Well the biggest problem that a lot of us have when we’re doing our estate plan is uncertainty. You know back in the old days, if there was a big IRA, and for reasons over here, I typically wanted to leave that money to grandkids. But let’s say I did that, and then maybe there wasn’t enough money for the spouse. Or if I left everything to the spouse, maybe the spouse got more than he/she needed, and we lost the opportunity to do this for the grandkids. And then you add in who gets what―well we have different tax brackets and different situations, and here’s the thing, when you come in to do a will, or your trust, or your estate plan, you don’t know what the law is going to be like. The law is significantly different because of the SECURE Act. It is much different, and my advice to people is significantly different.
Before I was anxious to get money to younger beneficiaries. Now a non-married beneficiary has to take it out in 10 years. So, we might want to have IRA money going to the spouse. And who knows how many times they are going to change the law between now and when you die. So that’s one question. We don’t know what the law is going to be like. And it could have a major, major difference.
Next question, if you’re a married couple, who is going to die first? Usually we assume the man, right? Because we tend to live not as long but it has often worked out the other way.
Next question, how much money are you going to have? Maybe you’re going to have a lot of money. Maybe as you get older, you spend less, the market does well, the portfolio grows and grows, and you have a lot of money. Or maybe, you know, I have clients who tend to be very conservative financially, “Oh, what happens if the market goes down? Oh, what happens if I get sick? Oh, what happens if you’re right?” Well, then we have less money.
Now, if we’re allocating money to kids and grandkids, then all of a sudden, the market goes down and you’re sick, now the spouse doesn’t have enough. And that’s a violation of our first rule, which is to provide for the surviving spouse. Alright?
What are the needs of the survivors? Maybe the kids are doing well, maybe they’re not. Maybe one kid is doing well, and maybe the other one isn’t. These are all things we don’t know. So how can we do a plan that is going to work with all these uncertainties?
Oh, more uncertainties. Where are tax rates going to be? We think that there is going to be a big tax increase in 2026, but who knows? If Congress does nothing, which is probably not a bad bet, we have a big tax increase coming.
Where will you die? I have people who always assume that they would die in Pennsylvania―as Pennsylvania residents. Now we have people moving to other states that have completely different tax laws, like Florida.
So what could be the plan to deal with all these uncertainties? And again, protect both of us, protect the spouse, cut taxes, and the advantage for the spouse. An exception to the SECURE Act, unlimited marital deduction, and favorable distribution of the inherited IRA. Unlimited and by the way, that’s also unlimited not only for federal purposes, but also Pennsylvania, so there’s no tax. That was, by the way, one of the reasons why I wanted older gay couples to get married. So, when one died and left money to their spouse, if they followed my advice, there’d be no tax instead of a 15% inheritance tax because the spouse got the inherited treatment, for a spouse, there’s no required minimum distribution for a Roth IRA, so that was a good thing.
Sometimes we wanted to leave money to a child because maybe the child was in a lower income tax bracket. Sometimes we wanted to leave money to a child because they needed it more.
Let me tell you a relatively common plan that I am constantly fighting because it’s the natural thing for professors particularly. So, a lot of times what would happen is people got used to living frugally, they put money in their retirement plan, didn’t think about it much, and it grew for 30 or 40 years and all of a sudden, there is a couple million dollars. And they’re still living frugally, which I fight all the debt all the time. “What am I going to spend the money on? I have everything I want.” I can’t tell you how many times I hear that.
Well, let me tell you what’s a pretty bad plan. Accumulate, accumulate, accumulate, accumulate, die, have a big tax hit, and then your kids get money in their 60s. Lousy plan, but that is the unstated plan of many professors. So, the best solution to this problem, don’t decide. Isn’t that nice? I’m going to let you guys off the hook. You don’t have to decide. Well, who decides and when? The surviving spouse decides. When? Not now, not two years or four years from now, but they decide within nine months after the first death. Why then? You know a lot more then.
So, let’s take the two examples. One, gee, do I have enough money to make it for both of our lives? And let’s say the market does well. Let’s say there is no major health problem or at least one that costs a lot of money, and there is a lot of money. Well, that’s a much different situation than if after the first death, you’re relatively broke. So why decide in advance? Let the surviving spouse decide within nine months after your death.
That way, the spouse could say, “Oh, okay, given I know what the law is now, I know what the tax rates are, I know the family situation, and I have some idea of how much money I’m going to need.” I’m going to make this decision often with the help of whether it is financial professionals or even their kids. You can come up with a much better solution later than you can now.