401(k) contribution
I’m dealing with a young, wealthy couple. They have a net worth of around $7,000,000. They will inherit at least $15,000,000. They have no debt and live very comfortably on $4,000/month. $150,000 is gifted to them every year. The grandparents have already funded education for their two children.
Pertaining to their 401(k) plans, should they max out their contribution, only contribute to the match, or contribute nothing? What is your rationale? I'll answer other questions if they are needed to answer mine. Thanks. I have my thoughts, but I was curious as to what others thought.Looking near-term, would the salary reduction benefit them any at tax time?
My initial thought would be to contribute up to the match. Any more than that, and you’re giving up alot of control of the money. What’s the point of deferring at 35% if there is a good chance they’ll be in a higher tax bracket in the future? I have a few more questions though:
When's the last time they reviewed their wills and trusts? How much life insurance do the have? What kind? What is their take on term vs. permanent? How much umbrella coverage do they have? How much do they like to keep liquid? What is their opinion on legacy-building? Besides their family, who do they want to have benefit after they're gone? How do they feel about real estate? Collectibles?I'm not a big fan of 401k's outside the match. Given they're so well off, they have so many more options to build wealth than most people. Ultimately though, if the castle isn't protected by a deep and wide moat, how to build wealth won't matter.
Adopt me and I will never work again Just having you on Anonymous…upcoming Long Weekend.
[quote=anonymous]I’m dealing with a young, wealthy couple. They have a net worth of around $7,000,000. They will inherit at least $15,000,000. They have no debt and live very comfortably on $4,000/month. $150,000 is gifted to them every year. The grandparents have already funded education for their two children.
Pertaining to their 401(k) plans, should they max out their contribution, only contribute to the match, or contribute nothing? What is your rationale? I'll answer other questions if they are needed to answer mine. Thanks. I have my thoughts, but I was curious as to what others thought.[/quote]So they have you helping them with $15,000/year? Who is handling the real money?
Do you have the grandparents?
If not, would you like to show them how to avoid uncle sam for the next 50 years?[quote=deekay]
I'm not a big fan of 401k's outside the match.
[/quote] Would you elaborate on this, please. As with nearly every other topic in this industry, if I asked five Jonesers about how they would advise a particular client regarding contributing to their 401k, I'd get at least seven different opinions. Is there no hard and fast rule?[quote=Borker Boy][quote=deekay]
I'm not a big fan of 401k's outside the match.
[/quote] Would you elaborate on this, please. [/quote] Sure. There are three phases of money: accumulation, distribution, and transfer. 401k's (especially with a match) are tremendous accumulation vehicles. Pre-tax contributions and tax-deferred growth help someone grow their money quickly. However, 401ks are horrible vehicles to take money out of, and one of the worst to transfer to other generations. The government is in complete control of the tax code, and they know they've got huge amounts of deferred taxes due to them. Who's to say they won't jack the highest marginal tax rate to 60%? Or 90%? Plus, the gov't can put an excise tax on large balances, change the minimum age of withdrawal, and in general, monkey with the tax code to their advantage. An analogy I sometimes use with my clients is this: "Imagine I pulled you off the street and asked you to go into business with me. Here is the way it's gonna work - you'll put up all the money and take all the risk. Because you're doing that, I'll draw up all the documents. However, I have the right to change the docs whenever I feel like it. Right now, I'll only be a 30% partner, but can change how much of a cut I take, and there's nothing you can do about it. You have to stay in the partnership until you are at least 59 1/2. If you decide to leave early, I'll take my cut plus another 10% for my time. Do you go into business with me?" Once they see that the 401k isn't all it's cracked up to be, they're begging me for answers.Borker Boy,
Give me your best educated guess on this question. Let's assume that the 401(k) money for my clients grows to $1,000,000 at their death and their total net worth is $20,000,000+. Their children are the beneficiaries of the 401(k) money. What is the total taxation of this 401(k) money? (Just give a quick rough guesstimate.)$350-$400K
75% - likely more in the future.
If they are charitably inclined, contributing up to the match and naming charities as the beneficiary would be my choice. If they aren't, then I'd counsel them not to contribute.With that much NQ funds already, and more to come, I would max the 401K. It will end up being “never money” and pass on to their kids tax free and possibly “stretched” (if the kids manage it right). That way, much of their income is sheltered (Idue to the 401K contributions), and you have flexibility in how you manage the rest of the NQ portfolio (it sounds like muni’s and growth stocks will keep their tax bill low and keep growing).
Explain to us your rationale of putting "never money" in a vehicle that is terrible at distributing and transferring assets. What happens if the couple needs/wants the 401k money in the future? They defer today at 35%, but what will tax rates be in the future? I'm not trying to predict the future, but there is a good chance they'll be in a higher tax bracket in the future.With that much NQ funds already, and more to come, I would max the 401K. It will end up being “never money” and pass on to their kids tax free and possibly “stretched” (if the kids manage it right). That way, much of their income is sheltered (Idue to the 401K contributions), and you have flexibility in how you manage the rest of the NQ portfolio (it sounds like muni’s and growth stocks will keep their tax bill low and keep growing).
DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he’s got so much NQ money that why not get some “tax diversification” but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine.
One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes.Not dealing with the specifics of taxation and distributions as the laws are different in the U.S. versus Canada. With a client/s in your described situation I would strongly suggest bringing in both the expertise of both lawyers and accountants. Does your firm provide access to these professionals for clients?
If so, I would be thinking of that as a way to provide a complete analaysis for your client/s.[quote=deekay] [quote=Borker Boy][quote=deekay]
I’m not a big fan of 401k’s outside the match.
[/quote]
Would you elaborate on this, please.
[/quote]
Sure. There are three phases of money: accumulation, distribution, and transfer. 401k’s (especially with a match) are tremendous accumulation vehicles. Pre-tax contributions and tax-deferred growth help someone grow their money quickly. However, 401ks are horrible vehicles to take money out of, and one of the worst to transfer to other generations. The government is in complete control of the tax code, and they know they’ve got huge amounts of deferred taxes due to them. Who’s to say they won’t jack the highest marginal tax rate to 60%? Or 90%? Plus, the gov’t can put an excise tax on large balances, change the minimum age of withdrawal, and in general, monkey with the tax code to their advantage.
An analogy I sometimes use with my clients is this: “Imagine I pulled you off the street and asked you to go into business with me. Here is the way it’s gonna work - you’ll put up all the money and take all the risk. Because you’re doing that, I’ll draw up all the documents. However, I have the right to change the docs whenever I feel like it. Right now, I’ll only be a 30% partner, but can change how much of a cut I take, and there’s nothing you can do about it. You have to stay in the partnership until you are at least 59 1/2. If you decide to leave early, I’ll take my cut plus another 10% for my time.
Do you go into business with me?”
Once they see that the 401k isn’t all it’s cracked up to be, they’re begging me for answers. [/quote]
Deekay-
They could just opt to do the ROTH 15,000 year and not worry about the future tax consequence… (Obviously, legislation could change that rule too) but still it’s a good option for these types of clients. The rest could go into an annuity…
Miss J
[quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none.[quote=MISS JONES] [quote=deekay] [quote=Borker Boy][quote=deekay]
I'm not a big fan of 401k's outside the match.
[/quote]
Would you elaborate on this, please.
[/quote]
Sure. There are three phases of money: accumulation, distribution, and transfer. 401k's (especially with a match) are tremendous accumulation vehicles. Pre-tax contributions and tax-deferred growth help someone grow their money quickly. However, 401ks are horrible vehicles to take money out of, and one of the worst to transfer to other generations. The government is in complete control of the tax code, and they know they've got huge amounts of deferred taxes due to them. Who's to say they won't jack the highest marginal tax rate to 60%? Or 90%? Plus, the gov't can put an excise tax on large balances, change the minimum age of withdrawal, and in general, monkey with the tax code to their advantage.
An analogy I sometimes use with my clients is this: "Imagine I pulled you off the street and asked you to go into business with me. Here is the way it's gonna work - you'll put up all the money and take all the risk. Because you're doing that, I'll draw up all the documents. However, I have the right to change the docs whenever I feel like it. Right now, I'll only be a 30% partner, but can change how much of a cut I take, and there's nothing you can do about it. You have to stay in the partnership until you are at least 59 1/2. If you decide to leave early, I'll take my cut plus another 10% for my time.
Do you go into business with me?"
Once they see that the 401k isn't all it's cracked up to be, they're begging me for answers. [/quote]
Deekay-
They could just opt to do the ROTH 15,000 year and not worry about the future tax consequence.. (Obviously, legislation could change that rule too) but still it's a good option for these types of clients. The rest could go into an annuity..
Miss J[/quote] Do we know a Roth 401k is available? How is an annuity appropriate as well (not bashing or condoning it, I'm trying to understand your train of thought.)?
They don’t have Roth Options. Both have access to 401(k)'s.
[quote=deekay][quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none. [/quote] It's illegal to help folks with their asset allocation in their 401k if we're not the rep for the plan?[quote=Borker Boy][quote=deekay]
I'm not a big fan of 401k's outside the match.
[/quote] Would you elaborate on this, please. As with nearly every other topic in this industry, if I asked five Jonesers about how they would advise a particular client regarding contributing to their 401k, I'd get at least seven different opinions. Is there no hard and fast rule?[/quote] Do you see what I mean about all the conflicting opinions. Geez...my head hurts.Sure, your head hurts, but threads like these are why I spend too much time here. Given this couple’s probable tax profile, it’s hard to imagine a 401(K) working well for them in most scenarios. That being said, I like Old lady’s solution the best (you can always spot a CFP in the crowd…). Contrbute enough to get the match and name charitable beneficiaries. Given what they have outside of the 401(K)s, they surely have sufficient charitable inclination to give away the 401(K)s. As an aside, is the provision to send RMDs directly to charities still in effect? In the back of my mind, I seem to recall some expiration date for this strategy…
Has anyone mentioned life insurance? LIRP…They could use the annual gifting they are gettting and fund some rather large face cash value insurance to cover future estate taxes while creating a potential for non taxable withdrawals in the future. If they don’t need the cash withdrawals, they will have created a non taxable legacy for their heirs and/or covered future estate taxes.
I would think a LIRP with some term insurance would be helpful. More so than investing in a 401K. In addition....the commissions on the insurance would be awesome!!!!!
[quote=babbling looney]Has anyone mentioned life insurance?
That is exactly what I was getting at. LIRP...They could use the annual gifting they are gettting and fund some rather large face cash value insurance to cover future estate taxes while creating a potential for non taxable withdrawals in the future. Explain your thoughts on a LIRP vs. a regular WL policy. I have my ideas on both, but I would be interested in hearing other viewpoints. Correct me if I am wrong, but LIRPs usually utilize VUL/UL, correct? If they don't need the cash withdrawals, they will have created a non taxable legacy for their heirs and/or covered future estate taxes. No question about it. The beauty is, the CSV can be accessed before 59 1/2 and, in many cases, withdrawn/loaned tax-free. Plus, if you're using WL, the dividends are tax-free up to basis and can be used just like a dividend from an investment (reinvested for PUA, taken as cash, reduce premiums, etc.)I would think a LIRP with some term insurance would be helpful. More so than investing in a 401K. Depending on premiums, insurability, and convertability of term, this is a great idea. In addition....the commissions on the insurance would be awesome!!!!! FACT. Let's hope anon doesn't have to put 'em through the grid (somehow I think he won't have to [/quote] Folks, this case is a perfect example of why an advisor with a lot of knowledge of how life insurance works adds value to their clients.
[quote=deekay][quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none. [/quote] DK, Our disagreement is really just risk and perspective. A couple things: if this is truly "never" money, then the 59.5 rule doesn't matter in the 401K. 2nd: deferring taxes has a huge affect on wealth building. It happens all the time in real estate. 3rd: Depending on what is done with the rest of the money, you may have very low taxes in retirement. What if it is all invested in muni's and non-div stocks? AND you save the QP for the next generation? In that case you are paying VERY little in taxes. Add on top of that CRT benefits (if this is an option in their case), and you have very good tax treatment. 4th: What about taking some of the NQ money and buying a large life policy (2nd to die). There's a huge NT legacy. Leverage it up. So you can defer current taxes thru 401K deducts, invest in non-taxable investments for the NQ stuff, and buy life insurance to gross up the estate. Hey, I don't know these people, and their personal wished will drive much of the decision. I am just throwing out ideas.One of the other things they should consider actually, is an annuity for current income needs (in retirement). It would be easy to guarantee some tax-advantaged, annuitized income (or Lincoln I4L) so they don't have to be concerned about loss of principle on their bills. Sounds strange when you have that much money, but it makes income planning much easier for them. You could carve out a piece of their NQ money now and invest it aggressively inside a deferred annuity. Outside the annuity you are taking too much risk, and throwing off too much current income (maybe). Just another thought....
Explain your thoughts on a LIRP vs. a regular WL policy. I have my ideas on both, but I would be interested in hearing other viewpoints. Correct me if I am wrong, but LIRPs usually utilize VUL/UL, correct?
LIRP is a technique of overfunding a life insurance policy as much as possible. Generally VUL or UL because of the ability to generate significant cash value I'm not a big fan of VULs because of the unpredictablity and the possiblity of having to jump premium contributions in a down market. However, if these people can overfund the policy and stand the volitility this wouldn't be a problem. I would suggest that the OP contact a couple of insurance wholesalers and companies, have them run some scenarios and get contracted. Hancock and Hartford have some nifty literature on this http://jh1.jhlifeinsurance.com/JHPortal/Common/JHPortal_Article_Master/0,2443,2072913_2079747_2873230,00.html For a really big case you might even be able to get the wholesaler or your upline( if that's how you are structured ) to sit in with you and present the insurance concepts. My upline guy would be all over a case like this. As an Indy, I don't have a grid for my insurance sales that are not on the VA side. Variable, you need to check with your B/D and find out who you are contracted with. These prospects are perfect for a good estate planning program. Off the top of my head, depending on the ages and health of the clients and the figures that are being tossed around I would say several policies would be in order.Forget the 401k contributions. Education for the kids is taken care of so no need there. Set up an ILIT with children as bene. Buy an annuity inside the ILIT, trust is owner and bene, children are annuitants. Funds grow tax defered, when client dies, IT IS NOT A TAXABLE EVENT TO THE CHILDREN as you just re-register the annuity. Now you have pulled assets out of the estate, avoided the tax issue there, and your children’s retirement is taken care of. Use the annuity to defer taxes for the next 50 years when the deferal benefit will actually overcome the fee. And if the children don’t feel they will need it, when they register the contract, they can designate their children as beneficiary of the annuity, completely skipping a generation and extending the tax deferal.
[quote=B24][quote=deekay][quote=B24]DK, I understand your point. However, 401K’s are not bad wealth transfer options if done correctly, and it is one place where he can shelter some income. Now, if the heirs pull it all out day 1, then yes, it was a bad option. But with stretch options available, it can really defer taxes for 2 generations.
What's the point of building wealth if you or future generations can't enjoy it? When you stretch the QP, all you're doing is deferring taxes, not avoiding them. At some point, they will be due. If the amount of money he had inherited was not so large, and was in qualified accounts, I would say yes, he needs to keep more outside of his 401K. But I think he's got so much NQ money that why not get some "tax diversification" but pumping up his 401K and deferring a lot of those taxes. Either way you aer sort of gambling on tax rates, future events in the family that are not yet known, what the clients will do with their money, etc. I just think spreading it among taxable and tax deferred accounts is wise. But only putting 3 or 4% per year into the 401K seems rather meager compared to his overall wealth. But generally speaking, I think you could arrange his investments either way and come out just fine. I see what you are getting at. You are correct: none of us know what taxes will be in the future. All things being equal, if you had a choice between maintaining control and not maintaining control over my money, I'll keep control. You lose access in a 401k until you're 59 1/2. The government has the power to change the rules at any time. You are limited to the investment choices offered. Unless you yourself are the rep on the 401k, you legally cannot give advice on the specific offerings. One other thing - if you put it into the 401K, you have more freedom as far as the type of assets you use. You do not have to be concerned about dividend paying funds, bond interest, etc., as it is tax deferred. With the taxable money, you have to be a little more particular about the investment classes you use in order to keep taxes down. With that amount of money (I think all-in, he said it will be over $20mm??), you could be looking at losing a large chunk of your gains to taxes. Again, without knowing their real intentions, you can't come to a finite conclusion. There are some great ways to arrange trusts if they are charitable that will help with taxes. I'm assuming you are referring to CRTs. By themselves, the donor loses all control, but gets a tax credit. However, the legacy suffers. My clients would rather have the biggest estate available to them net of taxes.[/quote] Ultimately, there is more that needs to be addressed. All-in-all, there are other more efficient ways these folks can invest for the future than a 401k. I'm not saying that 401ks are bad. However, if you're investing in them just to lower taxes today, you're setting yourself up for a rude awakening. If taxes stay the same when they withdraw money, there will be no tax savings. If taxes are higher when they retire, they lose. Yes, if taxes are lower when they retire, they win. We are at the lowest income tax rate in history (other than when the income tax was originally set up). What are the chances they'll be lower in the future? I would argue slim to none. [/quote] DK, Our disagreement is really just risk and perspective. A couple things: if this is truly "never" money, then the 59.5 rule doesn't matter in the 401K. What if they want access to the money before then? 2nd: deferring taxes has a huge affect on wealth building. It happens all the time in real estate. Agreed. 401ks are fantastic vehicles to help you accumulate wealth. Real Estate too. But as Steven Covey once said: "Begin with an end in mind." What are the consequences of plowing tons of money in a QP? Real estate? 3rd: Depending on what is done with the rest of the money, you may have very low taxes in retirement. What if it is all invested in muni's and non-div stocks? AND you save the QP for the next generation? In that case you are paying VERY little in taxes. Add on top of that CRT benefits (if this is an option in their case), and you have very good tax treatment. The government is not going to change how withdrawals from QPs are to be taxed. If you believe they will, you've got another thing coming. Why do you think we as consumers are encouraged to put as much as possible in 401ks? Because the government has a HUGE check waiting for them in the end. They're not going to all of a sudden become charitable and forego all that revenue. Like I've mentioned before, marginal income tax rates are at an all-time low. There is a good chance our clients will retire and live in a higher tax bracket than they are today. And for those of you who feel these retirees will live on less income - shame on you. Taking less income in retirement runs contrary to what retirement is all about. 4th: What about taking some of the NQ money and buying a large life policy (2nd to die). There's a huge NT legacy. Leverage it up. So you can defer current taxes thru 401K deducts, invest in non-taxable investments for the NQ stuff, and buy life insurance to gross up the estate. Why not just take what was going to go into the QP and put it in permanent life insurance? Same tax-deferral as a 401k, tax-free withdrawals up to basis, a way to pay for an impending estate tax issue, all the while allowing the client to maintain control vs. deferring until age 59 1/2. An added benefit is now the CRT can be used without sacrificing the value of the estate. The permanent DB replaces the asset placed in the CRT. Hey, I don't know these people, and their personal wished will drive much of the decision. I am just throwing out ideas. [/quote] B - this is very healthy discussion. I think we are on the same page, just with conflicting viewpoints. My experience, both in my own experiece and with clients, is that 401ks are not the panacea that most in our industry think they are.Babs - how does overfunding a UL affect the DB? Seems to me there’s a good chance a significant estate tax issue is looming. Also, anon mentioned this is a young couple. Could they be better served using WL? My experience is that UL tends to work better with older folks where DB is the only concern. UL over long periods looks more like “permanent term”. CSV just isn’t there later in life becuase the cost of insurance is increasing every year.
Well that depends on if you have a level DB or increasing DB and then the corridor rule would kick in once the cash value got large enough.Babs - how does overfunding a UL affect the DB? Seems to me there’s a good chance a significant estate tax issue is looming. Also, anon mentioned this is a young couple. Could they be better served using WL? My experience is that UL tends to work better with older folks where DB is the only concern. UL over long periods looks more like “permanent term”. CSV just isn’t there later in life becuase the cost of insurance is increasing every year.
If they were to use a LIRP plan in lieu of a 401K (which was the original question), whole life would not work because the whole point of a LIRP is to voluntarily overfund the policy to the maxium to create more cash value that they can then borrow against. If they don't need the income in the future and will still be in a high tax bracket, then they shouldn't be doing a LIRP plan or a 401K for that matter because the 401K could be a tax headache. The advantage of the LIRP is that the income/loans they take from the policy are non taxable as long as the policy doesn't collapse. They couldn't do this LIRP plan in an ILIT. Oustide the ILIT death would/could create a significant estate tax bump up. They would need to plan for how much that would be and cover it with additional insurance from the ILIT plan. However, Primo is correct too in that they need estate protection. I would encourage them to have a guaranteed WL or UL in an ILIT for that purpose. This is why I said several policies. LIRP, either a VUL or UL. ILIT with a nice second to die for estate purposes. With a case like this I would definitely rely on the help of an insurance specialist whether you went UL VUL or WL.
Maybe I am reading it wrong, but I wasn’t saying do a LIRP in the ILIT. Use an annuity. If the client doesn’t need the $150m that is being gifted to them, have the grandparents gift to the ILIT directly. Point is, no payment on death need be taken when the client dies as you just re-register the annuity.
I don't believe that is correct about the annuity. If it is, then please give me a reference so I can look this up. Or how this is structured. I assume the ILIT is the owner and beneficary with joint annuitants? The ILIT for life insurance merely removes the item from the estate, however the annuity would have to have a beneficary even if the beneficary is the ILIT itself. It can't merely be re registered at death The ILIT wouldn't change the taxation treatment of the annuity or the character of the investment, but would only remove the value from estate taxation.Maybe I am reading it wrong, but I wasn’t saying do a LIRP in the ILIT. Use an annuity. If the client doesn’t need the $150m that is being gifted to them, have the grandparents gift to the ILIT directly. Point is, no payment on death need be taken when the client dies as you just re-register the annuity.
children are the annuitant on the original annuity policy, so it is just a matter when the trust dissolves to change them to the owner line, no taxable consequence. Brendan Buckingham, John Hancock Annuity Advance Marketing Team is the source.
Can we all agree that this is a REALLY nice problem to have?
These people can probably afford to do all of the above: Fund an ILIT Fully fund 401K's Fund a LIRP (I never mentioned that in my entry, but I do like that idea - it's got almost the same affect as funding and then annuitizing an annuity, though not quite as tax efficient) Fund a CRT and.... live very nicely.Thanks. I'll look it up. Never too late to learn something newchildren are the annuitant on the original annuity policy, so it is just a matter when the trust dissolves to change them to the owner line, no taxable consequence. Brendan Buckingham, John Hancock Annuity Advance Marketing Team is the source.
Interesting responses. First of all, I have to beat up on any "max the 401(k)" idea. Maxing the 401(k) can be worse than giving all of the money to the government. Nobody questioned me on my claim that the tax rate can be more than 100%. When a rich person dies with qualified money or non-qualified annuities virtually all of the money is going to the Government. Look at what happens with $1,000,000 of qualified money for someone who dies with a net worth of $20,000,000:
This $1,000,000 is part of their taxable estate. With today's laws, that would be $500,000 in estate taxes. Depending on the state, there can also be state estate taxes. For my clients, this will be another $160,000 of taxes for a total of $660,000 of taxes. The beneficiary, the children, will still inherit $1,000,000. This (and any subsequent gain) will all be taxed as income. Between federal, state, and local taxes, they are paying over 40% in taxes. This is another $400,000+ in taxes. The combined taxes are over $1,000,000!!! Rich people should not die with money in IRA's and NQ annuities. The taxes take it all. This phenomena occurs because both the estate taxes and income taxes are both on the gross amount. If instead, the person takes the money out of their 401(k) while they are still living, at least taxes won't get the whole thing. Better yet, don't put the money into a 401(k) in the first place (or a nq va). This way, at death, no income taxes will be due on the unrealized gain. For the most part, the best solution in this case is old fashioned whole life life insurance. Putting money into the 401(k) will very possibly lead to $0 (or less) of additional wealth for the beneficiary. Funding a couple of ILIT's with this money instead will lead to a WORST CASE SCENARIO of $2,500,000 for the beneficiary and more likely $8,000,000+ with absolutely no taxes.Set up an ILIT with children as bene. Buy an annuity inside the ILIT, trust is owner and bene, children are annuitants. Funds grow tax defered, when client dies, IT IS NOT A TAXABLE EVENT TO THE CHILDREN as you just re-register the annuity. Now you have pulled assets out of the estate, avoided the tax issue there, and your children’s retirement is taken care of. Use the annuity to defer taxes for the next 50 years when the deferal benefit will actually overcome the fee. And if the children don’t feel they will need it, when they register the contract, they can designate their children as beneficiary of the annuity, completely skipping a generation and extending the tax deferal.
Primo, I don't know that you are wrong, but I believe that you are on shaky uncharted territory with this. If my client was the annuitant, and the trust was the owner the money would grow tax deferred, but at death, the gain would be all taxable. If the kids are the annuitants, with the trust as the owner, it is questionable as to whether the annuity will grow tax deferred. I would not trust your source on this one. I think that he is offering an opinion that isn't set in stone. However, let's assume that you are correct. I still don't see how this beats life insurance. Life insurance will obviously be much better if death occurs soon. Even if the person lives to life expectancy, the beneficiary will probably be better with life insurance. The annuity might have more money, but the cost basis will be zero and all gains will come out first and taxed as income. Ex. At death, the life insurance death benefit is $3,000,000. The annuity has a value of $3,500,000. What's better...$3,000,000 with no taxes or $3,500,000 that will all be taxed as income? Let's not forget that the life insurance has no investment risk. (Typically, the annuity would have to get a return in the 9% range and the person would have to live past life expectancy for this option to come out ahead. It doesn't make sense to me.)I cannot comment on the life insurance as I farm out that business. Notice you never see me post in those threads. As for the above scenario-
1) I have seen the opinion letter from the IRS and right now it can be done. 2) I thought of this as when the client dies, plenty of other money will go to the children, this is money that most likely will not be used. Assume client is 35 with 5 yr old child. They start contributing now and money comes out in 55 years for the childrens retirement. That is a lot of time to make up the taxes. Plus if the child does not need it, they can simply name their children as bene when the reregister the contract upon the clients death. Now you could be looking at 75 years of tax deferal, while still controlling the assets in case cash is needed. Just a suggestion that you don't hear about often.Primo, it’s an interesting idea and one that I’d like to find out for sure whether it can be done. If it can, it might make sense in certain circumstance and if the person isn’t insurable at good rates. Keep in mind that with the life insurance, everything can remain tax deferred for just as long, but ultimately with a much higher cost basis, thus much lower taxes. (the annuity wouldn’t get purchased until the death of the insured) Of course, if the next generation is also wealthy, this money is still ultimately going to disappear to estate taxes and income taxes.
Definitely take the time to learn more about life insurance. Even if you don't want to do it, there are probably times that life insurance makes the most sense for your clients, but you don't know it.I've got an insurance company's rep (big well know company, very competitive rates) in my town so I just call him to do the work. I do the planning, determine the need, he does the pitch, I still get paid. I've got a reasonable feel of insurance overall, but leave the details to others. My suggestion was not "do this instead", it was "consider this also". Let us know what you ulitimately do.
Obviously more info is needed to select the “best” answer but the 401k has many benefits not mentioned.
1: Liability protection granted by the Supreme Court (I think but I am not a lawyer).
2: The “tax rates are going up argument” makes deferral even more valuable as those rates would be on NQ money immediately. If tax rates were legislated to skyrocket I am pretty sure someone would post it here and most of us would be smart enough to pull our money out the year before. Of course it could happen overnight while we were sleeping or it could be retroactive. I am still betting we could see that train wreck from a ways off.
3: The current estate and income tax argument against 401k only works if the people take money from it to pay estate taxes. The whole point of a stretch is to avoid current and future taxes as long as is legally possible. Why not step up cost basis on NQ assets and sell for little or no gain and little or no taxes to pay estate taxes.
4: I know we can always create future scenarios of doom and gloom but that is not what we do. Our clients deal in possibilities. We deal in probabilities.
Some of my assumptions may very well be wrong. Let me know.
Forgot one thing…If the inheriting spouse dies will the survivor still get the $15,000,000? Grandkids probably. Spouse I guess less likely. Having as much as possible in that 401k could come in handy depending on how much, which one owns it, etc.
1: Liability protection granted by the Supreme Court (I think but I am not a lawyer).
Liability protection doesn't have much meaning when the future after tax value will be zero. 2: The "tax rates are going up argument" makes deferral even more valuable as those rates would be on NQ money immediately. If tax rates were legislated to skyrocket I am pretty sure someone would post it here and most of us would be smart enough to pull our money out the year before. If you read my posts, you'll notice that not once did I mention anything in my argument about tax rates going up. However, your argument is nonsense. If tax rates go up, one can't just take their money out of their 401(k) since this would trigger immediate taxation and penalties. 3: The current estate and income tax argument against 401k only works if the people take money from it to pay estate taxes. The whole point of a stretch is to avoid current and future taxes as long as is legally possible. Why not step up cost basis on NQ assets and sell for little or no gain and little or no taxes to pay estate taxes.Sorry, but you're wrong. Let me explain again. The 401(k) gets transferred via beneficiary designation. The estate pays the estate taxes. Let's make this easy and assume that the only assets are $19,000,000 of cash under the mattress and $1,000,000 in the 401(k). For simplicity, let's also just assume that estate taxes start at the first dollar. At death, the beneficiary gets $1,000,000 from the 401(k). Having this $1,000,000 as part of the estate will increase the estate taxes (federal and state) by $660,000. If the beneficiary takes this all at once and doesn't put it into an IRA, they will also owe income tax of over $400,000 on this money. Sure, they can put it in an IRA and stretch it. It won't change the fact that over 40% of every payment will go to pay the taxman.
66% of the estate will disappear to estate taxes. For money that is qualified, another 40%+ of this will disappear due to income taxes. None of the money left under the mattress will face income taxes or money left in any other investment except non-qualified annuities. Let's make this real simple and use 66% total estate tax bill starting at dollar 1. Look at 3 people each with $20,000,000. Joe has $20,000,000 in an IRA. Sam has $20,000,000 in his bank account. Charlie has been gifting money to an ILIT with a death benefit of $20,000,000. Ytreq is Joe's son and inherits the IRA. He rolls this money into a beneficiary IRA. The IRS will come after Joe for the estate tax since the estate has no money. He'll owe them $13,200,000. In order to come up with the $13,200,000, he'll have to cash in the $20,000,000 IRA. After paying 40% in income taxes, he'll have $12,000,000. He'll still owe the IRS $1,200,000. The IRS gets everything. Ytreq gets nothing. Deekay is Sam's son and is the beneficiary of the estate. The estate will pay estate taxes of $13,200,000. Deekay will $6,800,000 and have a basis of $6,800,000 and owe no taxes. Anonymous is Charlie's son and is the beneficiary of the ILIT. The estate won't owe any taxes. Anonymous will get $20,000,000 with a basis of $20,000,000 and owe no taxes. 4: I know we can always create future scenarios of doom and gloom but that is not what we do. Our clients deal in possibilities. We deal in probabilities.Some of my assumptions may very well be wrong. Let me know.
There's no doom and gloom here. I'm just dealing with current tax laws. Given the following set of facts, can you give me a scenario where someone would be better off inheriting qualified money instead of being the beneficiary of an ILIT?: 1) Total inheritance expecting to be over $20,000,000. 2) Beneficiary of all assets will be the same.
The kids would actually be better off fiancially if on the parent's death bed, they took the money out of the 401(k) and gave it away to strangers. So, yes, your assumptions are wrong. Welcome to the board! (I mean that sincerely.)Forgot one thing…If the inheriting spouse dies will the survivor still get the $15,000,000? Grandkids probably. Spouse I guess less likely. Having as much as possible in that 401k could come in handy depending on how much, which one owns it, etc.
The question is moot because I'll have them get the money out of the 401(k) asap and not contribute more. There's nothing handy about having money in the 401(k). The best case scenario is that the money grows tax deferred and income taxes will come out when the money is removed. The worst case scenario is that qualified money exists at the second death and over 100% in taxes gets paid.I know better than to answer this but here goes anyway…
anonymous, your response assumes that all of my points were directed at your posts. Note “if you read my posts”. That is presumptious and wrong. Part of your argument is “lets make it simple”. It would have been better if you said simple and accurate. I know this is blunt for a newbie but your comment of “nonsense” when you make up your own tax code and math is a bit rude and useless. I will now
politely and factually rebut most/all of your thoughtful responses.
--------------------------------------------------------------------------------
1: Liability protection granted by the Supreme Court (I think but I am not a lawyer).
Liability protection doesn’t have much meaning when the future after tax value will be zero.
The after tax value is only zero using your math and tax codes. Rather foolish of the Courts to waste time on this if it was already known that its actual value was zero. Silly Judges. ytrewq
2: The “tax rates are going up argument” makes deferral even more valuable as those rates would be on NQ money immediately. If tax rates were legislated to skyrocket I am pretty sure someone would post it here and most of us would be smart enough to pull our money out the year before.
If you read my posts, you’ll notice that not once did I mention anything in my argument about tax rates going up. However, your argument is nonsense. If tax rates go up, one can’t just take their money out of their 401(k) since this would trigger immediate taxation and penalties.
I did not say you said that nor did I reference your post. I am still right and this was posited in the topic. The higher the tax rate the more valuable tax deferral. Math. One CAN just take their money out of a 401(k). It is simply a mathematical decision. If taking it out now (maybe a penalty maybe not) generates more after tax income than the hypothetical rate that taxes are going to in the future then take it out. Period. Nonsense? Mathematically prove it wrong. ytrewq
3: The current estate and income tax argument against 401k only works if the people take money from it to pay estate taxes. The whole point of a stretch is to avoid current and future taxes as long as is legally possible. Why not step up cost basis on NQ assets and sell for little or no gain and little or no taxes to pay estate taxes.
Sorry, but you’re wrong. Let me explain again. The 401(k) gets transferred via beneficiary designation. The estate pays the estate taxes. Let’s make this easy and assume that the only assets are $19,000,000 of cash under the mattress and $1,000,000 in the 401(k).
For simplicity, let’s also just assume that estate taxes start at the first dollar. At death, the beneficiary gets $1,000,000 from the
401(k). Having this $1,000,000 as part of the estate will increase the estate taxes (federal and state) by $660,000. If the
beneficiary takes this all at once and doesn’t put it into an IRA, they will also owe income tax of over $400,000 on this money. Sure,
they can put it in an IRA and stretch it. It won’t change the fact that over 40% of every payment will go to pay the taxman.
This is where the simple but inaccurate starts. Published Federal income and estate tax documents don’t seem to use the same math as your example. Estate Taxes graduate to 45% and that is after exclusions, deductions and credits. Your math uses an “effective” rate of 66%. No matter what state you live in I’m not buying it unless you can prove it. Simple and you are wrong. I am also not sure how you got a 40% tax rate on the stretch distributions? Federal tax tables graduate to 35% over $349,700 (2007). Wouldn’t the RMD for the stretch beneficiaries at their presumed younger ages be pretty low even for $1,000,000? No time to pull up the calculator I am moving on to rebut the rest of your post. ytrewq
66% of the estate will disappear to estate taxes. For money that is qualified, another 40%+ of this will disappear due to income taxes.
None of the money left under the mattress will face income taxes or money left in any other investment except non-qualified annuities.
Let’s make this real simple and use 66% total estate tax bill starting at dollar 1. Look at 3 people each with $20,000,000. Joe has
$20,000,000 in an IRA. Sam has $20,000,000 in his bank account. Charlie has been gifting money to an ILIT with a death benefit of
$20,000,000.
Ytreq is Joe’s son and inherits the IRA. He rolls this money into a beneficiary IRA. The IRS will come after Joe for the estate tax
since the estate has no money. He’ll owe them $13,200,000. In order to come up with the $13,200,000, he’ll have to cash in the
$20,000,000 IRA. After paying 40% in income taxes, he’ll have $12,000,000. He’ll still owe the IRS $1,200,000. The IRS gets
everything. Ytreq gets nothing.
I have already proven your math is wrong. See above. By the way, why do you not take growth on the money deferred from taxes into account in any of your scenarios? The 40% (your number) of earnings sheltered by taxes would be huge over time. I would guess even bigger than your head (joke, sorry poor taste but I had to). ytrewq
Deekay is Sam’s son and is the beneficiary of the estate. The estate will pay estate taxes of $13,200,000. Deekay will $6,800,000 and
have a basis of $6,800,000 and owe no taxes.
I hope it was not IndyMac. Math is wrong. Real world it took Sam more money to get to $20,000,000 because it was being taxed as ordinary income. Ytrewq’s father made a mountain out of a mole hill due to tax deferral. Go Dad! ytrewq
Anonymous is Charlie’s son and is the beneficiary of the ILIT. The estate won’t owe any taxes. Anonymous will get $20,000,000 with a
basis of $20,000,000 and owe no taxes.
$20,000,000 DB with the equivalent of a $15,000 401(k) contribution? Charlie must be like 2 years old and have a life expectancy of 300. Oh, by the way, do they have to worry about gift taxes? Is this apples to apples? $20,000,000 DB is not $20,000,000 cash or securities. I would rather my Dad be alive and have $20,000,000 than him having a $20,000,000 DB and paying our rent money to purchase it. ytrewq
4: I know we can always create future scenarios of doom and gloom but that is not what we do. Our clients deal in possibilities. We deal in probabilities.
Some of my assumptions may very well be wrong. Let me know.
There’s no doom and gloom here. I’m just dealing with current tax laws. Given the following set of facts, can you give me a scenario
where someone would be better off inheriting qualified money instead of being the beneficiary of an ILIT?: 1) Total inheritance
expecting to be over $20,000,000. 2) Beneficiary of all assets will be the same.
Duh. Silly rabbit Trix are for kids. This is a loaded question (by you) and has nothing to do with the topic or real life. However, I am going to give it a real try. I am going to say the spouse of the owner of the qualified money. Why? As the spouse the ILIT DB would be brought back into his/her estate. This seems rather pointless when there is an Unlimited Marital Deduction. Oh, by the way, the beneficiary is OJ Simpson and he has a huge judgement against him. The worthless 401(k) has been protected by silly judges or
rabbits. I forget. Oh, and you are not dealing with current tax laws. You are dealing with made up ones. ytrewq
The kids would actually be better off financially if on the parent’s death bed, they took the money out of the 401(k) and gave it away to
strangers.
Since this is true I will offer, against my better judgment, to let you have all of your clients give me their qualified dollars. I will even pay the 40% tax. Have the kids gift to a charity for the deduction not strangers. ytrewq
anonymous, I came at you hard but only because you came at me that way first. I hope I can get and share ideas from others here and I am not a hater.
Thanks for the welcome!
Sometime when I have an afternoon to kill I’m going to read all that. For now is there a synopsis available?
iceco1d,
You are obviously right about the colors. I will learn to use the forum features. If you care to be specific about what you disagree with I will read your response with an open mind and learn from it.
anonymous,
I am sorry about the sarcasm in my post. It was not helpful and I was just being defensive. I do stand by my post until proven wrong. I will then humbly admit my mistakes and be glad I learned here and not in front of a client.
Anon, I agree qual money does not benefit wealthy individuals in many cases. However, if the 401k were included in the excluded portion of the estate, you would avoid the double taxation. Taking into account company match, it may not be a bad idea, although I am unwilling to run the numbers to say for sure. Just a thought.
As the spouse the ILIT DB would be brought back into his/her estate
No, because the ILIT is set up to pay on the second person's death. A properly set up ILIT uses second to die insurance. The death benefit is not paid out until all the insured are dead. That's the whole POINT of an ILIT. Oh, by the way, do they have to worry about gift taxes? Is this apples to apples Again, not if the ILIT is set up properly. You just choose enough beneficaries of the life insurance so that the premiums paid don't affect the allowable annual gift. So if the premiums on the insurance are 24,000 a year and the annual gift tax exclusion is 12,000. You set up 2 or more beneficaries. Ta Dah... no gift tax.Babs,
I answered the question as posed. You changed the question. 1 beneficiary not 3. 1 life not 2. I even made light of it with the OJ Simpson example (That was a d@mn good answer to a loaded question). I am sure it will be impossible to be correct if a: The questions are formed with no correct answer (ie Can God make a mountain so big he cannot move it?) or the correct answer is not allowed as a solution. b: If others can say that something is a fact just by them saying it yet I reference Federal documents & simple math yet it is wrong. No disrespect just a different opinion of the question.
iceco1d. Sorry I mistook your quote of…“I don’t think so…” as disagreeing with me. I did not know what else it meant. If it even mattered anymore I would change the colors of the post to make it clear but I doubt that it does.
I am probably getting off on the wrong foot here and should drop this topic but I think that part of point is to share ideas and learn from each other. I will be factually wrong many times I am sure. Sorry if I offended anyone. I enjoy a good debate as much as the next person.
iceco1d,
Reread your post and saw it was not to me. Disregard my quoting you. I apologize for the mistake.
[quote=ytrewq]I know better than to answer this but here goes anyway…
anonymous, your response assumes that all of my points were directed at your posts. Note “if you read my posts”. That is presumptious and wrong. Part of your argument is “lets make it simple”. It would have been better if you said simple and accurate. I know this is blunt for a newbie but your comment of “nonsense” when you make up your own tax code and math is a bit rude and useless. I will now
politely and factually rebut most/all of your thoughtful responses.
--------------------------------------------------------------------------------
1: Liability protection granted by the Supreme Court (I think but I am not a lawyer).
Liability protection doesn’t have much meaning when the future after tax value will be zero.
The after tax value is only zero using your math and tax codes. Rather foolish of the Courts to waste time on this if it was already known that its actual value was zero. Silly Judges. ytrewq
2: The "tax rates are going up argument" makes deferral even more valuable as those rates would be on NQ money immediately. If tax rates were legislated to skyrocket I am pretty sure someone would post it here and most of us would be smart enough to pull our money out the year before. So, you would rather defer at 35% and withdraw at 60%? How does that make deferral more beneficial?
If you read my posts, you'll notice that not once did I mention anything in my argument about tax rates going up. However, your argument is nonsense. If tax rates go up, one can't just take their money out of their 401(k) since this would trigger immediate taxation and penalties.
I did not say you said that nor did I reference your post. I am still right and this was posited in the topic. The higher the tax rate the more valuable tax deferral. Math. One CAN just take their money out of a 401(k). It is simply a mathematical decision. If taking it out now (maybe a penalty maybe not) generates more after tax income than the hypothetical rate that taxes are going to in the future then take it out. Period. Nonsense? Mathematically prove it wrong. ytrewq
If you can defer at 90% and withdraw at 35%, then yes deferral makes sense. Do YOU know where taxes will be in the future? I sure don't, but judging by history there's a better chance that income taxes will higher than lower than they are today.
3: The current estate and income tax argument against 401k only works if the people take money from it to pay estate taxes. The whole point of a stretch is to avoid current and future taxes as long as is legally possible. Why not step up cost basis on NQ assets and sell for little or no gain and little or no taxes to pay estate taxes.
Sorry, but you're wrong. Let me explain again. The 401(k) gets transferred via beneficiary designation. The estate pays the estate taxes. Let's make this easy and assume that the only assets are $19,000,000 of cash under the mattress and $1,000,000 in the 401(k).
For simplicity, let's also just assume that estate taxes start at the first dollar. At death, the beneficiary gets $1,000,000 from the
401(k). Having this $1,000,000 as part of the estate will increase the estate taxes (federal and state) by $660,000. If the
beneficiary takes this all at once and doesn't put it into an IRA, they will also owe income tax of over $400,000 on this money. Sure,
they can put it in an IRA and stretch it. It won't change the fact that over 40% of every payment will go to pay the taxman.
This is where the simple but inaccurate starts. Published Federal income and estate tax documents don't seem to use the same math as your example. Estate Taxes graduate to 45% and that is after exclusions, deductions and credits. Your math uses an "effective" rate of 66%. No matter what state you live in I'm not buying it unless you can prove it. Simple and you are wrong. I am also not sure how you got a 40% tax rate on the stretch distributions? Federal tax tables graduate to 35% over $349,700 (2007). Wouldn't the RMD for the stretch beneficiaries at their presumed younger ages be pretty low even for $1,000,000? No time to pull up the calculator I am moving on to rebut the rest of your post. ytrewq
66% of the estate will disappear to estate taxes. For money that is qualified, another 40%+ of this will disappear due to income taxes.
None of the money left under the mattress will face income taxes or money left in any other investment except non-qualified annuities.
Let's make this real simple and use 66% total estate tax bill starting at dollar 1. Look at 3 people each with $20,000,000. Joe has
$20,000,000 in an IRA. Sam has $20,000,000 in his bank account. Charlie has been gifting money to an ILIT with a death benefit of
$20,000,000.
Ytreq is Joe's son and inherits the IRA. He rolls this money into a beneficiary IRA. The IRS will come after Joe for the estate tax
since the estate has no money. He'll owe them $13,200,000. In order to come up with the $13,200,000, he'll have to cash in the
$20,000,000 IRA. After paying 40% in income taxes, he'll have $12,000,000. He'll still owe the IRS $1,200,000. The IRS gets
everything. Ytreq gets nothing.
I have already proven your math is wrong. See above. By the way, why do you not take growth on the money deferred from taxes into account in any of your scenarios? The 40% (your number) of earnings sheltered by taxes would be huge over time. I would guess even bigger than your head (joke, sorry poor taste but I had to). ytrewq The gross amount will probably be huge, this I can agree with. However, do you want the biggest pile of money or the highest amount of income that pile of money can generate? If I withdraw from the account and I lose 90% to taxes, who cares how much deferral grew the account to?
FWIW, I think it is in extremely poor taste for someone who has been involved on this message board for 15 minutes to insult a respected member.
Deekay is Sam's son and is the beneficiary of the estate. The estate will pay estate taxes of $13,200,000. Deekay will $6,800,000 and
have a basis of $6,800,000 and owe no taxes.
I hope it was not IndyMac. Math is wrong. Real world it took Sam more money to get to $20,000,000 because it was being taxed as ordinary income. Ytrewq's father made a mountain out of a mole hill due to tax deferral. Go Dad! ytrewq Since when does all NQ money get taxed yearly at ordinary income tax rates? Here's a question: Where can someone invest without locking up the money until 59 1/2, defer taxes along the way, AND withdraw tax-free?
Anonymous is Charlie's son and is the beneficiary of the ILIT. The estate won't owe any taxes. Anonymous will get $20,000,000 with a
basis of $20,000,000 and owe no taxes.
$20,000,000 DB with the equivalent of a $15,000 401(k) contribution? Charlie must be like 2 years old and have a life expectancy of 300. Oh, by the way, do they have to worry about gift taxes? Is this apples to apples? $20,000,000 DB is not $20,000,000 cash or securities. I would rather my Dad be alive and have $20,000,000 than him having a $20,000,000 DB and paying our rent money to purchase it. ytrewq
4: I know we can always create future scenarios of doom and gloom but that is not what we do. Our clients deal in possibilities. We deal in probabilities.
Some of my assumptions may very well be wrong. Let me know.
There's no doom and gloom here. I'm just dealing with current tax laws. Given the following set of facts, can you give me a scenario
where someone would be better off inheriting qualified money instead of being the beneficiary of an ILIT?: 1) Total inheritance
expecting to be over $20,000,000. 2) Beneficiary of all assets will be the same.
Duh. Silly rabbit Trix are for kids. This is a loaded question (by you) and has nothing to do with the topic or real life. However, I am going to give it a real try. I am going to say the spouse of the owner of the qualified money. Why? As the spouse the ILIT DB would be brought back into his/her estate. This seems rather pointless when there is an Unlimited Marital Deduction. Oh, by the way, the beneficiary is OJ Simpson and he has a huge judgement against him. The worthless 401(k) has been protected by silly judges or
rabbits. I forget. Oh, and you are not dealing with current tax laws. You are dealing with made up ones. ytrewq Since when is a QP the only creditor-protected asset one can own? What happens if the spouse dies and therefore the unlimited marital deduction cannot be used? What happens if the unlimited marital deduction is struck down in the courts? It seems like you're using today's senarios and applying them like they'll never change in the future.
The kids would actually be better off financially if on the parent's death bed, they took the money out of the 401(k) and gave it away to
strangers.
Since this is true I will offer, against my better judgment, to let you have all of your clients give me their qualified dollars. I will even pay the 40% tax. Have the kids gift to a charity for the deduction not strangers. ytrewq
I've already belabored the 40% income tax rate.
anonymous, I came at you hard but only because you came at me that way first. I hope I can get and share ideas from others here and I am not a hater.
Thanks for the welcome!
Anonymous did not come at you "hard". He had serious questions to your logic and, frankly, you level of knowledge. IMO, you did not do anything to convince me that shoving $15k a year into a 401k is correct in this situation. In fact, I'm more convinced that not putting any money into it makes more sense.
[/quote] In the future, I've demonstrated how to respond to lengthy posts by using different colors. FWIW, I don't want you to think I am attacking you. In fact, I'm glad we're having this level of discourse. So much of this board seems like Edward Jones bashing and anti-annuity rhetoric.
I do stand by my post until proven wrong. I will then humbly admit my mistakes and be glad I learned here and not in front of a client.
Ok, let's start here. Under current tax laws, if death occurs after 2010, what is the maximum federal estate tax rate? In my client's state, what is the maximum state estate tax? Let me answer these questions for you...50% and 16% respectively. The last time that I checked that equaled 66%. If the people inheriting the money make a good living, under current tax law, federal, state, and local income taxes on the RMD will be over 40%. When you humbly admit your mistakes, we can continue this conversation.No, because the ILIT is set up to pay on the second person’s death. A properly set up ILIT uses second to die insurance. The death benefit is not paid out until all the insured are dead. That’s the whole POINT of an ILIT.
Babs, this is just something to think about. An ILIT is usually used to pay on the second person's death, but it doesn't necessarily use 2nd to die insurance. In fact, with a young couple, my preference is to use two separate individual policies. The reason for this is that death may occur years or even decades apart. Ex. Joe and Mary's ILIT buys a $2,000,000 2nd to die GUL policy. Joe dies in 10 years. Mary dies in 40 years. In 40 years, the trust has $2,000,000. Chuck and Diane ILIT buys 2 $1,000,000 GUL policies. Joe dies in 10 years. $1,000,000 gets paid into the trust. If it grows by 5% after tax, the trust will have 5.3 million when Mary dies. ($1,000,000 from Mary's policy and 4.3 million from the growth of the 1 million.) I used GUL in this example to ignore the growth in the policies, but I really only like these policies at older ages.oops, am I wrong about the 50%? Doesn’t the tax go back to 55%…so the total estate taxes will be 71%. Now, there is currently a deduction for state estate taxes, but that my also expire after 2010. I’m not really sure. The exact numbers don’t matter. The point is that with qualified money, both estate taxes and income taxes come from the gross amount, so taxes can take all of the value.
At least with non-qualfied assets (other than annuities) this can't happen because of the step-up in basis.[quote=anonymous]I’m dealing with a young, wealthy couple. They have a net worth of around $7,000,000. They will inherit at least $15,000,000. They have no debt and live very comfortably on $4,000/month. $150,000 is gifted to them every year. The grandparents have already funded education for their two children.
Pertaining to their 401(k) plans, should they max out their contribution, only contribute to the match, or contribute nothing? What is your rationale? I'll answer other questions if they are needed to answer mine. Thanks. I have my thoughts, but I was curious as to what others thought.[/quote] I didn't read through the entire 7 pages so forgive me if someone has already suggested this. I would take a look at a Charitable Lead Trust or a private foundation. People with that level of wealth at one time or another will usually turn to philanthropic issues with their wealth. With a Charitable Lead Trust not only does it allow you to receive a tax deduction, and give to a personal cause, it also is a good tool at transferring an estate, tax free(not totally) to heirs. As long as the money goes through a charity, you set a specific payment stream and after that stream has been fulfilled you can transfer the remaining assets to individuals named in the trust with no gift tax. In this solution it really wouldn't matter what the government did with taxes, as long as they don't touch the charity deductions (which they won't). Or with a Private Foundation they can acomplish the same thing and have complete control over the funds and have their heirs as board members. Just something else to add to your bag when approaching this prospect with a solution. I just feel like talking about 401k contributions with this level of assets is like going elephant hunting with a BB gun, your just not going to get anything of significant value accomplished.If you want to learn, then you need to listen. No one in their right mind would set up an ILIT for a married couple with single life insurance and have the proceeds paid out to the surviving spouse. The entire purpose of an ILIT is for estate planning and to pay out of the trust at the last death to cover potential unknown amounts of estate taxes. If the payout is more than the taxes....good. When structuring an estate plan and setting up an ILIT the advisor and the attorney working together will be cognizant of the gift tax exemption amount and set up the contributions and numbers of beneficaries accordingly. Either you are a troll and don't have the first clue about financial advisory business or you are a severe danger to your potential clients. To: Anon. My answer to ytrewq was based on his mistaken idea that the surving spouse would have the insurance proceeds brought back into her/his estate with the first death. Your idea is very sound to individually insure the clients. Sometimes both spouses can't qualify for insurance for health reasons so then you would insure just one person but the proceeds stay within the trust.Babs,
I answered the question as posed. You changed the question. 1 beneficiary not 3. 1 life not 2. I even made light of it with the OJ Simpson example (That was a d@mn good answer to a loaded question). I am sure it will be impossible to be correct if a: The questions are formed with no correct answer (ie Can God make a mountain so big he cannot move it?) or the correct answer is not allowed as a solution. b: If others can say that something is a fact just by them saying it yet I reference Federal documents & simple math yet it is wrong. No disrespect just a different opinion of the question.
iceco1d. Sorry I mistook your quote of…“I don’t think so…” as disagreeing with me. I did not know what else it meant. If it even mattered anymore I would change the colors of the post to make it clear but I doubt that it does.
I am probably getting off on the wrong foot here and should drop this topic but I think that part of point is to share ideas and learn from each other. I will be factually wrong many times I am sure. Sorry if I offended anyone. I enjoy a good debate as much as the next person.
Source URL:https://www.wealthmanagement.com/forums/prospecting-marketing-and-selling/401k-contribution