Estate Planning 101

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by Michael Goodman

Estate Planning 101 video

My favorite class while getting my degree in Financial Planning was the class on Estate Planning. You can really get lost in all the different types of trusts, and I strongly recommend having a legal specialist prepare any trust you need. But there is one rule that should be followed with or without an attorney.

The first rule of estate planning is to AVOID PROBATE!

Probate

Probate is:

1. Expensive

2. The records are public (so anyone can see the details)

3. Assets may be sold for less than full market value

4. Property may not end up where you wanted it to go because a third-party (the judge) will make the final decision.

Avoiding Probate

Avoiding probate is fairly easy with a little planning.

There are basically 3 types of property that are exempt from probate:

1. Funds in a POD (Payable On Death) or TOD (Transfer On Death) financial account that allows the naming of a beneficiary. Examples of this are bank accounts, investment accounts, and life insurance.

2. Real Estate owned with a transfer-on-death deed. The precise deed can vary by state. In California, examples of this are property owned as “community property” or “joint-tenancy with right of survivorship.” In other states, it might be “tenancy by the entirety” with a spouse.

Depending on the state, other personal property (like cars or boats) MAY be excluded from probate; as may other community property. Check with the state in which you live to be sure.

3. Property transferred to a trust, like a Living Trust.

The Bottom Line for Estate Planning

Property that is not protected or excluded from probate must go through the process and any financial assets may not be available until probate has been completed. However, if you do this right, very little property will have to go through probate and many states now have a simplified process for small estates (this varies by state).

An Example

Now that you know this, here is one example to consider: (from an article on Nolo.com)

“An estate consists of a $400,000 house that’s jointly owned, a $200,000 bank account for which a payable-on-death beneficiary has been named, a $100,000 IRA with beneficiary named, and a solely owned car worth $10,000. The estate has a value of more than $700,000.”

Question: How much of the estate must go through probate?

Answer: You are correct if you said the only probate asset is the car—and its value ($10,000) qualifies it for the small estate procedure in almost every state.

Congratulations! You just passed the simplified class on Estate Planning 101!

How Much Will Income Tax Rates Rise, and When?

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by Michael Goodman

As you can see from the chart below, current income tax rates are on the low end compared to the highest rates in history.

Historical Income Tax Rates

Part of this is the result of the tax reductions passed in 2017 and effective in 2018. However, the 2017 law will expire in 2026 and rates will jump back to previous levels for individuals.

However, the Biden Administration is not planning to wait for current rates to expire. They have plans to spend money and assume they can get it by raising taxes.

According to Allianz, here are some of the goals that the Biden campaign discussed –

Personal income taxes

  • Raise the top individual income tax rates from 37% to 39.6%.
  • Taxpayers with more than $1 million of taxable income would pay ordinary income tax rates on capital gains and qualified dividends (instead of the lower capital gains tax rate).
  • Impose Social Security taxes on taxable income above $400,000. Currently this only applies to income above the Social Security wage base (set at $142,800 in 2021).
  • New $5,000 tax credit for family caregivers (those meeting the cognitive or physical needs of a family member).
  • New tax incentives for the purchase of long term care insurance (details not specified).
  • Changes related to contributions to qualified retirement plans to “equalize” the tax benefits for all levels of income (details not specified).
  • Repeal the $10,000 cap on SALT deductions (deduction for state and local taxes). However, another proposal would limit the tax benefits of itemized deductions to 28% of value for those making over $400,000. For example, a taxpayer making over $400,000 who has $50,000 of itemized deductions would be limited to using $14,000 of those deductions.

Estate and gift taxes/taxes at death

  • Decrease the applicable exclusion amount for estate and gift taxes. Exclusion in 2021 is $11.7 million ($23.4 million for a married couple). No official figure has been proposed, but exclusion likely to be reduced to $3.5-$5 million ($7-$10 million for a married couple).
  • Repeal of the step-up in basis rules at death. Basis of deceased owner would carry over to heirs. It’s uncertain if death would trigger the tax, or if the tax would be triggered when the asset was sold by heirs. Also, it’s not certain if appreciation prior to repeal of step-up basis rules would be grandfathered in.

Business and business owner taxes

  • Raise the corporate tax rate from 21% to 28%.
  • Phase out of the 20% qualified business income deduction for taxpayers with taxable income above $400,000.
  • Revise the tax-free nature of 1031 exchanges (exchanges of commercial real estate) such that it applies only to those with taxable income under $400,000. This has not been promoted heavily by the Biden campaign.
  • Impose a 15% corporate minimum tax on book income (applicable only to companies with $100 million or more of net income but which owe no U.S. income tax).

The GOP will try to block some or all of these changes. What do YOU think will happen?

What “Tax-Free Retirement” by Patrick Kelly Says for Doctors

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by Michael Goodman

Tax-Free Retirement by Patrick Kelly

Way back in 2011, I reviewed the book, “Tax-Free Retirement” by Patrick Kelly and gave it a strong recommendation. That review is one of the most popular pages on my site. Now that my practice is focused on doctors, I thought this would be a good time to look at what Mr. Kelly’s book recommends for doctors.

Chapter 20

In chapter 20 of Patrick Kelly’s 10th Anniversary version of “Tax-Free Retirement” (2017), Patrick writes, “Doctors have many unique attributes. And in my opinion, their unique attributes are what makes this group one of the most significant to benefit from the strategies in this book.”

He then lists four reasons why doctors are a great fit for using an indexed universal life policy (IUL) for retirement planning.

“Reason #1

Most doctors make more than $196,000 per year, which is the phase-out limit for being able to contribute to a Roth IRA. Therefore, they have no truly viable tax-free retirement option available to them other than life insurance.” (NOTE: in 2021, a married couple making over $208,000 cannot contribute to a Roth IRA, while the maximum deposit is only $6,000 unless you’re over 50 years old)

“Reason #2

Doctors are specialists. They have given their lives to be the best at what they do – and they are. However, this level of specialty often leaves little time for less urgent activities such as retirement planning”

“Reason #3

Doctors are often taken advantage of by snake-oil salesmen in the financial realm hocking half-baked, poorly-formed investment strategies promising wonderful returns.

“Reason #4

Doctors generally need a lot of life insurance for three reasons. One, they need to protect a large income for their families. Two, they usually carry high debt. Often this is due to starting out in debt from large medical school bills and low wages during their residency and internship years. Three, doctors as a group have one of the lowest life expectancies of any profession.”

Bottom Line

Most doctors that work at a hospital have a contract that provides a life insurance policy (usually a term policy) and a retirement plan of some sort (usually a 401k plan these days). But the life insurance policy often leaves them under-insured and the qualified retirement plan is likely to create an income tax problem later. Doctors in private practice usually have to pay for everything themselves, or through the organization that owns the practice.

When comparing the various options available to doctors that want to supplement the benefits in their contracts, or create a retirement plan by themselves, Patrick Kelly says on page 147 of his book there is “one superior option – life insurance!” Explaining why, he summarizes that life insurance offers an “unlimited contribution potential,” “grows without annual taxation,” “takes no time to manage,” “provides a huge sum of money to the physicians family in the case of an untimely death,” and “best of all, if structured properly, the policy can allow access to future money tax-free.”

What’s not to like?