Optimizing Your Inheritance [On-Demand Webinar]

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Welcome everyone to today’s Savant live webinar. My name is Dominick Parillo and today we are going to be discussing optimizing your inheritance. I work with Savant’s wealth transfer team, and we specialize in estate planning and trust administration. Today I’m joined by my colleague Mike Cyrs. Welcome Mike. It’s great to be here. Thanks Tom and welcome to everybody in the audience today. Great. Let’s get started. Today we want to speak to the following topics. And when Mike and I created this presentation, we really created it primarily for people who have just received an inheritance. But a lot of these concepts can also apply if you’re expecting to receive an inheritance in the future or even if you’re designing your own estate plan. A lot of the issues that your future beneficiaries will have will also be sort of covered in this webinar. So, we’re going to start things out by giving everybody a base line on some income, estate, and gift tax concepts. You know, I I received my inheritance. Now, what do I have to pay tax on it? You know, how does that work? We’ll speak a little bit about proper trust establishment. You might receive your inheritance in a trust or maybe be working on your own estate plan. to some tips and tricks on how to design things or better understand the structure that you currently have. We’ll touch briefly on some investment topics. You know, one caveat is this presentation is not meant to be an investment how to. You know, we’re going to barely dip our toe into the investment waters, but just you know, some good baseline things to consider. Then also you know, what does this inheritance mean for future generations? Some considerations for planning. And then some common pitfalls often overlooked things, a recap of some of the concepts and then again at the end if we have some time for questions which I think we will we’ll try to answer your questions live. So, Mike, can you get us started by introducing everyone to some income estate and gift tax concepts. Sure. Again, I’m going to start with kind of the basics. are going to we’re going to cover the fundamentals and the basics so that we can get into the strategies you know that we need to be able to make you aware of and we’re going to begin and end where all things seem to begin and end and that is on the on the taxation side before I do that what I would say is you know there’s a huge transfer of wealth the statistics are varied that are out there but they say sometime in the next 10 years between now and 2035 there’s between 72 and 84 trillion dollars of wealth that’s going to transfer. So, we just felt that this was a great topic. If it hasn’t, you know, if it’s if it’s if you haven’t inherited some property yet or received it as a gift, there’s a good chance that much of the material we’re going to cover today, there’s going to be something in there for you and something to think about. So, on the taxation side, we’re going to start with the income tax side, get a little deeper on the income tax side, and then get into the estate and gift tax side. And there’s great new news on the income tax side and the basics of it. We get this question all the time. an inherited piece of real estate or a taxable account. Is that includable in taxable income to me? And it is not. It is. It is not an asset that you’d have to pick up, you know, on your 1040. It’s not subject to income tax. you can receive those assets outright, generally speaking. So, you just inherit $100,000, that’s yours. You’re free and clear. Now, there are a couple of exceptions to that. The first exception is with respect to IRD assets. you’ll see those referred to on the right of the screen and they get sticky. So, we’re going to cover there’s a lot of strategy there that’s involved you know forward looking. So, we’re going to push that off to the side right now. But that would be like IRA, 401ks, annuities that’ve grown on a tax advantaged basis. The tax that’s inside those accounts or those assets just like the owner of the account if they started drawing during their lifetime would have to recognize that income tax. If you receive an asset like that at death, same thing – you know the taxing entity the US treasury or the state department of revenue they’re going to want a piece of that and there’s going to be taxation as that account is drawn out so that’s one exception the other exception is on the left there and that’s with respect to the income tax that’s due from the point of death until the point of distribution to the beneficiary okay and the way I often describe this is think of it as there’s a there’s a timeline a straight line and you know all these taxing entities want to pick up the taxation and they don’t want to miss any piece of that timeline. So during the life of the decedent any taxation is going to obviously be picked up under the decedent social security number on a 1040 a personal income tax return interest in dividends etc. When a person passes away, the social security number is void. And so, what you need to do, a fiduciary, a trustee or an administrator is going to go out and get a tax ID number, from the IRS, either online, or through what’s called an SS4 form. And then they’re going to reregister those assets under that tax ID number. And so that tax ID number is then going to pick up, interest, dividends, etc. Now the taxation of that is such that you know when it flows through passes those assets to the beneficiary that 1041 the trustee or administrator will issue a K1 and that signals to the to the taxing entity pick up those it points to the tax to the beneficiary and their tax return and says look over there to make sure you pick up that that interest in dividends. And so, you know, an optimization technique here is if you’re receiving an inheritance, okay, don’t rush out and file your tax return early in the in the calendar year because you might be getting a K1 later on as a remainder beneficiary where you’re being kicked out this this stub interest or dividend taxation. And remember, it’s not the if you inherit a $100,000 account, it’s not the hundred,000 that you’re going to have to pick up. it’s this the thousand or the 2,000 of interest in dividends in that interim time period. And then of course, if you think about it like the timeline that I just talked about, when the beneficiary then takes over those assets and reregisters them under their social security number, then of course the taxation will be on the beneficiaries 1040. So, it goes 1040 1041 with a K1 and then 1040 again. So those are the couple of exceptions there. Now I want to spend just a minute to talk about basis. What basis is is it’s the level of your taxation of the asset as it was acquired that captures future capital gains essentially. So, if your parent bought a house for $50,000 and it’s worth 150 or a piece of land and they and they during their lifetime if they sell that the basis is what they acquired it for. minus depreciation plus capital improvements. And so, there’s an embedded capital gain in there. And this is a big issue and a big issue going forward because estate taxes have changed so fundamentally in the United States. It’s super important because currently you get a full step up in basis on any assets that you have an incident of ownership in. So, when you pass away what happens is you adjust the basis on those assets and the example I gave you from 50,000 the initial cost to the fair market value at the time of death which is 150,000. And so now if the beneficiary sells that asset the basis is equal to fair market value. You’re going to have zero capital gain. So, if you’re inheriting assets, again an optimization, make sure that you know you’ve adjusted the basis that if it’s a taxable account coming over, every one of the securities inside the account has been adjusted to fair market value. Or if you’re inheriting a piece of real estate, you’d likely want to get an appraisal, okay? Unless you’re going to sell that property in short order, in which case the sale price could be your acknowledgement of basis. But if you’re going to hang on to it, lock in that fair market value basis, put that in a safe place and make sure that that’s something you keep track of going forward. So those are the rules regarding, you know, generally inheriting property. Joint tenancy assets would get a half of a step up in basis, not a full basis adjustment. So a little bit of a nuance there, but okay, so now let’s get into these IRD, these sticky assets, and the rules have changed. We’re going to talk about what happened in 2019 under the secure act and then we’re going to dive into the strategy here because I said as you get a complex set of rules as the services provided us you’re going to get a lot of strategy to work around these rules and nuances. So we’re going to spend a little time here and then jump into the estate and gift tax side. So Dom, I’m going to pass it back to you and tell us about this landmark piece of legislation, this tax legislation called the Secure Act. Sure thing, Mike. Thanks for setting us up. You know, as Mike had mentioned, you know, basically if you inherit assets that are not IRA assets, not 401k assets, those generally pass to you income tax-free, right? You’re only paying income tax on the earnings of those investments post inheritance. IRA and 401k type assets are taxed differently. When the initial transfer occurs to you, you’re not paying any income tax on the initial transfer when the IRA or 401k account is retitled in your name as the beneficiary. However, when money is withdrawn from those accounts over time, you as the beneficiary of the account pay income tax at your marginal income tax rate when it’s added to all of your other income sources. And you’ll notice on our slide here the title secure act that was passed in 2019. Well, the secure act fundamentally changed how IRA assets are inherited by beneficiaries. Little bit of history. Prior to the secure act, when a beneficiary inherited an asset, that beneficiary generally could keep the account open for their entire lifetime and withdraw money out of the account over their lifetime based on hypothetical actuarial life expectancy table. So, it was a tax deferred type of inheritance. Secure Act, unless you’re considered an eligible designated beneficiary, and we’re going to go through whom those people are on the next slide, you’re really limited to a 10-year maximum time period in which you can actually keep that IRA or 401k account open. In other words, the Secure Act has greatly accelerated income tax recognition for beneficiaries because now all of the account has to be withdrawn within a 10-year period for most inheritors of those accounts and income tax has to be paid. One recent development, I think this happened in 2024, the IRS, promulgated some new regulations and has clarified that when you’re in the 10-year period as a non-eligible designated beneficiary. There is a required minimum distribution in each of the 10 years. I think that actually technically started this year in 2025. and that RMD or required minimum distribution is based on your life expectancy but all the money has to be out of the account at the end of the 10-year period just a little bit every year up until that point is how that works. ast sort of comment is given this new paradigm we’re in with this 10-year window for these assets. A lot of the focus has shifted to income tax planning for beneficiaries and inheritors of these qualified accounts. So, it’s important to do a long-term look at what your income tax situation is so you can withdraw the money out in a tax smart nature and minimize the overall income tax that you’re ultimately subject to by strategically targeting you know income tax brackets over time. So, really important to engage a financial advisor and tax advisor understand how this will impact you. Okay. So, I mentioned this term earlier eligible designated beneficiaries. Why are these beneficiaries special? Well, under the Secure Act, if you’re considered an eligible designated beneficiary, excuse me, beneficiary, you are not subject to the 10-year limit for keeping these accounts open. You can actually use life expectancy like before the Secure Act. Eligible designated beneficiaries are surviving spouses of the account owner. The account owners, minor children under the age of 21 years old, disabled individuals, chronically ill individuals, and individuals not more than 10 years younger than the original IRA owner, typically siblings or friends of similar age that those class of beneficiaries not subject to 10ear rule have more income tax deferral windows. Spouses are afforded maximum flexibility under the tax code. But if you’re a surviving spouse, you can actually roll your deceased spouse’s retirement account into your own name and you have a lot more tax deferral opportunities, a lot of flexibility. On the next slide, and yes, I know there’s a lot of words here. We’re estate planners, you know, we live in will, trust, and POA lands. We’re dealing with block text all day. But big takeaway is on the left-hand side you’ll notice that red circle with a line through it when you’re filling out your beneficiary designations or you’re understanding you know what your parents or whoever you inherit the money from. A lot of times the default beneficiary in a beneficiary form if you don’t designate your own beneficiaries is the estate of the account owner. Watch out for this pitfall, this trip wire, because if your estate is the designated beneficiary, it’s very possible that it’s a five-year income tax deferral window a lot more income tax that has to be paid at the other end of the spectrum, and Mike, go ahead. Do you have a thought? Yeah, and I was just going to add to that. You know, a lot of people don’t realize, you know, you want to have the SP, you have the spouse named as the primary beneficiary, which is great, but things don’t happen right away. and some, you know, your spouse passes away, there’s a lot a lot of change, a lot of things going on, and they don’t get to do the spousal rollover, and they don’t choose the new named beneficiary. So, it’s important, you know, to optimize things to make sure you complete that rollover and choose that newly named beneficiary. And as we’re going to find out in a little bit, align, you know, perhaps the secondary beneficiary as well. Take a look at all of the structures. Don’t wait that time period out because as Dom has correctly identified here in that first category, you don’t want to get stuck back in the five years the worst you can get because everything’s going to come out. And that’s what you want to avoid. Certainly, if you can get pre secure act into a stretch type of context, that’s the best. You still could have the advantage of the 10-year, but don’t get caught in that five-year if you can help it. So I just wanted to add that and we’ll jump to the next category there. D that is such a good practice tip, Mike. And that’s actually very common especially for you know married couples or individuals where you know you become advanced age right spouse passes away sometimes it’s hard to think about completing those rollovers in a timely manner. So very important to make sure you’re working with a advisor who’s on top of these issues so you don’t set up your beneficiaries for unintended tax traps. Great tip there Mike. So, you notice on the right hand side of this illustration, there’s charitable beneficiaries. Charitable beneficiaries are great inheritors of retirement accounts because charities don’t pay income tax on that transfer. They’re 501c3 tax-exempt beneficiaries or entities I should say. And many many people have charitable desires and bequests in their overall estate plan. So if you’re thinking about leaving money to charity, big thing is think about designating charities as the direct beneficiaries of your IRA accounts. That preserves more of the you know tax friendly basis stepped up as Mike mentioned earlier assets for your non-charitable you know family member type beneficiaries you know leaving them in a better overall income tax situation after you pass away. One, you know, thing is you use percentages, not dollar amounts. That can impact the tax deferral opportunities if there’s non charitable beneficiaries, you know, alongside those charities on the actual IRA account. And then couple quick takeaways here. We’re going to dive really deep into some planning concepts for planning for your spouse. But again, just a reminder, you know, your spouse, if your spouse is the beneficiary, has maximum flexibility under the tax code as far as deferring income tax. And there’s even strategies to protect those assets and trusts, which Mike is going to walk us through next. If you find yourself in that 10-year category, just don’t miss that required distribution in each of the 10 years. If the person you inherited the IRA account from passed away after their required beginning date, RMD age, something that gets missed, there’s penalties. Just want to make sure that you avoid that situation. And again, you’ll want to think about who your beneficiaries are going to be on that account in the future. Coordinate it with your own estate plan and maybe do a little bit of tax planning. Make sure you’re withdrawing the money tax efficiently. Now, I might just add a couple more things on that slide there and we could, you know, there’s a lot here. We could talk about it for a long period of time, but if you look at this, you’ve got a lot of options, right? There’s a lot of opportunities here. And as Dom said on the far right, the charity side, this is a situation where maybe to optimize if you do have a charitable bequest in your trust, you might take it out because you can cover it. You know, change your trust, remove that provision because you can now cover it with respect to a beneficiary form on a p it doesn’t have to be all of an IRA. It could just be a piece of an inherited IRA that’s subject to, you know, some required distribution there. So kind of a smart tax move there if you’re naming a trust, you’ll see next to the charitable beneficiary column there, you’re either five or 10 years depending on how that trust is written. So if you’re going to name a trust for a child, for example, and we’re going to show this in a in a picture in a little bit later, but I want to just kind of lay the framework for it.  It might be five-year, it might be 10 year, but that that’s a pretty big difference. And there’s a way to make sure that you can get that tenure. And again, you might say, “Well, I’m going to name my children directly, but what if a child predeceases leaving young grandchildren and you want it in trust because you don’t want that young grandchild to receive a $100,000 IRA at their 18th birthday.” So, you want to delay that till there’s a little bit better judgment and better use of those funds or perhaps they get a little more settled in life. So, you want to watch that 5 10-year strategy in there. And then one the one that I really like to set up is in the second column where you can name a trust for your spouse. And you’ll see at the bottom there you can get a distribution period that’s equal to the uniform life table. So you can run it into a trust for the benefit of your spouse and get the same tax treatment, the same RMD period as if you did a spousal rollover, yet you get all of the asset protection that that is contained within a standard trust for a surviving spouse from creditors or from remarriage or you know maybe it’s a you know a blended family and you want to do some assurance as to a definitive plan and that would be that’s essentially the old stretch, right? That’s the old uniform table. Take 126th or 127th which is only about 4% of the account versus you know one/10enth which is 10% of the account or you know god forbid you get in a 5-year payout and you’re taking 20% of the account out or something like that or taking it out in five years. So anyway that’s hopefully that just sort of gives a little additional summary there as to what we’re talking about. Lots of strategy around these RMD periods. So, anything else? I think there one point I would add too, Mike, because I mean this this is the topic of discussion, how to plan for the tax efficient passage of your retirement accounts and what to do once you inherit them. So, if you are a beneficiary of an inherited IRA account and that IRA account is owned by a trust, absolutely imperative that you understand the tax deferral treatment of that trust. And if you’re designing that trust, like Mike said, very important that you work with qualified counsel that understands these income tax rules because you could go from a, you know, pretty decent, you know, tax deferral situation to a disaster if the trust isn’t drafted properly. And again, you want to make sure that you’re following the rules as the beneficiary or trustee of the trust to make sure that money is coming out appropriately. Really, really critical stuff here, Mike. Thanks again. Okay, I know we’re going to get to some of those estate plan design side slides in a moment, but Mike, could you introduce everybody to, some estate and gift tax comp, concepts a little bit different than income tax where we just left off? Sure and this is the taxation again on the total estate of a decedent where essentially, you know, it’s a death tax. You passed away and your heirs have to pay a tax before we get into the other strategy. And there’s really, really good news here. So, it wasn’t that long ago where the threshold for estate tax, I’m thinking back to 1997, was a mere 600,000 per person. So, family farms, family business owners, you know, anybody with 600,000 and more in assets once you, you know, the first thousand over that taxation at a 37% rate and up to a 55% rate. This has been changing over time. So 97 we had the taxpayer relief act set us on track towards a million dollar what’s called unified credit that credit amount that you can use during life or at death to exempt property from estate or gift tax went to a million was headed towards a million from the 97 act. The 2001 act made it immediately a million when governor Bush became President Bush and set it on a track towards almost repeal and then we had the 2000 we had 2010 act and we set it at 5 million adjusted it for inflation and the Obama administration. And then we were on this path at 5 million indexed for inflation and then under the tax payer the tax cuts and jobs act in 2017 it went to it was doubled we doubled it as to what the inflation index was. And we’ve been operating under this regime where we thought it might it might get cut back. We there was an expiration a sunset provision in that tax law and the one big beautiful bill act was passed this summer and did really two things. One, it set it as a permanent exemption and it set it high. It’s going to be $15 million per person next year. If you’re below that, no estate tax. If you gift any piece of that during lifetime, it’s like a piggy bank. You can use it during lifetime. If you do want to make a million-doll gift during lifetime, instead of having 15 million at death, you’ll have a 14 million exemption and it’s it combines for a spouse from one spouse to another. It’s what’s called portable. So, if one spouse wants to leave all their property to the survivor, they can port that exemption over and the survivor will have a $30 million-dollar exemption. Again, that wasn’t the case in in the 97 act and the 2001 act. that’s also now a permanent fixture as well. So this really draws a lot of people out of the federal estate tax regime, you know, thankfully including a lot of family farms and family businesses. And for the first time, it’s  as permanent as things can be in Washington. It’s set. It’s not set to sunset. So as from a planning perspective, it gives us some good certainty. Now the thing that’s important about that for sort of the everyday person is that there is an annual exclusion amount it used to be $10,000. It’s earmarked for inflation in $1,000 increments. So, you can give the annual exclusion to any number of individuals you want each year and reconstitute that gift the following year, each calendar year, and it doesn’t cut into your exemption. A lot of people get confused and they think, well, I can only get that amount is now $19,000 per person because it increases in thousand increments and from the 10,000 that it was, it’s gone up to a 19,000 annual exclusion. A lot of people think that’s boy that’s the limit of my gifting ability. If I want to start optimizing this inheritance and putting it in different accounts for kids or trusts for grandkids, that’s not the case. You just need to use some of that unified credit which is now $15 million, you know, per person, 30 million per couple. So, lots of flexibility when it comes to planning to shift things around. It’s something to keep in mind. So, Dom, do you have any thoughts on that, this great new era that we’re in? Yeah, I mean, it’s unprecedented. You know, a lot of families aren’t going to be affected by these transfer taxes that Mike’s describing. I was going to make a quick note on lifetime giving, and that’s a great reminder, Mike, that there’s a misconception that there’s gift tax due when you make a taxable gift, you know, in excess of the annual exclusion. But earlier we spoke about income taxation on post-death inheritances. One thing that’s important to note is that if you gift a an asset during your lifetime or you’re the recipient of that asset during the donor, your mom and dad’s lifetime, there’s transferred tax basis to that gift. So here’s an example. Mom and dad want to make a gift to you and they transfer stock in Apple, for example. Whatever mom and dad paid for that Apple stock becomes your tax basis. It was transferred during lifetime. If you sell that asset, you’re going to pay full freight capital gains based on the difference between the market value and what mom and dad originally paid for that Apple stock. But if mom and dad would have held on to that Apple stock, kept it in their estate, they would have gotten that step up in cost basis that Mike mentioned. So trap for the unwary. If you’re gifted assets during a lifetime, be mindful of the capital gains tax implications of selling those assets. That’s a that’s a great point. Thanks, Dom for bringing that up. And it’s it, you know, it’s super important. Basis is kind of where it’s at now. That federal estate tax threshold is so high. The thinking is that, you know, if there are changes in the tax code that we’re going to really have to keep an eye on, it’s and it’s been proposed in the past is perhaps a loss of basis adjustment that would be a huge revenue raiser obviously to the US Treasury is to be able to have a limit or a cap on the amount of assets that can get adjusted through fair market value at death. And as Dom pointed out on those gifted assets that have the transferred basis, if they’re into a trust, there are some tools and techniques whereby you can cause incidents of ownership back to for example the grantor or a surviving spouse and then get taxation back so you get a step up in basis. There’s techniques called decanting or possibly a non-judicial settlement agreement. It depends what the state law is or you can inject into that planning, you know, sort of this this pill, you know, that will allow you to then get inclusion in the estate and then get the step up in basis. So, so keep that in mind if you’re operating under a regime where maybe a spouse previously passed away and the basis is stuck. It’s not going to get a step up in basis. Watch for those optimization strategies to pull that back up. Before we switch to the next slide, I’ll just on the state estate tax side and we’re going to go into the states to show a map here in in the interim. There’s state estate tax that’s different than the federal estate tax. There are 12 states in the United States that still have a state estate tax plus the District of Columbia. There also six states that have an inheritance tax. So even though the federal threshold is high, you got to watch out for these states that we highlighted here because again, this is a death tax. So, it’s going to come off the top and, it’s got to be paid and the beneficiaries are ultimately responsible if it’s not paid by the trustee or the fiduciary, the administrator or the executive. And, the thresholds can be quite low. So, for Massachusetts, it’s a $2 million exemption. For example, in Florida, or I’m sorry, in Illinois, it’s a $4 million exemption. And those are nonportable exemptions. So if a couple in Illinois leaves everything to a spouse and that they have, you know, $5 million, the spouse dies, they would have had the use of the two4 million exemptions and had proper planning in place had zero Illinois tax. They’re going to end up with significant Illinois tax because it’s all going to end up in the survivors estate with one $4 million exemption. So you have to be, you know, super diligent with respect to, you know, again, optimizing that estate plan to get both credits, especially when you inherit assets. The other thing I would inject in here at this point in time, and these are hard conversations to have with a more senior generation, your parents, but if you’re in a situation in a state where there is state estate tax in play and you’re below the federal, if you can have a conversation with parents to have your inheritance not brought into your estate, not come to you with incidents of ownership, you can actually have it put in trust where you’re the trustee. You can, you’re the sole beneficiary. You have the right to principal and income for health, maintenance, comp support, education. You can spray those assets to any descendant of yours or a spouse. And you can control what happens at death amongst all of those people, which is a whole lot of flexibility. You’re basically getting your cake and you’re eating it, too. And you keep it off the tax radar. It’s entirely kept away from creditors. it’s entirely kept away from state taxing authorities. So, this can be a real strong, you know, again, you inherit some property. You know, maybe there’s another, you know, you know, something else coming in. Watch and see if you can have those conversations. Watch where you are from a state estate tax perspective. So Mike, before we move on to the actual trust design, I am seeing a lot of this come up, this issue that you just described, when often the you know the parent is designing their estate plan, they’re thinking about their own potential estate tax exposure, not necessarily what that transferred wealth is going to mean for their children or grandchildren and future estate tax exposure. So, we’ve seen a couple of cases recently and these individuals lived in these estate and inheritance tax jurisdictions and they had, you know, relatively modest estates. They might have been flying under the estate tax radar, and they get an inheritance from mom and dad or even a spouse. There wasn’t proper planning and now they’re dealing with estate tax problems of their own. So really important to get the design correct before the asset is transferred and to the extent that you can have those conversations with mom and dad as Mike mentioned and coordinate the better. Okay, Mike, let’s talk about trust. Yeah, we’re going to run through some diagrams. Thanks, Dom and I think this will help. So here’s a little sample diagram. We use this in our planning all the time. Similar devices such as this, but we’ve got a husband and a wife. They each have a revocable trust. They’re going to have the assets titled to the trust to avoid probate, create an efficient mechanism for transfer. And at the first death, they’re going to create a sub trust. Sometimes they’re called AB trusts. Sometimes they’re called marital family trusts or a credit shelter trust or a bypass trust. The concept is the same. They’re going to hold those assets. So, they’re not taxable to the surviving spouse. They’re not a part of a surviving spouse’s estate. So, they’re not open to creditors. And if the surviving spouse gets remarried, they’re going to file their own tax return. They’re going to be exempt from, you know, you know, ever becoming marital property in a surviving spouse’s, you know, new over life there. And so if you inherit property here, you can see the inheritance coming in in the top left there, the $2 million. It’s a good idea, put it in the separate trust, title it to that separate trust. Now, this will segregate it so that it stays in the family line. It can then fund that family trust. The spouse can use it if they need it. They can be the trustee of it, but you know, it’s going to stay within the bloodline, which is a lot of times what people want when assets come from a more senior generation or the generation above them. They sort of want that to stay in that bloodline and this makes sure that that that’s going to happen. Now, the other thing about this is some people will have a joint revocable trust as an estate plan. It’s not an uncommon, you know, device for planning purposes. You could, you know, put a TOD or a POD on inherited account and then pay it down into a sub trust that’s created, you know, out of a joint trust or you could just amend the estate plan to go to separate trusts like this. So, there are a number of community property jurisdictions, Wisconsin and others, that do use a single trust concept. you would want to use the TOD or the POD as a and then and then drive that inherited account into that family trust or credit shelter trust. So that’s just a design feature. The next slide, Dom, if you can advance there for me, it shows it ending up it’s staying in that family trust. The spouse can use it if they need to, but if not, it’s going to end up going down to the to the children at the second death. So that’s just kind of hopefully gives you a little bit of a picture as to how that works. And again, our team is constantly working on this. There’s a lot that happens when a family member passes away, a lot of strategy, income taxes and asset protection, etc. And so, it’s a really a good time to jump in there and look and work through some of these things. The really when it comes to leaving IRA assets, we’re going to show a diagram here on this. As we talked about, a lot of strategy, a lot of times people just go with outright beneficiaries and that’s low complexity but no protection from an asset protection standpoint. you know and a fair amount of uncertainty because if you name for example children a lot of people do this and the children one of the children doesn’t survive and it’s a per sturppies designation it’s going to go straight to those grandchildren that the children of the deceased child no delay and a lot of times people have a delay inside their estate plan where they want assets held to age 30 or 35 till they’re a little bit more you know responsible and older and their marriages are more settled etc. So, it’s a good idea often times to go through the trust. There’s more complexity there definitely great, you know, significant asset protection and then you have to be careful because you don’t want to lose the income tax benefit that you have. But if you design it appropriately, you’re going to get that that income tax protection. I’m going to show you in the next slide here hopefully how that can be done in just one example. So here we have that joint family trust that we talked about, a single trust for a husband and a wife. And at the first spouse’s death, we have half the assets going directly to the surviving spouse, free and clear outright. But then we do create this family trust. And maybe it’s for state estate tax purposes or what have you and we’ve got assets that we want to put in there. Well, one of the assets might be an IRA or an inherited IRA. If you use a regular IRA that you have and you run it into the family trust and use what are called conduit provisions, these are special types of provisions which acknowledge through the trust that the spouse is the is the sole beneficiary and only the sole beneficiary of all of the RMDs. What happens is you get the same RMD period, the same stretch distribution period as if you did a spousal rollover. Now the benefit to that you can see and these are just some samples at age 72 the distribution period would be 127th of the account 121 divided by 27.4 four. So, you know, a little more than three 3% there. A very significant deferral. The account is still growing. The RMD is flushed through. Everything is stays in that account. Now, these are not, you know, this isn’t the Roth account where there’s, you know, we’re talking about accounts that have this deferred income tax component into it. You want them to continue to grow like that and defer that tax. So, you’re getting this this huge deferral, this long stretch. The spouse can be the tr surviving spouse can be the trustee. They’re the beneficiary. They can have the spray power. They can get more assets out of the trust if it’s proper. But you’re getting you’re accomplishing all of the objectives and hitting 100% on the on the income tax side as well. So that’s just one example. You can see of the options here. One is, you know, no asset protection but maximum flexibility. two, you’re getting the AC asset protection with a very significant income tax deferral and then, you know, kind of or three, I’m sorry. Two is the children, you’re getting the 10-year unless you run it, you know, unless they’re an eligible designated beneficiary. And this one I want to mention as well, the EDB there, because there are a lot of families that have, you know, a disabled individual, maybe a disabled grandchild. If you have a trust for that person, they’re able to capitalize on that that long stretch distribution period of their remaining life expectancy. Remember when Dom was talking about the carveouts, that that was one of the carveouts that existed. If they are disabled, they still get life expectancy treatment. Not the 10-year rule, not the five-year rule. So looking at the IRA and potentially funneling it into a supplemental needs trust or special needs trust is often a super good strategy. So anything to add there, Dom, that you think I may have missed? No, you did a great job covering all of the concepts. I think I mean this can become very complicated. I think that the big takeaway here for our viewers is that if you inherit assets, you absolutely need to review your estate plan. And if you don’t have an estate plan, you need to get one in place and understand exactly how this inheritance is going to impact you from an income tax standpoint and also from a transfer tax standpoint and making sure you have those proper protections in place for your loved ones. So, really good stuff here, Mike. Just a quick takeaway slide. Like Mike mentioned, there’s special considerations that have to go into IRA and 401k planning from a beneficiary standpoint. One of the things that we see quite often when we’re reviewing estate plans is misaligned beneficiary designations. I think there’s a misnomer out there that once you have your will or your trust in place, that will or trust handles all of your assets. You know the truth is that the beneficiary designation that you put on those accounts that controls how the asset passes and if you don’t have the trust named one of Mike’s examples is either primary or contingent beneficiary for asset protection for state tax planning purposes that asset is going to bypass that IRA account is going to bypass the terms of your trust and you know that that could be not a good situation and all that good planning could be for not. So don’t forget to review those beneficiary designations quite often. Okay, speaking of boy, I got this inheritance. What else do I need to think about? And again, this is not designed to be a you know a lecture or a class on how to invest and construct a portfolio. But you know the big thing is you know you received the inheritance, you might need to revisit your investment strategy, right? your overall asset allocation. What is your asset allocation? Well, it is the mix of different asset classes that you own. Simply stocks, bonds, and alternative assets like commodities, you know, real estate, that sort of thing. The asset allocation that you choose overall will determine how much risk your portfolio has and what the expected returns are. Here’s an illustration. We call this the efficient frontier. So when you’re designing your overall investment strategy, you want to make sure that you’re working with a qualified advisor that can help you pick those right mix of assets to minimize the risk or the volatility, the ups and downs in your portfolio for each given rate of return that you would expect based on those asset classes. Another thing to think about too is I’ve gotten this inheritance. Okay, I’m going to meet with my advisor, determine how I might change my portfolio strategy if anything. But when you receive that inheritance, let’s say you’re still working. What does that mean for you from a retirement standpoint, right? Can you accelerate your retirement time frame and retire early? If you’re already retired, you know, can you spend more, right? Do you want to invest those monies that you’ve inherited differently? Mike talked about a desire to sometimes keep those inherited assets in the bloodline. You know, maybe you want to get a little bit more aggressive with those assets and have a higher, you know, return target, right? A little bit more risk because you want those assets to grow for future generations and a different allocation for your own accumulated retirement assets. So there’s a lot of decisions that need to go into portfolio construction when you have those new inherited assets. And sometimes, you know, you’re inheriting single stocks, appreciated securities. Hopefully there’s basis step up, right? If you receive them during a lifetime, there’s transferred basis, but you know, how do you feel about those investments? Do you have particular emotional attachment? You know, maybe mom and dad worked for the company, right? And you inherit the stock from mom and dad, right? How do you work that into your overall investment plan? Things you can discuss with your investment advisor. Here’s another income tax sort of concept when it comes to investing. We spent a fair amount of time speaking about the different types of income tax attribute assets that you can inherit after tax assets like brokerage accounts in real estate retirement accounts which are tax deferred and then Mike mentioned Roth accounts Roth accounts are tax-free to the beneficiary to the owner when money is withdrawn. So there’s tax-free growth and defer and then when money comes out, there’s no income tax due when you when you actually take the money out of the account. So what does that mean from an investment standpoint? Well, depending on the type of asset you have, those assets are taxed differently. So you want to make sure that you’re working with your advisor to orient your investment asset allocations into the optimal tax buckets, right? Income producing assets like bonds, you know, real estate holdings, sometimes there’s, you know, real estate type investments that you know, publicly traded. You might want to orient those in your, you know, your tax deferred pre-tax bucket so you’re not paying income tax as those underlying investments generate you know, interest income basically or rental income. you know, you might orient your capital gain type assets to your taxable account, right? Because you can only pay income tax when the asset is actually sold. So, so it’s all about aligning the tax attribute with the appropriate tax bucket. And Mike, do you have any thoughts on this topic? Yeah, I would just add that you know when you inherit those if you receive an inheritance that you know now there might be opportunities there that you didn’t have before and you should search these out optimization you know strategies. So, for example, maybe you were contributing to the 401k and you could have done a Roth 401k, but you it was just wasn’t in the budget. You weren’t able to put after tax dollars to pay tax and then put after tax in the and the Roth was available. Well, now maybe it is. You can use these monies to cover that tax bite and then switch your account over to a Roth 401k. So, your contributions are going into that account. Maybe you can, you know, just take do a conversion that you otherwise weren’t able to do. you know, pay some tax, get it into a Roth, stretch it out, and now you’re going to get it out, you know, without having to pay tax later on. Maybe you can make a catch-up contribution. Okay? So, again, taking it because now you’ve received this inheritance. It’s sort of in the taxable bucket, but the idea is, well, how can I get it growing? Not only how can I get it keep it growing on a tax advantage basis. These are the distribution rules that we’ve talked about, but how can I get it into one of these categories? for example, a 529 plan for a grandchild’s education gets it growing in one of those buckets, make a contribution there. So, a lot of strategies there to move it around and some people will earmark and say, “Well, gosh, I received this, but I really could, you know, push this towards the towards the grandchildren or a piece of it. So, this is this is how I’m going to do that.” So, it’s a matter of looking at looking at it from all different angles to accomplish that. That’s a great point. I mean, when you inherit different tax bucket assets, it creates a lot of flexibility and opportunity, quite frankly, that you might not have been aware of. So,  just keep those strategies in mind. Okay, we’re getting close to the end and, we covered investments, income tax, estate and gift tax, potential trust design. Next, let’s speak about estate planning considerations for generational planning. you know this slide I’ll take this one Mike when you when you u gain an understanding of your inheritance how it fits in to the big picture think about your overall estate plan one thing that often gets overlooked is just the basics getting organized Savant has something we call the estate and trust administrators guide which can allow you to capture important information your future fiduciaries your executive your trustee can consult to that isn’t in your actual legal documents like who to contact if something happens to you, you pass away, where important documents are located, your team of professionals, funeral and burial arrangements. You know, getting organized, creating a really nice breadcrumb trail for your beneficiaries and your future fiduciaries is one of the greatest gifts that you can give, right, Mike? Yeah, absolutely. And again, you know, Dom’s we’re both practicing attorneys. Dom is licensed in Florida and Virginia and I in Illinois, Wisconsin and Florida and you might think it’s a little bit self- serving, but if you receive an inheritance, it’s a good idea update your estate plan or if you don’t have a solid estate plan, and this is the this is our process here. We act, you know, with outside counsel to make sure our clients have, you know, just a great estate plan in place and make sure we’re, you know, crossing all the tees and dotting all the eyes. But it’s a good time, you know, talk about optimization, use those resources, you know, make sure your plan is up to date and improve it or make that expenditure to get a solid estate plan in in place going forward, you know, towards the next generation. There are a lot of things to think about when it comes to, you know, the strategies going forward. We just mentioned, you know, a few of them. Who’s going to serve as trustee? You know, this might be a a place to update. boy, I’ve got significant more assets. I’m not sure I want an aunt or an uncle to be trustee for a niece or nephew. Maybe a corporate I don’t want to mess up the family circumstances or the kids are far away and spread out and I want family harmony. So maybe a corporate trustee makes sense where it didn’t before where there’s an independent third party that’s going to take over and just take care of all the business that needs to be done, you know, and it there’s a cost to that at death, but maybe that’s justified. Maybe they’re, you know, as it shows to the to the far right there, you maybe layer it with the kids’ trustee and a corporate trustee is the last trustee. And as it says in the third column there, you give the beneficiaries the power to remove and replace, of course, that corporate trustee so that there’s still control back to the family. Take a look at the, you know, downstream, you know, how do I need to protect this this inheritance to stay in the family? That can also be a big deal. And then this slide we put in there because when it comes to I think when the estate tax threshold has gone so high now and it’s been you know it’s been moving in that direction there hasn’t been enough attention paid to estate planning distribution standards. So you know people would get locked into these standards because of the tax law the traditional what’s called a hem standard health education maintenance and support. Now there’s flexibility but people haven’t really worked through that flexibility. How and when do you want your the next generation or other members to optimize this inheritance, right? Like how can it be put to best use and what parameters do you put around that? Not being bound by the old tax laws that were out there. There’s freedom where there wasn’t freedom before. And this gives you the opportunity to have some real diligent conversations and just really take a take a new look at it where you insert certain special provisions. is sometimes called spray powers or limited powers of appointment and the like. So, you know, it really opens up sort of the landscape for proper estate planning. And then the slide here before we get into common pitfalls, Dom, trust protectors. This is a modern or contemporary tool in estate planning. It’s really a good idea and catching on. If you haven’t had your estate plan updated in the last 10 years or so, probably won’t have these provisions, it’s just like fire across the United States. What it’s essentially if you have a family member or trusted person or advisor in in your circle, you can make them what’s called a trust protector and embed that independent person with authority over the trust. So that if there are sub trusts, irrevocable trusts for children or grandchildren, somebody has the power to interpret the trust, to change the situs to a more tax friendly state jurisdiction, to settle disputes, resolve ambiguities, all kinds of things like that. So we’re just seeing an abundance of good planning, you know, around what are called trust protectors. And it is an optimization technique. It’s an opportunity to update your estate plan, optimize it, and now you know now there’s flexibility in what would otherwise be a very in inflexible document. So, we’ll head into the common pitfalls there, Dom, and then we’ll talk about answering some of these questions that we have in the queue. Sure. And before we head there, I just wanted to add a few more points. I mean, Mike, 100% agree. you know, it’s critical to get the design right up front if you’re creating the estate plan, whether you’re the inheritor of the wealth or the person transferring the wealth, but if you if you if you are the inheritor of the wealth and you receive your assets in a trust, for example, right, it’s very important that you understand the terms of those trusts, the rules for how the money can be used. I think there’s, you know, maybe some misunderstanding that you could just withdraw the money for any reason. Sometimes that’s what the trust says. Other times there might be some restricted provisions. Maybe the funds can only be used for health, education, maintenance, and support. Right? What are the required trust accounting income distribution rules? So, just don’t want to miss that point, if you have a trust you’ve inherited, you really want to work with a team or, you know, become educated on how that trust actually works for you as the beneficiary. And sometimes you might be a trustee of a trust for another person as well. Very important to understand how the trust works from that perspective. All right, we have a wrap-up slide. Common pitfalls. So we covered a lot of these topics. There’s a couple new ones. So again, you know, big pitfall is just not understanding how those inherited IRA accounts work. What is my status? Am I an EDB? Am I a regular designated beneficiary? Are there RMDs, you know, required? So, so making sure you understand the rules, make sure you properly align your own beneficiary designations. Absolutely imperative. You kind of alluded to the second one, Mike, about coming inherited assets and you know, state laws vary on this topic but there are some consistencies. When you inherit an asset from a parent or their loved one, generally that’s not included as marital property by default if you’re a married person. So Mike mentioned earlier in that joint trust example, you know, you might not want to immediately title inherited assets in the name of you and your spouse, right? Because inherited assets are generally considered separate property, not ordinarily subject to division upon a divorce, for example. Number three, right, u failure to adjust the basis at death. This is something that gets administratively overlooked. It just doesn’t happen automatically. You have to provide instructions to that account custodian to process that market adjustment. Otherwise, you could inadvertently realize a bunch of capital gains as the beneficiary if that was mishandled. Failure to update your own estate plan, right? We talked about a lot of issues that could arise, unintended estate tax consequences, inadequate asset protection provisions for young beneficiaries. read, review, and update your estate plan if you receive an inheritance. And then finally, you know, insurance, just something that gets missed, right? What are the beneficiaries on those old insurance policies, right? Are they in your estate? Are they out of your estate? So, understanding those insurance coverages from a life insurance standpoint. All right. Before we take questions, just want to remind everybody that if you want to discuss your situation with the Savant advisor, there you can schedule a complimentary 15minute call, there should be a link in the chat feature of your Zoom window popping up right now with a link to go ahead and schedule that complimentary appointment if you’d like to. We’re going to try to get to as many questions as we can with our remaining time, but if we can’t, you know, one of the Savant advisors can certainly speak with you in your situation. So, we’ll take some questions now. Thanks everyone. Yeah, I’ll take one that I see out there that maybe clear things up. So, we talked a lot about the RMDs at death and sort of the different options and strategies that are out there. The question was, well, what about during lifetime? remember during lifetime, you know, you’re operating under this under this uniform table, so as an owner of a of an account, an IRA account, there’s a table for your required minimum distribution and so it’s you’re already in the stretch zone during lifetime and you reach whatever age you happen to be, your required beginning date, and then you take out, you know, according to this table, you can take out more if you want, but you got to take out at least that much because the IRS wants to start to get a bite of that apple back. What happens at death is that goes away. There’s a ghost what they call ghost a ghosting of that that you can use in certain situations. But now you’re into these other rules into these at death rules. So it’s sort of the it’s sort of the flip side of that. You’re going from this long you know possible you know required distribution date to potentially very short distributions and you’ve got to do the rollover you know if you’re a spouse or take it as an inherited IRA and then choose secondary beneficiaries. So, a whole different a whole different realm there. One of the questions that came up was, you know, can you disclaim assets? Where you just say, I don’t want to inherit these and drop them down to the next generation. And you can, you have nine months from the date of death to do that. You can’t take control of those assets. But sometimes people want to do that. They just want to say, “Hey, treat this as if I predeceased.” And that’s why it’s so important to line up the primary and secondary beneficiaries on these accounts correctly. When you do that because you know if you name a spouse as primary and a trust as secondary you give the you know the surviving spouse the ability to disclaim and drop into these other trusts and there might be good reasons to do that. So good strategy is to is to look at all the options and line them up primary secondary in nature. So you see anything else out there Dom that you want to jump on? This is a good one and I think this came up when you’re speaking about potential estate plan design, but there’s other documents that you put in place with your power of attorney documents. And one of the questions is, what’s the difference between a living will and a power of attorney for healthcare? They go together. A power of attorney for healthcare document allows you as the principal to name an agent to make health care decisions on your behalf if you become legally incapacitated. the living will or advanced directive provides your end of life decisions to your physician caregivers and family. So whether or not you want artificial nutrition or hydration withdrawn or administered. So you really need both documents. The names of documents vary from state to state. Sometimes there’s a separate healthcare POA and a separate living will. In states like Virginia, it’s one document called an advanced medical directive. So, as you’re designing your estate plan or refreshing your memory on the terms, just make sure that you’ve, you know, you have your healthcare and powerful property in place with those living will instructions. Okay, Mike, I think we did good. We’re ending on time today. I’m gonna take one more question if you want. Yeah, just came in and it was on inherited ass. In most states, inherited assets are separate assets. It’s, you know, they won’t become part of the marital estate. But the problem is people start to co-mingle them. They buy a piece of real estate in joint tenancy with a spouse. So, in most states, whether they’re community property state or not, they’re they should have separate distinction. You don’t always know that’s the case, though, because you never know what a state law judge is going to do. And also over time those assets even though they were separate at one point in time because they were inherited and had that spec you know that specific classification they generate taxation interest in dividends which gets picked up on a joint income tax return with a spouse and so now the argument can be made well I’m you know I’ve been paying tax on those on some of those assets they should be marital property. So you that’s why you want to get in there and identify separate property. Also, if you move from a, you know, a community property state to a non-comm community property state, it’s a good idea to do something to give you the benefit of that initial community property, which gets you a full basis adjustment, not just the 50% basis adjustment that a joint-tenancy asset would have. So, there’s a special nuance there. So if you’re, you know, you’re in one of the community property jurisdictions in the United States, Wisconsin, and you’re thinking about, you know, moving out of it, make sure you keep that double basis, you know, that’s that full basis adjustment. As we talked about basis, basis, basis, super important. So, all right. I just wanted to cover those. Thanks, Dom. This has been a great program. Hope everybody appreciated it. Been lots of fun to put on. Any final words there, Dom? No. The devil is always in the details, as you’ve taught me. You know, your mileage will vary. So thanks everybody for attending today’s live webinar. If you’re looking for more information about Savant and what we do, we invite you to check out our website at www.savantwealth.com to learn more and to schedule that 15-minute complimentary call with one of our advisors. Thanks again everyone. Have a great day. We’ll see you next time. Have a great day everybody. If you enjoyed this webinar, visit savantwealth.com/guides and download our complimentary guidebooks, checklists, and other useful financial resources.