With the passage of the SECURE Act, we saw how quickly carefully laid plans can be thrown out the window. Many of our clients have diligently saved for decades in their retirement plans. They have carefully structured estate plans with hopes that their years of hard work and savings would not only support their own retirement, but help provide a legacy for their children and grandchildren.  And then Congress changed the rules of the game.

So what can we learn from this?

Build an estate plan that isn’t overly dependent on the whims of government. Take control. Keep things as private as possible.


Adult Guardianship (a.k.a. “Living Probate”) and Probate

Many people come to us wanting to avoid probate upon their death. In brief, if you have no estate plan or if you have a will-based estate plan, then it is likely that some or all of your estate may be exposed to probate—a court process where the court “babysits” your executor and family while they settle your final affairs. It’s a process that adds unnecessary cost, headaches, and time expenditures to the settling of your estate. It's no wonder people want to avoid it!

But many fail to consider the potential consequences of Adult Guardianship—also sometimes referred to as “Living Probate.” If you become mentally incompetent due to Alzheimer’s, dementia, stroke, or a similar ailment, then it’s possible that we may need to legally strip you of your power to handle financial matters for yourself. Consider this example: we once had a client in the early stages of cognitive impairment. A common side effect of early cognitive impairment is compromised decision-making. This client had lost around $100,000 to “hot stock tip” spam emails.

Many people think that a Durable Power of Attorney helps with this type of scenario, but it doesn’t! A power of attorney allows you to appoint someone to act on your behalf, but it doesn’t stop you from acting for yourself. Thus, in such instances, your family may have no choice but to seek Adult Guardianship to have your powers removed. And just like Probate, Adult Guardianship is a court process that adds unnecessary cost, headaches, and time expenditures.

So what’s the next best alternative? Set up a properly funded Living Trust. Think of the Living Trust like a box that holds your assets. You write a “rulebook” for how you want your assets managed and you attach it to the box. You then appoint a Trustee to follow the rulebook on your behalf. While you are healthy and able, you appoint yourself as your own Trustee, but within the rulebook, there is a clear mechanism for who (usually trusted family members) can remove you as Trustee in the event of cognitive impairment. This allows the process to be a private family matter. [Note: This is not always 100% foolproof but it highly increases the likelihood of avoiding Adult Guardianship.]


Estate Taxes

Over the past couple of years, we’ve encountered many clients with estimated estates of $3 million or higher that have eschewed the idea of estate tax planning because the current estate exemption is over $11 million through the end of 2025 (when it is scheduled to revert back to $5 million adjusted for inflation). But here’s the thing: We are NOT guaranteed until the end of 2025. This year is an election year. Congress can always change the rules on us again. If you think it is likely that you will need estate tax planning in the future, it may be prudent to “lock-in” the current favorable tax rules to the extent that you’re able to. [And if you’re reading this with a current estimated estate of $2-$5 Million and thinking that this doesn’t apply to you—a couple of reminders: Your taxable estate includes the death benefit of life insurance and rough math suggests that unless you are actively spending from your estate, it is likely to double every 8-14 years or so, which means you very well could be on track to have a taxable estate.]


Retirement Planning

As we discussed last month, the SECURE Act made sweeping changes to the Retirement Plan rules. You can still download our memo outlining the impact and planning strategies here.

We’re also experiencing some of the lowest income tax rates in history, leaving many to speculate that income tax rates will be higher in the future. This has left many questioning whether they should be reconsidering their investment strategies.

For example, would it be better to pay taxes now and invest in a Roth IRA (or Roth Conversion) at today’s lower income tax rates in order to enjoy tax-free distributions in the future? Of course, this is dependent on Congress not changing the Roth IRA rules…

Or, perhaps it would make more sense to pay taxes now and invest in a simple brokerage account where future distributions are likely to be taxed at the long-term capital gains tax rate, which for many, is lower than their marginal income tax rate. Plus, brokerage accounts enjoy a step-up in basis upon death, which can be a huge tax advantage for your beneficiaries. But again, this is dependent on Congress not changing the rules. However, for what it’s worth, these capital gains rules are much more established than the Retirement Plan rules which have only been around for a few decades and don’t carry as much lobbying support.

In short, do NOT assume that a Roth Conversion is the best strategy for your situation. We recently sat down with a client and compared Roth Conversions vs. other planning strategies and were able to obtain far better tax savings and multiply the estimated net after taxes that the client will leave to heirs without using a Roth Conversion.


Life Insurance Planning

Many think that life insurance is just about providing a death benefit to their family. However, for astute students of wealth and tax planning, life insurance has enormous income tax benefits under the tax code. There is a reason that many of the country’s wealthiest individuals and corporations carry significant amounts of permanent life insurance. When structured properly, a permanent life insurance policy can function much like a Roth IRA with the ability to withdraw money from the policy tax-free. A permanent life insurance policy is also potentially more flexible—you don’t have to wait until age 59.5 before you withdraw funds and there are no contribution limits based on your income.

While these rules are also subject to the whims of Congress, these favorable rules have been around a long time and are heavily bolstered by extremely strong lobbying efforts (some of the same ones that lobbied in favor of the passage of the SECURE Act, by the way). We can help you explore whether this may be an appropriate strategy to incorporate into your planning.


Long-Term Care Planning

Do you want your future health and quality of life to be dependent on the government? The two most common government programs that people turn to for help with the devastating costs of long-term care are Medicaid and Veterans benefits—both of which leave much to be desired.

Medicaid is subject to strict eligibility rules. And while there is a lot that we can do to protect assets from Medicaid, the bigger issue is that Medicaid is primarily for skilled nursing facility care and provides little to no assistance for in-home care, assisted living care, and/or memory care. (Assisted living and/or memory care generally costs $6,000-$9,000 per month in our area. Around-the-clock in-home care can cost $12,000-$14,000 per month.) Further, one must be medically needy of skilled nursing facility care. Many clients with cognitive impairment do not medically qualify for a skilled nursing facility until the late stages, leaving many families struggling with how to afford assisted living or memory care.

Veterans benefits are also subject to strict eligibility rules and are only available to wartime veterans or their spouses. In addition, with monthly benefits ranging from around $1,200-$2,200 per month, the benefits rarely are enough to cover the full cost of care.

This is why for years we have been urging more clients to take long-term care planning into their own hands. We can help you explore private long-term care planning strategies that limit your financial risk and can be used to pay for in-home care, assisted living and/or memory care. Some of these options even include tax-savings.  


Your Next Steps

If you don’t have a plan yet, or if you have a plan that is not “government proof,”give us a call at 919-443-3035 to schedule a Vision Meeting. We would be delighted to help you explore your goals and the planning options available to achieve those goals.


Jackie Bedard
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Attorney, Author, and Founder of Carolina Family Estate Planning