Brian's Blog: Thoughts on Estate Planning, Business, Asset Protection, Family & California Life

Five Things Parents of a Child with Special Needs Must Know about Estate Planning

If you have a child with special needs, there are some things you absolutely must know about estate planning. First, failing to plan will jeopardize any needs-based government benefits your child receives. That’s because California law (i.e., the laws of “intestacy”) will determine how much your child gets from your estate. Think of everything you own going in shares to all of your children, including your child with special needs. He or she will suddenly have a lot of assets counting against the SSI and Medi-Cal limits.

Second, your best planning option will likely be a revocable living trust that takes care of you and your dependents while you are alive and then directs your special needs child’s share into their own special needs trust if you pass away. A correctly drafted special needs trust will not only preserve your child’s access to benefits, it will also ensure those needs that aren’t covered by government assistance are covered. If appropriate, your child will travel, experience cultural events, play sports, have better transportation, receive better care, and even have cable TV. Who can live without cable TV?

Third, don’t think that leaving everything to your typically achieving children will solve everything for you. Nothing causes more tension and destroys family relationships faster than forcing one set of children to take care of a sibling, especially one that requires particular care. A special needs trust can provide the structure for your whole family to live in harmony after you are gone. Plus, if you leave funds to your typical achievers expecting them to care for your other child, know they could lose that money in a divorce or lawsuit or to creditors. If they die before your child with special needs does, the money you leave them may go to their beneficiaries and be unavailable for the person with special needs.

Fourth, remember that other family members could also end up leaving money to your child with special needs. For example, if you died before your parents, any money they were planning to leave you could end up going under their plan (or by law) to your child. That’s likely to be just as risky as if you left the money to your children "free of trust." In other words, make sure your parents (and other family members) know they should name your child’s special needs trust as the beneficiary and never give anything outright to the child.

Fifth, and this is where it can get pretty complicated, make sure that the special needs trust is designed to receive any income from qualified retirement accounts (e.g., IRAs and 401(k)s) and any proceeds from life insurance. There are some pretty hairy tax issues to work through, especially with respect to those IRAs and company retirement plans.

We do special needs planning in our office. Our goal is to make it as easy as possible for our clients, knowing that they (like any parent) have very busy lives. If you know someone with a child who has special needs, we would love to help. In addition to doing their vital estate planning, we can connect them to some great financial planners who specialize in ensuring that beneficiaries with special needs have what they need to thrive.

© 2008 Brian D. Wyatt, A Professional Corporation (All Rights Reserved)

Why Does the Cost of an Estate Plan Vary So Much from Attorney to Attorney?

People frequently ask me, "Why does the cost of estate planning vary so much from attorney to attorney?"  It's a good question. 

Many folks have become convinced that one living trust is pretty much the same as another.  The only difference, they think, is price. 

The truth, however, is that all living trusts are not the same.  But the misperception that they are has affected how most attorneys work.  It has also affected what they charge. 

And there is real pressure to charge less.  Unfortunately, the only way for an attorney to do that is to ratchet up the volume of documents they produce each week, shoe-horn their clients into one-size-fits-all plans, avoid focusing on quality, and neglect the follow-on services and communication necessary to make sure those plans actually work when they are needed. 

Without knowing it, most estate-planning attorneys have become little more than sellers of pre-printed stationary.  To one degree or another, they have stopped practicing law and given in to all of the misinformation that's out there about living trusts. 

But I did not go to law school to learn how to sell you a stack of paper with generic legal writing on it.  I became a lawyer to make a meaningful difference in my clients' lives. 

After all, your estate plan is how you tell your family that you love them for the last time. If your plan creates a big mess for them to deal with, what does that say to them about your affection?  And what does it say about your lawyer? 

That's why we put so much effort into creating the highest quality estate plans for our clients.  More importantly, it's why we build a lifelong relationship with them.  We want to be there for their loved ones if our clients become incapacitated or pass away.  Our clients love that about us, and we appreciate them for caring so deeply about their families.

Sadly, I only know a few estate planning attorneys who still practice like we do.  (What we charge for our services is very competitive with these excellent lawyers.) 

At the same time, I review a lot of trusts put together by those attorneys who have become nothing more than document sellers.  People typically bring these trusts to us because they haven't heard from their lawyer in more than 10 years.  They suspect, and rightly so, that their plan no longer fits their lives, their families, and their finances. 

That's bad.  But it gets worse.... 

Their plans also haven't kept up with the law.  If they become ill, new privacy laws will prevent their successor trustee from taking care of them.  (That means a court will have to declare them incompetent in a public hearing and, sometimes, even establish a costly conservatorship.)  Plus, their decade-old estate-tax planning is horribly inflexible and based on complicated formulas that will make the surviving spouse's life miserable.  They will have no ability to reassert control over their estates should they recover from an incapacitating illness.  The inheritance they leave to their loved ones could be lost to lawsuits, divorce, creditors and unnecessary estate taxes.  (It doesn't have to be!)  Their medical powers of attorney may have expired.  Their assets will go through probate because they haven't been properly put into their trust.  I could go on and on about how document-seller trusts end up going bad over time.

If you have an old estate plan, please don't go to a document seller to get it "redone."  You'll just have to have it "redone" again in about 10 years by a completely different lawyer, assuming you are alive and have legal capacity to make changes at that time.  The process of constantly starting over will probably cost you more over the long run than hiring a lifelong advisor would.  And the planning won't be nearly as good.   

If you want the latest and greatest planning, if you want it to work when it's needed, if you want to save money over the long run, if you want the attorney you've chosen to be there for your family when you can't be, and if you want real peace of mind, find a lifelong advisor whom you like -- whom your loved ones will like -- and make the investment.  You and your family are worth it. 

© 2008 Brian D. Wyatt, A Professional Corporation (All Rights Reserved)

The IRS Increases Audits Of Those Making At Least $100,000 Per Year

According to the January 30, 2008 issue of The Wall Street Journal, the IRS has been feeling some pressure to put additional taxpayer money in Uncle Sam’s pockets.  The Service has responded by increasing the number of audits of those who make more than $100,000 per year. 

In particular, with regard to tax returns filed in 2007, the IRS increased audits of those making at least $100,000 per year by 14%.  Those making more than $200,000 saw a 29% increase in audits, and those with at least $1 million in income saw an 89% jump.  Even more audits are on the way for these demographics' 2008 filings.  (Herman, T., “High Earners Face Surge in Tax Audits,” The Wall Street Journal, January 30, 2008, Page D1.)

If you are self-employed (e.g., you have an S Corp or are a sole proprietor) and you earn more than $100,000 year, you may want to speak with your accountant about dealing strategically with the increased audit risk. 

In addition, The Journal’s Wealth Report Blog suggests three other things you should do as you look at your 2007 taxes over the next few months:

(1) Don’t get overly creative with your tax accounting.  Keeping things simple should trigger fewer automatic “audit-flags” with the IRS.

(2) Try to be consistent with what you did last year, especially with regard to deductions.  The software the IRS uses to determine who to audit looks for major variations from year-to-year. 

(3) Stick with what the forms tell you.  Don’t take a “different position” with respect to a 1099 or K-1 that you receive. 

Good luck as you prepare and file your 2007 taxes!

IRS Circular 230 Disclosure:  Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

What That Economic Stimulus Package Might Do For You

Most folks believe that we are nearing the end of the post-9/11 expansion in the U.S. economy.  That our economy should cycle between expansion and contraction is as normal as it is uncomfortable.  Expansions seem to last about seven years on average, which means that we are due (in theory) for an economic “correction.” 

Since the Great Depression, policy leaders have used two tools to make sure that any downturns in our economy are as short and shallow as possible.  These tools are generally referred to as “monetary policy” and “fiscal policy.”

Monetary policy is established by the Federal Reserve Bank, which is technically not controlled by politicians.  Simply put, the Fed adjusts the supply of money (i.e., the “number of dollars” available for buying stuff) as well as the cost of those dollars (i.e., the interest rates we pay when we borrow from the bank or use our credit cards).  In doing this, the Fed uses monetary policy to encourage or discourage economic growth. 

Some people, like William Goss, think there isn't much the Fed can do this time around, as our battered banking system may not be at liberty to extend credit the way it was before the housing boom went bust.  Of course, that hasn't stopped the Fed from dropping rates 1.25% in the last eight days (as of today's post). 

In contrast to monetary policy, fiscal policy is what Congress and the President do together to encourage spending and/or investment.  Fiscal policy is highly political, and each party ordinarily has its own ideas about how fiscal policy should or shouldn’t be used.  Surprisingly, however, there appears to be real consensus that the “fiscal stimulus package” that is currently winding its way through Congress is necessary.  Our elected officials clearly believe that “something” must be done in this election year – and fast.   

We’re so used to bickering and sniping among our political leaders that it almost seems surreal when they stand united on something.  Nevertheless, both our Republican President and our Democrat-controlled House of Representatives seem to agree that the stimulus package the House recently passed (385 votes to 35) is a good one.  Although the bill needs approval by the Democrat-controlled Senate, which is taking a more deliberative approach than the House did, the Senators are feeling pressure to get something for the President to sign into law. 

If the Senate makes no changes in the bill, the package would provide rebate checks to every American making at least $3,000.  Most taxpayers would get checks for $600 to $1,200.  Married folks with children would generally get more than others, but wealthier tax payers would not receive as much as those of more limited means.  In addition to rebate checks, there would be some tax breaks to businesses to generate investment in equipment. 

What’s the hold up?  Well, the Senate is debating a slight reduction in the amount of each rebate check.  In return, it would drop the limitation for wealthier tax payers and add funds for seniors and unemployed persons.  Senator Reid, the majority leader, is shooting for a final bill by February 15th.  That means our readers will probably receive some kind of tax-rebate check around July.

If you get one, what will you do with it?  Will you spend it quickly?  Will you pay off credit-card debt?  Will you use it to plan your estate and protect your family?  (Wink.  Wink.)  Will your check change how you feel about the economy?  Will it change the way you vote in November?  And what will your neighbors do with their checks? 

Will any of this really matter?

Fortunately, regardless of what happens with fiscal or monentary policy, any downturn in the U.S. economy won’t last forever.  No matter how bad things get, the economic future for our country is still a hopeful one.  In part, that’s because we have a significant comparative advantage when it comes to national resources, including the ingenuity of our people.  For those of us who tend to indulge in fretting, let’s not lose focus on our nation’s “economic glass,” which, though not overflowing, is still more than half full.

Why 2008 Should Be A Great Year To Purchase A Home

It’s no secret that the real estate market has declined steadily during 2007. Most experts think this trend will continue into and even through 2008. But waiting for the “bottom to hit” before jumping in could be a costly mistake for at least three reasons.

First, interest rates on home loans are still at historical lows. Buyers’ markets like this come around only once every 15 years, but interest rates are usually much higher when they do.  In fact, we’ve never had interest rates this low during this type of market.

Second, potential buyers have more choices now than ever. For years people were forced to purchase homes that they only “kind of liked.” They were spending top dollar, settling for neighborhoods they didn’t love, and getting into homes that didn’t fit their true needs or desires. Now, things are quite different. A buyer can find the house and neighborhood they want, plus they can negotiate an amazing deal.

Third, it will probably be too difficult to know for sure when we really hit the bottom of the market.  From past experience, we see that the media begins to report a market turnaround about six months after it actually starts happening! That means people who jump in when the media tells them the coast is clear will do so six months into a sellers’ market.  In the meantime, interest rates could have gone up and/or valuable financing programs may have disappeared, limiting the buyers’ options.

The reality is that a declining real estate market provides fantastic opportunities for most buyers. In particular, first time home buyers, homeowners who want to upsize, and long-term investors should be looking to take advantage of current conditions.

• First-time buyers who were priced out of the market over the past few years may finally be able to afford a home. With improved federal loan programs, low prices, and a huge selection, first-timers would be wise to start looking.
• Homeowners wanting to “buy up” have a real advantage in this market. Yes, they may take a price hit on their current home, but they will be able to take advantage of the even larger hit someone else has taken on a more expensive home. Not only that, but buying in this low market means the buyer’s property taxes will be lower than they would otherwise be. 
• Long-term investors are already starting to do their research. Investors know that while real estate goes through peaks and valleys its value has always gone up. This is not the market for fix-and-flip investors, but it’s a great time for the ones looking to hold for five or more years.

If you have been thinking about buying real estate, it’s time to get serious about it. Talk to a real estate professional who can help you search for opportunities and watch prices. A realtor can streamline the buying process for you and provide you with the information you need to make the best choices. In addition, you might consider meeting with a lender to find out what loan programs you’re qualified for and to go over your credit. A good lender can help you improve your credit score and save you lots of money in interest. To be sure, this is not the market to “go it alone”! But there are great deals and great loans out there.  Make sure you take advantage of them.

Traci Butler, an experienced Realtor with Lyon Real Estate in Roseville, contributed this article.  Traci has a reputation for guiding her clients through the sometimes confusing process of buying or selling real estate, including whether it’s best for them to buy, sell, or wait.  She may be reached at (916) 276-9975 or tbutler@golyon.com. 

Why You Should Talk to Your Parents about Their Estate Plan over the Holidays

Do you know what kind of estate plan your parents have?  The holidays can be a great time to figure that out together.

You see, if you buy a car, you'll know whether you got a lemon in no time.  But when will you know whether your parents' estate plan is a “lemon”?  Probably years from now, when one of them becomes ill or disabled or passes away -- the very time when you and your family most need it to work -- and when it may be too late to fix!

Don't get me wrong, it's great to have an estate plan.  And if your parents have one that includes a living trust, their plan may be just fine.  The problem is, once your parents set their plan up, it just sits innocently in their home or safe-deposit box. It doesn’t require much (or any) annual paperwork. It doesn’t affect their income taxes. It doesn’t restrict their use and enjoyment of their assets. So, they probably just put the plan out of mind.

That's what’s so dangerous.

Has your parents' estate plan been kept up-to-date with their wishes?
Does it reflect the current needs and circumstances of their loved ones (including you)?
Has it been updated for changes in the law?
Does it reflect the newest planning strategies?

Why am I making a big deal out of this?  Because I regularly review estate plans, including living trust plans, that contain multiple defects!  These defects are the kinds that may someday cause you and your family needless suffering, as well as unnecessary court fees, attorneys' fees, taxes, and exposure to the claims of in-laws, ex-spouses, and other unprincipled parties.

If at all possible, please don't let your parents' estate plan (or lack of a plan) remain a disaster waiting to happen.  To help you get the conversation started this holiday season, here are nine points you should raise with them:

1)  Will your parents' plan protect you and their other loved ones from losing their inheritance to divorces, lawsuits, creditors, and government claims?
2)  Does their trust use a special legacy provision to build your family's wealth, free of unnecessary estate taxes for many generations?
3)  Does their plan permit whichever parent lives longest to save (potentially) thousands of dollars in unnecessary capital gains taxes?
4)  If your parents are married, does their trust contain the right kind of "A-B" language to avoid unnecessary paperwork and fees for the survivor?
5)  Are their health care documents and their living trust properly updated for recent laws called “HIPAA” and “CMIA” -- so the person they've named as their Successor Trustee can act promptly when they are ill or disabled, rather than be forced to go to court?
6)  Do they have a simple, but invaluable, emergency card that will make their health care documents available to any hospital where they are admitted?
7)  Are their IRAs and company retirement plans protected by their living trust alone?  (Note, thanks to recent IRS rulings, it's possible to make these accounts into the largest asset they'll leave to the next generation.  Without proper advance planning for their accounts (even if they are just $150,000 accounts), your family could lose millions in potential wealth.)
8)  Does their trust have the flexibility to adapt after they are gone to new tax laws and the ever-changing needs of their beneficiaries?  Or could their trust simply fail to work the way they intended?
9)  Have they heard from their original estate plan attorney recently?  If not, how do they know that person is actually representing their best interests?  Will that person really be someone you want to work with if something happens to your parents?  I don’t mean to be cynical, but is their old lawyer actually hoping that your parents won't update their plan?  If they don’t, and if that lawyer is still around, you may end up paying him or her a ton of money to deal with any big messes.

All estate plans, all living trusts, and all lawyers are NOT equal.  Many estate plans fail because they simply aren’t maintained or kept up-to-date.  Is the one your parents have (or are thinking about getting), really going to do what they want it to do?

If your folks would like to know more about having their plan created or reviewed, please have them contact us.  We would love to see if they are a good fit to work with our firm.  Mention this blog article by January 31, 2008, and we won't even charge for a review (or an initial consultation).

Why Incorporating Your Small Business Might Be The Best Financial Move You Make in 2008

We know first-hand what it’s like to invest in starting a small business and making it grow.  That’s why we are so passionate about helping small business owners make the right choices.  If you own a small business, one of the choices you should consider making is incorporation.  This is primarily for four reasons. 

First, incorporation can save you a lot of money in the form of a reduced tax bill.  To see how this works in your situation, you really should take some time to consult with a qualified CPA.  The best CPAs are those rare practitioners that check in with their clients throughout the year – not just at tax time.  A good CPA like that can help you work proactively to minimize the size of those checks to the IRS and the FTB.  In our experience, it’s not uncommon for a sole proprietor who incorporates to save $5,000 or more in unnecessary taxes.  The total savings will of course depend on how much revenue your business generates and the quality of the advice your CPA gives you.

Second, in addition to saving money, incorporating also gives you increased protection against audits. According to the most recent numbers from the Internal Revenue Service, if your business is an S-Corporation, you are 9.95 times less likely to be audited than a sole proprietor.  And, for those S-Corporations who have at least $100,000 in gross receipts, the odds of being audited are even more favorable at 10.26 times lower.

Third, incorporation provides exciting opportunities for retirement planning.  That’s because a corporation has more flexibility and more options in establishing retirement plans.  For instance, a corporation can form a 401(k) with a Roth option.  If it does, the owner's contributions will not be treated as reductions of income, but all of the account’s earnings and principal can be pulled out tax-free. 

Fourth, depending on your industry and how it's regulated, incorporation can help you shield your personal assets from your business liabilities.  Many business owners fail to incorporate before they get sued as a result of contractual arrangement gone awry or an employee’s mistake.  It's too late at that point for those owners to protect themselves and their families.

If you are interested in knowing more, we would be glad to talk to you.  In fact, we are each offering an hour of our time (without charge) to any sole proprietor who mentions this article and wants to find out how incorporating could benefit them specifically. 

Incorporating your business could be the smartest financial move you make in 2008. 

David Airola and Brian Wyatt coauthored this article.  David is an experienced CPA who interacts regularly with his small-business clients to ensure that they minimize their tax obligations.  His firm specializes in providing advice and services to business owners. You can reach David at (916) 932-7110 or dga@airolacpas.com.  Brian is a business and estate planning attorney who develops life-long relationships with his clients.  Those clients have great confidence that the planning he does for them will work when it's most needed.  You can reach Brian at (916) 273-9040 or brian@wyattlegal.com. 

Pursuant to recently-enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

Annette Spangler on Ten Smart Choices for Parents of Young Children

Having spent more than 25 years working with families, I've noticed that successful parents tend to make a lot of the same good decisions.  Here are ten smart choices that I've seen moms and dads make: 

1)  When their children are little, smart parents remember that it takes a lot of practice for the children to learn a new concept.  They remain patient.

2)  They are also consistent.  They let their "yes" mean yes and their "no" mean no.  Remember that allowing a child to turn your "no" into a "yes" just limits your authority and turns them into negotiators.

3)  Smart parents model the right way to do things.  They avoid merely telling their children what they are doing wrong.

4)  These parents also encourage their children to make choices that are appropriate for their ages.  “Do you want the yellow glass or the red glass?”  “Do you want to eat Cheerios or Rice Krispies?” “Do you want to wear your jacket or not?”  “Would you like dad to buckle you in your car seat or mom?”  You get the idea.

5)  Effective parents are kind and firm at the same time.  Making a child feel bad generally doesn’t make them want to do better.  When was the last time that a discouraging word made you want to do better?

6)  They recognize that their words have real power.  Words can either build your kids up or tear them down.  Smart parents practice using their words wisely.

7)  Good parents remember that all kids misbehave.  Children learn by trial and error.  Their parents have a plan for what they will do before the misbehavior occurs.  Then they act without lecturing.  “I see all of you decided to play by yourselves in your rooms until you all treat each other kindly.  Let me know when you have decided you want to play with each other.” 

8)  Good parents invite cooperation by making it a value for the whole family.  “In our house we all help each other.”  “Thank you for helping.”

9)  A wise parent both tells and shows their children every day how much they love them and how important they are to them.

10)  They know that discipline means they are making a "disciple," someone who follows.  The best parents discipline their kids with appropriate consequences for misbehavior.  The consequences are Reasonable (i.e., age appropriate); Respectful to the child, to the parent, and to the rest of the family; and Related to what the child did wrong.  If any of the three “R’s” are missing, the discipline probably won't make sense to the child.  That's when a parent punishes without teaching.  The goal is for the children to learn from their misdeeds.  When parents punish without teaching, their children can become resentful or learn to do things behind the parents' backs. A smart parent's goal is to instill great character in their kids whether the parent is in the room or not.

Annette Spangler is the Director of Parenting Ministries at Bayside Church in Granite Bay, California.  She has over 25 years experience loving, mentoring, and learning from parents.  For more information, please email Annette at annettes@baysideonline.com. 

Should You Really Just “Walk Away” from Your Mortgage?

It’s almost cliché to observe that, as home prices have dropped substantially, many people find themselves owing more on their homes than their homes are worth.  The adjustable-rate mortgage trap that many fell into is causing them to think about simply defaulting on their loans. 

We euphemistically call this “walking away,” and it almost sounds consequence-free.

But it isn’t. 

In fact, walking away results in a tremendous hit to a person’s credit score.  This can make it very difficult for them to obtain financing in the future, including other home loans.  For folks whose loans are “recourse loans,” which may be the case with respect to investment properties, there is the added concern that lenders might go after a “walker’s” personal assets.

If you are struggling to make your mortgage payments, you might approach your lender about a workout.  A “workout” sounds worse than a “walk away,” but it’s really better in the long run.  Your lender may allow you to refinance to stretch payments over a longer period or even defer some payments.  Although not all lenders have been willing to help their borrowers in this way, banks don't usually want to be landlords. 

For more information on the dangers of walking away, including some serious income-tax consequences, you might read this October 18th article in The Wall Street Journal.  (Subscription to The Journal Online is likely required.)

How You Can Turn Even A Small IRA or 401(k) into Millions of Dollars in Protected Wealth for Your Grandchildren.

As any IRA owner who is nearing 70-1/2 will tell you, there is a limit to how long the government will let you simply accumulate and avoid withdrawing tax-deferred money from your traditional IRA.   That’s because 70-1/2 is the age at which you must soon begin to take required minimum distributions (also known as “RMDs”) and pay income taxes on those withdrawals. 

Many people think that the RMD rules will force them to exhaust their IRA savings, but that's not what the rules are designed to do.  If an IRA owner takes only the minimum distributions, there will be money left for the next generation when the owner dies. 

That opens up some incredible planning opportunities.  The IRS changed the RMD rules in January 2003 to allow non-spouse beneficiaries to “stretchout” the taxable required minimum distributions.  In other words, if your child inherits your IRA, he or she can now use his or her life expectancy (as calculated per IRS rules) to determine how big the required minimum distributions will be for the rest of the child’s life. 

Let me give you an example of how this works.  Assume your son is 45 when he inherits your $200,000 IRA.  Also, assume that your IRA is growing at a modest six percent (6%) per year.   Because of his young age, your son’s required minimum distributions will be much smaller than yours.  At the end of his life, that account would be worth $300,000, even though he took all of his required minimum distributions.  Plus, those RMDs that your son had to take will add up to $400,000.  This means that, all things considered, your $200,000 account will benefit your son to the tune of at least $700,000.  Nice. 

Now, what if your son didn't spend the $400,000 he had to take in minimum distributions from your IRA?  In other words, what would happen if he took that money and reinvested it?  Well, then, the account that was worth $200,000 when you died could be worth over $1,000,000 when your son dies (assuming 6% growth).  Very nice.   

That’s when the real advantage of these stretch rules kicks in, because your grandkids will inherit your IRA, which retains your name by the way, and use their life expectancy to calculate the RMDs.  With the right planning, your account could be worth well over $10 million by the time your grandkids pass away!

Sounds great, right?  Well, not so fast.  The stretchout is not automatic.  A number of things can foul it up, including your son's decision to withdraw more than his RMDs or an IRA custodian who unwittingly writes one very big check to your son after you die instead of leaving the money in your IRA.  Plus, lawsuits, divorce, and estate taxes can eat into the IRA before (or after) your grandchildren inherit it.

Sadly, you can’t look to your revocable living trust for help with these risks.  The IRS has made it very clear that living trusts make horrible IRA beneficiaries.  In fact, if you leave your IRA to your living trust, the rule in many cases is that your successor trustee would have to withdraw all of your IRA savings over 5 years, paying income taxes at the highest state and federal rates. 

So how do you both ensure the stretchout and protect the wealth for your grandkids?  You do it by using a Retirement Account Trust.  Think of a Retirement Account Trust as a “living trust for your IRA,” without the nasty tax consequences.  Thanks to recent IRS rulings approving the techniques used in a Retirement Account Trust, it’s become the only way you can leave an IRA to your heirs, preserve the stretchout, and protect the money for generations.

Very few financial planners and estate planning attorneys know how to set up and use these trusts.  Our office does, and we’ll be writing and speaking more about them in the future.  In the meantime, if you’d like to know more, please contact me.  I'd be glad to give you and/or your financial advisor more information.

P.S.  Thanks to the Pension Protection Act of 2006, people who have corporate retirement accounts (like 401(k)s, 403(b)s and 457s) can use Retirement Account Trusts as well.  The law allows each plan participant to set up a Retirement Account Trust, make it the beneficiary of his or her corporate account, and then let that corporate account rollover into an "inherited IRA" after the participant passes away.  Now there are still a few corporate plans that don't allow the rollover to an "Inherited IRA," but that's about to change.  In fact, beginning next year, the IRS will require all qualified retirement plans to make available the non-spouse rollover to an "Inherited IRA."

The bottom line:  If you have invested more than $150,000 in some combination of corporate retirement accounts (like 401(k)s or 403(b)s) or IRAs, then a Retirement Account Trust will give you a realistic shot at leaving millions of dollars to your grandchildren in a way that protects them (and your own children) from lawsuits, creditors, and divorce -- not to mention unnecessary estate taxes.  That is an opportunity not to be missed.