Jack’s second wife, Jenny, takes comfort believing that their financial house is in order.  This is where it gets interesting.  A long time ago, when Jack started contributing to his company’s 401(k) plan, he was asked to provide a beneficiary for the account.  The name he put down was that of his first wife, Diane. Makes sense, right? After all, that was his wife – at that time. The million dollar question is this:  Did Jack update his beneficiary form after “life happened”. If not, Diane is still the beneficiary of record.  And that beneficiary form is recognized as the last will and testament for that 401(k).

And this is where it gets messy.

As if the grief of losing a loved one wasn’t bad enough, lawyers for both sides are now preparing for battle – a battle that could have easily been avoided had that beneficiary form been updated. [Note: state laws may differ on how valid a case the ex-spouse may have.]  So what’s in a name? Possibly, the rights to the single largest asset you’ll ever have. Check your beneficiary designations on your 401(k) and/or IRA accounts every year or so and keep a copy of that document for your records. You can change them, at any time, with a 3-second stroke of the pen. And I can assure you, that will be time very well spent…long after the thrill of livin’ is gone.
(A special thank you to John Cougar Mellancamp. Without whom, this blog might have been a little less interesting.)

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