Dear Friends,
Happy New Year! Wishing you and your family good health and happiness in 2025!
With every new year, we want to assure you The Legacy Foundation team will continue to provide the advice and guidance needed to make prudent financial decisions. For us, this means obtaining professional credentials, continuing education, keeping up with new technologies, and market research. One of our primary focuses in 2025 is to make you aware of our family/trusted person participation initiative. We hope to ensure that your heirs and those responsible for carrying out your legacy planning are well-informed of your financial and estate planning objectives. This allows them to advocate for you while you are living and execute your wishes beyond your lifetime.
After 37 years of providing financial planning, our goal is to avoid the pitfalls that occur when comprehensive planning hasn’t been considered. Below are some of the questions we discuss with our clients that allow us to find solutions:
- Are your children, spouse or trusted person(s) prepared to make critical decisions on your behalf if you are unable to? Do they have a clear understanding of your wishes?
- If you unexpectedly passed, would those left behind be prepared to see through the administrative process?
- If you have a trust, does your trustee have a clear understanding of their duties and responsibilities?
- If you are having a tough time identifying a trustee for a trust, did you know that there are third party options that are available?
- Do your beneficiaries understand their options with inherited assets, the associated tax consequences, and possible strategies?
Family meetings are one of the most important engagements we conduct. They also help eliminate angst that adult children or partners may have due to lack of transparency or financial knowledge. We provide individualized advice with the understanding that every family is unique.
In order to help illustrate the importance of having a well-developed plan, we have included below a scenario to demonstrate some potential pitfalls in planning.
Richie and Sophia Nettles have two adult children, Sarah and Michael, who each have two children of their own. Richie has always handled the family financial affairs as well as their estate planning. Richie was a long-term planner and thought beyond his passing. As part of his plan, Richie had established two trusts. The first was a revocable trust established to help funnel their remaining assets to their heirs after both had passed. The second trust was an irrevocable trust which assumed ownership of the family home. Lastly, Sophia and Richie had also established 529 college plans for their four grandchildren. Richie was the owner of each account, and Sophia was the successor owner.
When Richie passed at age 75, Sophia, age 70, knew she would have to make some updates, but did not have a trusted person to help guide her through the process. Unfortunately, after Richie’s passing Sophia opened a beneficiary IRA instead of consolidating Richie’s $1.7 million IRA into her own IRA. This meant that Sophia had to continue taking Richie’s Required Minimum Distributions (RMD) during her lifetime. This extra income went above and beyond her expense needs, and thus she was paying tax on income she didn’t need. Had she consolidated this account into her own IRA, she wouldn’t have been subject to the RMD because she had not reached the RMD age. She simply wasn’t aware of her choices at the time.
Sophia and Richie also did not realize that once they both passed, the type of revocable trust established disallowed Sarah and Michael from taking distributions from the inherited IRAs’ over the maximum allowed period of time – ten years. Unfortunately, specific language is required in the trust to allow for this, but they were not aware of the requirement. Instead, the inherited accounts had to be depleted over five years, which for an IRA worth $1.7mm, creates a significant tax liability for the beneficiaries. Since Sarah and Michael were unfamiliar with any of the planning that was put in place, and did not have an advisor of their own, they were not able to help identify potential pitfalls with the plan.
Richie and Sophia’s home, which was in an irrevocable trust, could have passed to Sarah and Michael with a stepped-up tax basis, however the structure of the irrevocable trust did not allow for this. With a step-up, their new tax basis would have been the market value of the home at Sophia’s passing which was $2mm. However, since the home was put into an irrevocable trust, the basis for Sarah and Michael was the market value at the time the home was originally put into the trust at Richie’s passing – $1.5mm. This means that they will pay capital gains tax on the appreciation, $500,000, if the home were to be sold. This could have been avoided with a different estate planning strategy.
Lastly, Sophia left the 529 plans as they were. She didn’t know she had to name a new successor owner after she assumed the accounts, so when she passed, these accounts became probate assets.
If Richie and Sophia had met with a trusted advisor, they could have avoided costly mistakes and been better prepared to update their plan to fit their current situation. As always, I would like to thank you for your continued trust in our ability to help you achieve your financial pursuits. Whether your priorities in 2025 are estate or tax planning, retirement income planning, or learning more about investment strategies, we want to remind you that we’re always inspired by the work we do for you in these areas of our expertise.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
The Legacy Foundation and LPL Financial do not offer tax advice.
Recent Comments