Best Practices in Estate Planning


In this episode of the Science of Economic Freedom podcast, “Best Practices in Estate Planning,” I speak with Jeremiah H. Barlow, JD, Head of Family Wealth Services at Mercer Advisors. Jeremiah is an expert in estate planning, and he has a unique way of explaining the sometimes-difficult concepts associated with this subject in an easily understandable, anecdotal, and entertaining way.

In this podcast, you’ll find out:

  • The latest thinking when it comes to estate planning for Mercer Advisors’ clients.
  • Strategies deployed today that could have a meaningful impact on legacy planning.
  • What has changed on the estate-planning front because of the new tax laws.
  • The importance of medical directives.
  • The best and worst states for estate tax issues.
  • The 2012 Supreme Court ruling that changed the law regarding inherited IRAs.
  • The benefits of a retirement trust.
  • Avoiding the mishandling of beneficiary designations.
  • Making sure you adjust your estate plan for legal and life changes.
  • Plus, much more.

 

Estate planning is one of those areas of personal finance that tends to go without attention for years and years, but it shouldn’t. If you want to expand your knowledge of estate planning, a good start is my discussion here with Jeremiah.

 

Transcript:

[Music]

 

Doug:               When was the last time you updated your estate plan? Would placing your IRA in a special retirement trust benefit you? And which are the worst states to die in from an estate planning perspective? On this episode of the Science of Economic Freedom, we interview Jeremiah Barlow, Head of Estate and Tax Planning at Mercer Advisors.

 

Message:          The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio. This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.

 

Doug:               Welcome to the Science of Economic Freedom. I’m your host, Doug Fabian. This podcast is all about helping you achieve your financial dreams. We call that economic freedom. This program is about your journey to achieve economic freedom for yourself and your loved ones. Today, we want to help you identify your next step on that journey. Now, this is a very important podcast subject, expanding your knowledge of estate planning. This is one of those areas of personal finance that goes without attention for years and years. Many people think that once a living trust is done, their estate plan is done. Not true, as you will find out today. This podcast is all about best practices in estate planning. Joining me is Jeremiah Barlow, Head of Estate and Tax Planning at Mercer Advisors. Jeremiah was on the podcast in January when we talked about changes in the tax law. Of course, Jeremiah is an attorney specializing in estate planning. Jeremiah, welcome back to the Science of Economic Freedom podcast.

 

Jeremiah:         Pleasure to be back. Thank you for having me, Doug.

 

Doug:               Jeremiah, today, I want to talk about the subject of estate planning and your team’s best practices when working with individuals and families of our clients at Mercer Advisors. The way I think about best practices is this. What is the latest thinking when it comes to estate planning for our clients? What strategies are we deploying today that could have a meaningful impact on our clients’ legacies? What has changed because of the new tax law? So, let’s jump in. Let’s start with this. When should an estate plan be updated, and why?

 

Jeremiah:         This is a very common question that we receive from both advisors and clients alike. What I have found is it’s best to break it down into two categories. The first is, has there been any life changes over the past whatever period that would necessitate updating your documents? The second is, have there been any legal changes that would affect how your documents were drafted so the result now is different from what you had previously intended? A good example of that is we had two significant changes just in the last five years — one in 2012, another in 2017 — that would necessitate wanting to revisit your documents. So, if you had drafted documents prior to, say, 2012, you’re going to want to have your legal team or your advisors here at Mercer… Our team is holistic in that regard, so our team of attorneys and other legal experts can help in that regard, and our advisors do the same thing regularly for our clients.

 

Doug:               Talk to us about life events. You mentioned if you’ve had a change in life. How would our listeners connect with that?

 

Jeremiah:         Absolutely. A good example would be I just had my third child in January. A third child is actually a new beneficiary, and then that would necessitate wanting to update my documents so that if Broderick were to inherit my assets, or if something were to happen to my wife and I, we want to make sure that Broderick is now going to be inheriting his fair share. The way the documents were drafted up until just a few months ago, that would not have occurred.

 

Doug:               Jeremiah, the estate plan documents, because you and I are in the same office building, I see your team creating these notebooks for clients. Obviously, a part of an estate plan are the medical directives, but you had mentioned to me something that I really hadn’t thought about, how hospitals really want to see medical directives that are relatively current. Talk about the medical directive portion of one’s estate plan and why it’s important to have these documents fresh.

 

Jeremiah:         Absolutely. Well, in short, if you ever become incapacitated, for whatever reason, you’re going to want documents in place that appoint people that you trust that can step in and take care of your affairs. However, you’re going to want to also make sure those are updated regularly, because we’re seeing a trend, both on the healthcare side and on the financial side, where if these documents are older than three or four years, they’re being treated as stale and they’re not being honored by these institutions, primarily for litigation risk. For our clients, it’s important to make sure they’re updated every three years. And we actually do that. Every three years, we reach out to our clients to make sure that they’re updated regularly, so that, if God forbid, they became incapacitated, we’re not going to find out if they’re stale at that time when it’s too late and a court has to get involved.

 

Doug:               Now, estate law has federal and state law implications. Now, you’ve told me that there are some states that, “Doug, you just don’t want to pass away in” for estate planning purposes. Talk to us about the worst states for estate tax issues.

 

Jeremiah:         The topic is interesting because it’s quite subjective, because if you live in one of these states, I’m sure an attorney there might have a different opinion. But we have some states that have their own estate and inheritance taxes. Just to throw out a few, on the West Coast, you’re looking at Washington and Oregon. In the Midwest, you’re looking at Nebraska, and Iowa, and Illinois, also Minnesota. Then, on the kind of Northeast area, Pennsylvania, and the worst that jumps out to me is Maryland. That state has both an inheritance tax and an estate tax. To me, that would be the worst one you’d want to pass away in.

 

Doug:               It just brings up the point how important it is — and especially as people are going through their lives, they’re in their 60s, or 70s, their 80s. Certainly, none of us is getting out of this alive — that they need to know the rules for the state that they live in, because I’m sure in some cases, people may want to make a change, depending upon their circumstances.

 

Jeremiah:         Absolutely. And it’s probably worth noting that if you were driving through Maryland and you die, that doesn’t mean you’re going to have an estate tax because you’re visiting. Instead, it’s where your residency is. And to your point, Doug, you want to make sure you have experts in place that understand not only your state but your also personal situation so planning is proper.

 

Doug:               Most people, who’ve been listening to my podcast for a while, know that I’m relatively new to Mercer Advisors — now going on my second year there — but I’ve been a financial advisor for more than 30 years, and certainly, I know some things about estate planning, but you have really enlightened me, Jeremiah. And there is something I want to talk about in great detail now. There is, I’m going to say, a little known ruling that came from the Supreme Court in 2014 that changed the rules, changed the law, relative to inherited IRAs. Explain this to our listeners.

 

Jeremiah:         Well, absolutely. The result of this Supreme Court case really thrust the retirement accounts and how we deal with them in estate planning into the limelight, for those who are listening. But, as you noted, some weren’t. Because of that, though, kind of in short and to be concise, what it did is it exposed retirement accounts once you pass away and pass those accounts on to your beneficiaries. As long as it’s not your spouse, if it’s going on to your children, it’s now going to subject them and limit the amount of protections you’re going to provide to them. For example, myself and my wife, we have three children. Upon my passing, my retirement account will go to my wife, Kim. Kim then passing away, the assets will go to my three children, Harrison, Louis, and Broderick. When that happens, that’s when this law changes the way that the retirement accounts will be protected for your estate.

 

Doug:               Now, what we’re talking about here is the fact that creditors can actually go after your retirement assets if it was an inherited IRA. Is that correct?

 

Jeremiah:         Absolutely. So, once… We’ll use the example of your children inherit your retirement account. They’re now exposed to that creditor scenario. If, say, my son, Harrison, enters into a business deal, and it goes bad, and they have to file bankruptcy, the retirement account now would be exposed to creditors in that regard. I use also creditors broadly because it could be a spouse, and it could be any kind of liability scenario such as hitting and killing someone. That would now have exposure for the retirement accounts where that didn’t exist prior to 2014.

 

Doug:               So, how can we get around that from an estate planning perspective?

 

Jeremiah:         Well, there’s definitely a way to protect against it. When you have a retirement account that’s inherited, you really are trying to achieve two goals. One is to keep that account in the retirement and tax-deferred environment for as long as possible, but also protect that retirement account from creditors. A good example of this — again, I’ll use my personal scenario — I don’t want Harrison to get access to that money today because he’s five, but I also want to make sure that that money stays in that tax-deferred environment. And when you’re dealing in estate planning, those are two conflicting scenarios. What you can do to solve that is create a special trust called a retirement trust, which actually solves both of those scenarios.

 

Doug:               So, what are the benefits? Talk to us more about the benefits of these retirement trusts.

 

Jeremiah:         Absolutely. For one, it is a separate trust, completely separate from your revocable living trust. The benefit is it allows the assets to stay in the tax-deferred environment, required minimum distributions that have to come out still come out, but instead of going directly to the beneficiary, they’re going to be protected inside of that account so the creditor can’t come after it. So, your two benefits, creditor and asset protection, as well as control, if you have spendthrift children or underage children, but also allowing that money to stay in the tax-deferred environment.

 

Doug:               And for the listening audience, Jeremiah, go over the rules on required minimum distributions for inherited IRAs because they’re different than normal IRAs.

 

Jeremiah:         Absolutely. Thank you. That is a commonly ununderstood component of inherited IRA, is that the rules change. The IRS, when one is alive, has allowed you to keep assets in a tax-deferred environment, and as a plan owner, you get to keep those assets in that environment until you’re 70 and a half, until you’re forced to start taking out what are called required minimum distributions. However, once becoming inherited by a non-spouse beneficiary, you now are forced to start taking the distributions out. Ideally, that’s based on the life expectancy of the beneficiary. So, if you have someone who’s 55 when they inherit that, we use the IRS actuarial tables to determine the distribution schedule. In that case, at 55, IRS says the money has to be out by 85, you start taking distributions out over a 30-year period, they start small and scale up over time as you get closer. So, they’re required to take out that money. They don’t get to wait until they’re 70 and a half like a plan owner could.

 

Doug:               What are the negative circumstances that can be avoided by placing your IRA in a retirement trust?

 

Jeremiah:         A couple of options come to mind. One is you get to take advantage of keeping the assets inside of that account. The negative circumstance avoided is allowing the money to come out immediately, which would be 100% subject to income tax. What we see often is when somebody inherits a lump sum of money, they tend to want to have access to that immediately. When it’s an IRA, or any kind of retirement account, they actually see $1 million in an account and they want to receive it. They don’t realize that, in high-income tax states, you could be paying up to 50% of that, so they will only receive a check for $500,000. So, you can help ensure the assets will stay in that tax-deferred environment, but also protect against creditors being able to take that money as well.

 

Doug:               In a retirement trust, Jeremiah, the person who is designating the trust, can they designate an asset manager, they can designate the flow of funds, meaning just the minimum amount so you can’t take out a lump sum? That’s what you’re saying, you can restrict the beneficiary from taking a large sum of money out of this trust. Am I understanding this correctly?

 

Jeremiah:         Absolutely. An example would be we had a client not too long ago who had set up a trust like this, and unfortunately had passed away, and our client now is the child. The child, she called into the trustee, who happened to be one of our advisors handling that, and indicated that she needed to buy a new car and she would like $100,000 wired over to the Porsche dealership where she wanted to receive the money. Good news is the advisor knew she needed a car, but this advisor also knew that she probably did not need the Porsche. Instead, they came up with the option of making sure she had $30,000 over at the Toyota dealership to make sure that’s taken care of. That’s the kind of scenario where you make sure that the money’s there for the right purpose, but it’s also spent wisely, especially for younger beneficiaries.

 

Doug:               One of the other issues that had come up and a mistake that happens — and we all know that we have a high divorce rate in this country, 50% of marriages end up in divorce — it’s important that people understand that when they inherit assets, that is not a family asset, that’s an individual asset. Explain how a retirement trust can avoid, in a divorce situation, your inherited assets getting halved.

 

Jeremiah:         Exactly. That’s one of the key reasons why a lot of our clients like to move forward with this. I would say 99% of our clients go forward with a retirement account in this sort.

 

Doug:               Because of this reason?

 

Jeremiah:         Because of this reason. And the reason is the retirement account is set up in a way to where, if God forbid, a divorce happened, and my son Harrison is going through that scenario, the retirement account itself would not be considered as part of the divorce proceeding, nor would it be considered as an asset of which Harrison has that could support him if he gave all the rest of the assets to the other spouse, which some judges look at that. When you have inheritance and it’s fully accessible, even though it’s not considered in the divorce to be split, it could be used as a resource to where they could say, “Harrison can use all that money. Harrison, your $500,000 a year you get now goes 100% to your spouse.” It protects against that as well. So, not only is it sheltered, but also not considered.

 

Doug:               Now, Jeremiah, this retirement trust, it’s almost like a separate step or a separate process, it’s a separate trust within an overall estate plan. Most people are familiar with the living trust concept. Why can’t an IRA be spoken for within a living trust?

 

Jeremiah:         Well, the good news is it can, but you have to either give up the asset protection and control that we were just talking about in protecting Harrison from the divorce, or you need to give up the money staying in the tax-deferred environment. So, you need to choose one or the other. In this particular case, most of our clients, 99% of them, don’t want to choose between the two, they want their cake and eat it too, and they can do that here by utilizing a retirement trust.

 

Doug:               So, you need that retirement trust in order to be able to accomplish these core objectives of controlling the flow of money out of this retirement trust and protecting it from creditors and bad relationships?

 

Jeremiah:         Exactly, and making sure it grows in a tax-deferred environment. So, not only making sure it can stay there but ensuring that people don’t take it out too early. And that’s key here because what we often find is estate planning attorneys or experts will draft clauses into trusts that account “for retirement assets”. But by accounting for the retirement assets, they’re actually allowing that money to be exposed to creditors. So, it’s a common misconception that, “Oh, my attorney, or my trust specialist, told me that my trust has my retirement account “covered”.” And I would say, “Be very cautious about that comment.”

 

Doug:               It’s a sidebar conversation to this retirement trust process, Jeremiah, but let’s talk a little bit about beneficiaries. And I believe that many people don’t give a lot of thought. Certainly, if you’re married, you put your spouse on as the primary beneficiary, you might immediately place your kids on there. But many times, life insurance policies, annuities, IRAs, retirement accounts, they have this beneficiary form, you fill it out, and maybe you don’t think about it again. You’ve had experiences where beneficiary information has been mishandled. Just give us some examples. And what I’m trying to do, ladies and gentlemen, is really enforce the importance of understanding who your beneficiaries are, looking at these things from time to time. Certainly, if you get a divorce, you want to update your beneficiary information. But talk to us just about some mishandling of beneficiaries for a moment, Jeremiah.

 

Jeremiah:         Well, I can speak to three. The first one is exactly on what you just said. We had a client who had a beneficiary designation form that they updated when they received their retirement account initially in 2000, for example. This individual was divorced in 2000, received half of the assets, upwards of $3 million in IRA. And as pursuant to that divorce, she had her ex-spouse named as the primary beneficiary, and she never looked at it again. Well, unfortunately, she passed away just a couple of years ago, and she never looked at it again. So, her ex-spouse was still named as the primary beneficiary on that beneficiary designation form. Unfortunately, he passed away a couple of years before she did. And, unfortunately, before he passed away, he actually got remarried. The way that that beneficiary designation form read was the surviving spouse of the ex-husband was the one that received a $3 million IRA instead of the two biological children of the family. Now, those two biological children, we actually work with, and they weren’t too happy, they didn’t like this individual prior to this, and certainly didn’t like this individual afterwards. That’s one where just looking at that beneficiary designation form would’ve solved all problems. Second one, I’ll use a personal example. I created a simple IRA when I first got out of school, a Roth. At the time, I wasn’t married, didn’t have children, hadn’t even met my wife. And at that time, I put my nephew down as the beneficiary. Well, when I started at Mercer, I decided that I was going to consolidate my assets and have them invested here, and found out that I still had my nephew named, and at the time I was married and had one child.

 

Doug:               [Laughs] Your wife probably wasn’t real happy about that.

 

Jeremiah:         She wouldn’t have been if something happened to me, let’s just be clear. That’s one of those ones where I was able to fix it. The other one is what we often find when you have a spouse who’s married but maybe it’s a second or third marriage and they don’t necessarily want to give the retirement account to the spouse, so they take it upon themselves to just directly name, say, children, and they circumvent the spouse as the primary beneficiary. Important to note that in a lot of states, a spouse has a contractual right to your retirement account if you contributed to it during marriage. So, we find some negative consequences there where beneficiaries have been named as primary who actually don’t have a legal right to that. And there was actually a case that came out from the IRS that I didn’t deal with where a husband actually did this and it went to court. The spouse won, but unfortunately, the outcome is that the spouse had to take all the money out of the retirement account to get paid because the IRS wouldn’t allow her just to be named as the beneficiary. So, immediate taxation for bad filling out of the beneficiary form.

 

What I also find — and this would be a tangential forth — but make sure that you are giving the retirement assets to the people you want. You can’t name a retirement account to somebody and expect them to give money to someone else. We found that, actually, in a case where an individual had given a $4 million IRA to one child with the expectation they would divvy it out amongst the other four. Two problems with that. The one individual owned it, so in order to distribute it, they actually had to take it out of the taxable environment. And two, every dollar given was a gift from that individual to these other beneficiaries. So, a double negative that you really need to think about your beneficiary designations, look at them regularly like we do with our clients here at Mercer. We look at those annually to make sure they’re updated and regular. Even if you don’t have accounts with us, we look at all assets holistically, and we’re going to make sure that those are kept up to date and how you want them, more importantly, they align with your estate plan, making sure you don’t have these rogue beneficiary designation forms.

 

Doug:               Jeremiah, I want to go back one more issue on the retirement trust. I got to believe, in some circumstances, the retirement trust, there’s an added expense, it may not be necessary. Is there a dollar amount, is there some criteria where you feel that, “In this circumstance, a retirement trust should be considered,” and then there are circumstances where, “Hey, the cost is not worth it.”? How you would talk about the cost, obviously, it varies depending upon who does the paperwork, you can’t address exactly the cost, but obviously, there is a cost to a separate trust. But talk to us about kind of the parameters of when it makes sense to consider a retirement trust.

 

Jeremiah:         Absolutely. Our rule of thumb is if you have $300,000 in your retirement account, you should consider a retirement trust. That rule of thumb basically comes from that US Supreme Court case where $300,000 was that issue in that case, and I figured that’s a good barometer for a minimum. Now, we have clients that have less that want to utilize a retirement account because maybe they’re giving assets to a special needs child, like my sister who’s autistic. And my parents may want to give $250,000 of their account to my sister but still allow her to receive medical benefits and SSI. By doing so, we can put it in this retirement trust, although it’s lower than that threshold. Other scenario would be an individual who is younger in their career and they may only have $150,000 in their retirement account but they know they’re going to have a lot more. Those are two good examples and kind of a bright-line rule that’s not so bright, kind of vague. $300,000 is our minimum, but circumstances could necessitate going lower than that.

 

Doug:               Jeremiah, let’s wrap up today and just remind listeners. Recap the recent estate law changes and just encouragement that you could give listeners about their own estate planning situation and whether or not it’s time for them to do an update.

 

Jeremiah:         Well, I definitely think the tax law change that was signed into law on December 22nd of 2017 necessitates at least looking at your plan. One big reason is because, on the estate tax side, what occurred is the estate tax threshold, in which tax applies, was set to be $5.6 million before this law went into effect. Now, it’s $11.18 million per person. If you’re married, you can effectively aggregate those, but as an individual, you have an $11.8 million exemption now, which lets you give away at life or at death that amount of money. The interesting thing is a lot of documents didn’t account for this so they had different planning components built-in. And if you live in any state that has an estate tax threshold… A lot of states are going back and changing their laws because they were going to align with the new federal exemption, and they’re going back to change that because they don’t want to align with an $11.8 million exemption, they want to align with a $5.6 million exemption. So, states like Connecticut just passed a law that is going back and retroactively unwinding what they were going to do so it doesn’t line up. But one point to note is this new law, it’s only good for the next eight years. In fact, if there’s a change in Congress, it could end much earlier than that. So, it’s also a planning opportunity. If you have assets you’re looking to give, today is the time to think about that. Don’t wait six years because you think it’s going to be around that long.

 

Doug:               We’ll add back into that, of course, if there’s been a life event, death, birth, divorce, and also a change in where you live. If you have moved from Connecticut to Florida, maybe your estate plan should be updated, something along those lines as well. Does that make sense?

 

Jeremiah:         Absolutely. The life events I look at are those exact same ones, birth, death, divorce, marriage, buy a business, sell a business, move, buy a property in another state. All of these items are keys to those life event circumstances. Of course, the one I used is the legal change, but life events are clearly just as important.

 

Doug:               Another key action item I want to mention to listeners is to take a look at your beneficiaries of all of your retirement accounts. There’s a couple of stories that Jeremiah told today that I had not heard before that were shocking, and so I just want to encourage the audience to make sure they know how their retirement accounts, life insurance policies are designated, and of course, your estate plan has designations within it as well, and if there have been changes in your picture, then maybe you need to make some updates. So, Jeremiah, thank you very much for joining us on the Science of Economic Freedom podcast today.

 

Jeremiah:         My pleasure. It’s been a great time. Thank you for having me, Doug.

 

Doug:               I want to mention a couple of other things, ladies and gentlemen, before we sign off this episode. I know we have many Mercer Advisor clients who listen to the Science of Economic Freedom podcast. We thank you for that. And maybe the subject of retirement trust is new territory for you, so your action step would be to talk to your Mercer Advisor client representative next time you have that conversation and see whether or not a retirement trust makes sense for you. If you’re not a Mercer Advisor client and you have some follow-up questions from this podcast topic, I would encourage you to set up a wealth coaching conference with me. You can go to the scienceofeconomicfreedom.com and sign up for wealth coaching. This is a free service we offer, it’s going to be a consultation. I’m not going to be able to give you legal advice, but I would be able to give you coaching on the subjects that we’ve talked about today. And, of course, if there’s a question that came up that I needed Jeremiah’s expertise, I’d walk down to his office asking the question. Then, lastly, if your estate documents need to be updated, then we would encourage you to be meeting with your estate planning attorney. Just a reminder, if you have questions, comments, show topics, you can send me an email. My email address is [email protected], [email protected] This is Doug Fabian. Thanks so much for joining us today.

 

[Music]

 

Message:          The Science of Economic Freedom is intended as an investor education resource. The views and opinions expressed on this program should not be construed as a recommendation to buy, sell, or hold any specific security. Consult your investment advisor and read any investment perspectives carefully before making any changes to your investment portfolio. This program is sponsored by Mercer Advisors. Mercer Global Advisors Inc. is registered with the Securities and Exchange Commission and delivers all investment-related services. Mercer Advisors Inc. is the parent company of Mercer Global Advisors Inc. and is not involved with investment services.

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