More than ever, the fundamentals of financial planning are core to ensuring a solid financial future. Listen to a discussion regarding issues and opportunities that we believe all clients should consider in today’s volatile environment. Featuring First Republic Private Wealth Management’s Richard Scarpelli, Head of Financial Planning, and Joseph Dionisio, Advance Planner.
See below for a complete transcript of the audio recording.
Rich Scarpelli - Good afternoon everyone, and thank you for joining us today for a session on finance planning insights, key considerations for today. We just have one housekeeping item, we are going to take questions that can be submitted in writing on your screen in the chat function. We're going to try to answer as many as we can as we go along. But we're definitely going to set aside some time at the end to address a few questions. So let me start by introducing myself. I'm Rich Scarpelli, head of financial planning at First Republic, and I'm joined by a planning colleague of mine, Joe Dionisio. Joe, why don't you introduce yourself?
Joe Dioniso - Great, thank you so much, Rich. I'm Joe Dionisio, senior managing director and one of the advanced planners on the financial planning team based in New York. Normally, I'm working out of our Rockefeller Center office, hopefully back there soon. So Rich, what are we going to cover today?
Rich - Joe, there's going to be a few things we're going to be covering today. Some are going to be widely applicable to almost everyone on the call. Other items will depend on one's personal situation, but we're definitely going to be providing a high level overview of several strategies. Some are going to be basic, some are going to be complex. And we're also going to be providing some actionable items clients can address today. So why don't we bring up some slides? Let's start at slide two. And we'd really like to cover the three broad categories. Okay, number one, it's going to be around risk management and how best do we manage these risks during these times and out into the future. The second category we should touch upon is around cash flow, income tax retirement planning strategies, some are going to be very applicable during these times. And then the last, and I think it's a great opportunity is around some wealth transfer opportunities if clients want to avail themselves of some of these strategies. So that's what I think we'll cover today, Joe.
Joe - These are great categories to cover Rich. And I think it's really important to begin with the end in mind. So when I start talking to clients, I like to emphasize how important it is to understand first, where you want to get to and what you want to accomplish. Set another way, it's always helpful to know where the finish line is. Also, I definitely encourage everyone to start out by writing down your goals. When you write down your goals, be specific about dollar amounts and time horizon. Define your short term, mid-term and long term goals. Then put your goals in priority order from most important to least important. You'll find this to be very helpful exercise. I know I did. But while we work to meet our goals and plan for the future, we also really need to prepare for the worst. So Rich, what are some of the risks that we may be facing right now?
Rich - Oh Joe, great question. I mean, there's a lot of risks that we could be facing or many of us could be facing. Why don't we turn to the risk management slide. And I think there are a few risks that we should address today. And let's start with one of those risks that individuals are probably actually dealing with which is around loss of income, or reduced income and the ability to meet or maybe not meet some cash flow needs and what immediately comes to mind is this concept of establishing an emergency fund, the many folks who have established an emergency fund in the past maybe availing themselves of those funds today to meet certain needs. And for those that haven't and have the wherewithal to establish one now, I would strongly urge them and recommend establishing an emergency fund and starting to fund that on a regular basis. And typically, an emergency fund is an easily accessible account, such as a checking account where you can write checks, you have an ATM card, it's there for liquidity purposes to meet those expenses. And the idea is to set aside a certain amount of your cash flow, whether it's on a weekly basis, monthly basis, maybe it's on a quarterly basis, but to set aside a certain amount of cash flow on a regular basis to meet certain expenses, some of those short term necessities like just paying the mortgage or grocery bills, etc. Generally speaking, again, not for everybody, but generally speaking, the idea should really be to set aside three to six months’ worth of living expenses, those necessities in life. And depending on one's risk appetite, sometimes it's going to be longer. It could be six to 12 months that you want, and it'll just take a little longer to build up that stockpile. But for some folks, they may be very comfortable with one to three months’ worth of expenses that they set aside. The key is to find the right amount for you individually. Along with income replacement, another risk, which is very apparent in today's environment is one's health and their ability to work and produce income. So Disability Insurance comes to mind and we want to make sure everybody has the appropriate coverage in place, they have access to it. And then the last risk has to do with mortality risk life insurance. It's really important if for those folks that are on life insurance to go back and review the life insurance that they have, as well as review that your life insurance needs, they very well may change on a regular basis from year to year, you may need more, you may need less, and you may need different types of policies. So it's really important to review those policies. And I think of life insurance in a number of different ways, but two of the most common themes around life insurance or considering life insurance for income replacement purposes, when there's an income earner of the family that we have to replace that income if they happen to pass away. And the second thing is to provide liquidity to, pay bills or estate taxes, if you will, which is prevalent. We'll touch upon that in a second. So let's just go to income replacement because this is an area I want to touch upon. The key question, everybody should be asking themselves is, what proceeds from life insurance do I need to support spouses, partners and family members that I may leave behind? That's a key question, as well as how much of the lost income do I want to replace? So Joe, maybe some folks want to replace 100% of their lost income, maybe just 80 or 50, it depends on one's own personal situation again, yeah, we're each individually different and our family situations are different. So you really need to assess for yourself how much income and how much life insurance proceeds do I need to meet those needs after somebody passes away? One of the big gaps that I've noticed throughout a couple of decades that I've been practicing is that rarely do I see consideration given to the non-income earning partner or spouse, please folks, take a look at the non-income earner as well, because you could very well be in a situation where that non income earning partner or spouse passes away, and the income earner may want to adjust their work life balance, which could mean a lower income. And you may want to compensate for that or fill that gap and life insurance is a perfect mechanism to do that. In addition, it's not just about income, don't forget about your liabilities, mortgage obligations, outstanding credit card debt, maybe you have an outstanding balance on a revolving line of credit. Perhaps you want those paid off again, if something should happen just to make life easier, simpler, one less bill, and one less payment to make. The other thing that I mentioned before is the final thing is around estate liquidity. We could very well have clients on the call today that have a taxable estate both at the federal level and the state level, especially here on the East Coast when you're dealing with New York, Connecticut, Massachusetts, we could have a lot of taxable estates out there. And that tax bill would have to be due that estate tax bill, that death tax. So life insurance can be provide liquidity to the estate to meet those tax obligations without heirs having to take it from their own inheritance. So these are some of the risks Joe, folks should be thinking about. I know there are lots of other things out there. I know there's some things that you'd like to share. So can you share some of those other things with us?
Joe - Yes, absolutely. So what you mentioned is critical, having in place an emergency fund, as well as disability and life insurance, it's critical. We also really need to make sure we have an up to date estate plan. So what's estate planning? Estate planning is really the process of ensuring that our assets pass to whom we want, when we want and then the way we want. In addition, you want to ensure that our affairs are going to be taken care of properly if we become incapacitated. I know a lot of people out there have not yet created an estate plan. Most people don't like thinking about their mortality, or feel that it's a long way off. And some people who have estate plans in place may have done this a number of years ago. And it's been a long time since they reviewed how their documents work. Practically speaking, when I work with a client, I first asked them, "Do they have estate planning documents?" I frequently get this answer, "No." Which is surprising. The next common answer is yes. However, they're very old documents, and I'm not sure how they operate. So now is an excellent time to review what's in place and make sure that it still fits your goals and objectives. Or if you don't have an estate plan, go ahead and create one. Don't delay just get this done. So there are four key documents that I want to make sure you have. The first is a will. And a will is a series of instructions. That tells your executor how to distribute your estate in the event you pass away. It's a document that names both executors and guardians for your minor children. It also includes other provisions as well. Fortunately, with the will, your estate may pass to state probate system, and in some states like New York, the probate process can really be lengthy. It can take a year or longer to get through. It's a public process. So anyone can go down to the courthouse and look up information about it. Just as an aside, so when a famous person dies, I go online to see if they have a will, and if they do, what does it say? In fact there's a book written about it, the wills of the rich and famous and a final point, probate can be expensive. So in many cases, it also makes sense to set up what's called a revocable trust. And that's a document that instructs your successor trustee on how to take care of your assets if you're unable to do so, and how to distribute those assets after you pass away. So this kind of trust a revocable trust, can help your state avoid probate process, as long as you title all of your assets in the name of the trust, however, not retirement accounts or life insurance, as those assets will go according to your beneficiary designation. But the majority of your assets should be titled in the name of the trust. By the way, this is a very important note. So many people create these documents and never change the title of their assets. Titling is very important when it comes to estate planning. I can't emphasize that enough. The third document we want to have in place is what's called a power of attorney and that authorizes another person, an agent to make financial decisions on your behalf if you're unable to do so. The fourth and final documents we want to have in place are what's called the health care proxy and living well. A health care proxy gives another person the ability to make medical decisions on your behalf if you cannot. The living will allows you to specify what kind of medical treatment you want, or don't want, especially if you're in a terminal condition, and you're not expected to recover or come out. Rich, there are two important items as it relates to COVID and these two last documents that we're seeing, number one with the health care proxy, getting the right fear agent to act remotely, for example, via Zoom or FaceTime. And with a living will, to address the use of life support specifically ventilators in light of COVID. I know that talking about that, illness and disability can really be difficult for a lot of people. But it's important to discuss and plan accordingly. So Rich, once we've prepared for all the potential risks, let's get back to planning for the future. So in this environment, what are some of the planning things that we can do?
Rich - Thanks Joe, that's definitely a nice transition to our second category. We can go to the next slide around cash flow, income tax and retirement strategies. Some of these strategies are definitely appropriate for these times. I saw a question come through as mentioned income tax around tax potential tax changes if the democrats win. I mean, that's really tough to say, what would happen. We do know this that, under Biden's proposal there are some in my mind some significant changes to how long term capital gains taxes are treated for, for the wealthy, the higher income earners which is, up at the top income tax bracket. So that's just something to be aware of. There's a lot of spending going on, it's going to have to be paid for. So I would imagine there would be some, probably more than some changes, there would be some changes, there would be changes to tax law in 2021. But it's a little too early to tell, given the election and how the site looks like and just getting something done in through Congress. But even back on track what we want to cover today, as I mentioned, income tax retirement strategies, budgeting, saving, it's really important nowadays, it's just around cash flow, savings and spending and as I said, budgeting and it's really important for individuals to take another look at their savings and spending again, as well as develop a complete picture of all the assets that they own and liabilities that comes into play when you're talking about savings and spending and the strategy. The key is before I go into savings and spending is write it down, write things down on paper, write it down, write it down, and write it down. I can't stress that enough. Because once you start to write it down on paper, it puts it all into context. And it makes it much easier to make some tough adjustments and decisions. As I'm sure there are probably some tough adjustments and decisions that have been made or still need to be made by many on this call. What's also important is revisit your time horizons, you really need to reassess your short term goals as well as your long term goals such as retirement, and maybe you have to push retirement back. Maybe there are other goals folks had around purchasing a second home or traveling that may have to be pushed back or reduced. So we visit your time horizons as well. So let's get on to savings and budget, how to go about that, sometimes it sounds easy and simple to do but trust me, it's not having practice 20 years in financial planning, you know what's a good guide is this 50, 30, 20 rule out there. It's a very common rule. And it's just a concept, but it's a good, really good guardrail and guideline. And this is what the 50, 30, 20 rule says. So take a look at your after tax income, and 50% of that income should go towards the necessities in life, and you have to make the mortgage payment, the rent, you have to eat, groceries, drink water, utilities, etc. So that's where 50% of your after tax income should go. 30% of that after tax income is more discretionary in nature, like going out to dinner. I want to know how many people go out to dinner nowadays, but hopefully we'll get back to normal. But there are other discretionary items, I think of monthly subscriptions, for example, Netflix, come to mind with that 30%. Although nowadays some people may feel Netflix is definitely a necessity as well with quarantine in various parts of the country. But I think you know what I mean. And then the final category 20% of your after tax income should really be siphoned off or save for longer term goals such as retirement, or college savings if you have to put a child through to college. So this is a general rule, I'm not saying or suggesting that you should follow it to a tee. But I do strongly urge you to use this as a rule and a guideline, write it down on paper, write your budget, your saving, your spending down on paper, your assets, liabilities, utilize technology, whether it's Excel, Microsoft Excel, or some other applications and tools out there that you may be familiar with, and see where you fall within that 50, 30, 20 rule. It's going to be much easier to make some adjustments off of that, and maybe it's not the 50, 30, 20 rule for you, but maybe it's 60, 20, 20 or maybe it's 50, 25, 25, you really have to find the right target for you. But that's definitely a good guideline. So that's the first thing. The other item that I want to talk about is more of a retirement income tax strategy that could be extremely timely nowadays and apply to a wide range of folks, essentially on this call. And that's the concept of converting a traditional IRA to a ROTH IRA. So before we go and talk about the conversion, let's just talk about what a traditional IRA is, and what a ROTH IRA is first, and then we'll go from there. So a traditional IRA is retirement account where what has contributed pretax dollars, those dollars have not been taxed yet. The government hasn't collected money on those yet. And those assets in that account will grow on a tax deferred basis, until they're distributed is when they're distributed from that account, that's when the tax event is going to occur. And that income, that distribution will have to be picked up as ordinary income on your tax return, and that's when the taxes are going to be paid. The ROTH IRA is just about a flip of that, a reverse, where it's an account, retirement account, and you're contributing after tax dollars. So it could be up to withholding. You've made your tax payments, you're taking these dollars after tax, and you're contributing them to this account. And this account will grow in a tax free manner. You have a tax on capital gains dividend interest income, just like the IRA. And then when the distribution finally occurs, hopefully at retirement when you're older, that distribution will not be subject to ordinary income tax at all. So you could see the tremendous tax free compounding effect that it has and it's really your tax cost that you're paying at the beginning, that you just need time to recoup. He definitely can see the difference there. It could be a tremendous actually compounding effect, where you're not hit with that tax bill, when it's distributed. So why is this concept of converting a traditional IRA to a ROTH IRA timely? And what is it? So you're basically taking your individual IRA, your traditional IRA account, taking a distribution today, and you're going to put that distribution into a ROTH IRA, you're going to get hit with the tax on that distribution, and you're going to pay that tax now, okay? Now, why would you want to do this today? There are three factors coming into play. Number one, the traditional IRA could have a lower value, I noticed the markets have bounced back, probably more so than anybody could have imagined. But depending on what sort of investments were in that traditional IRA, it still may be worth less. So six or seven months ago, for those that have been contemplating converting a traditional IRA to a ROTH IRA, it may even make more sense because that account is lower. So on conversion, that distribution when you take it from the traditional IRA to the ROTH IRA, you're paying less tax than you would have six or seven months ago. So that's factor number one. Factor number two, is given where current rates are maybe fairly attractive, the top tax bracket is 37% right now, we know the government's spending a lot of money, which I said before, eventually going to have to be paid for. And the likelihood is taxes going up in some way, shape or form, probably highly likely. So if you've been contemplating a conversion, you may want to do it now, while tax rates are where they are given the risk and the chance that they may go up in the future, and you may be subject to a higher tax rate in the future. You'd hate to be in a position a year or two years from now saying I should have done that conversion back then, because tax rates are higher now. So that's the second factor. And then the third factor is it could very well be a low income tax year for some individuals. So you go you file your 2020 tax return, the end of the year for April 15th, the following year. Take a look at your taxable income, it may have gone down 10, 15, 20, 30% depending on your own particular situation. We could have been business owners out there that potentially had net operating losses that offset a tremendous amount of their taxable income, their taxable income could be wiped out for the year. So that conversion, you see where I'm going? That tax impact could be very low in this particular year 2020. So you could take advantage of the conversion now with minimal tax cost and enjoy the benefits of the tax free compounding effect over time, so that you know that there's tons of strategies, tech strategies out there. But that's one about retirement, beyond retirement. I think there's a tremendous opportunity around wealth transfer, and why don't we go to our next slide and talk about some topics under wealth transfer, because I do think there's a tremendous opportunity. And I'm sure there are some folks on our call that are very interested in what they can do around wealth transfer today, especially if they've been contemplating a gifting program. So what do you think, Joe?
Joe - Thanks, Rich, so there are three factors that contribute to why today is a great time for people to consider wealth transfer opportunities. Number one, lower asset values. Number two, extremely low interest rates. And number three very high estate tax exemption amounts. So let's take one at a time. Number one, many assets have dropped in value, making them good assets to transfer into trust. This means the potential for greater asset appreciation inside that trust. Number two, the government has lowered interest rates to some of the lowest we've ever seen, in fact they're the lowest in my 30 year career and number three, and we have the highest gift and estate tax exemption in history which is $11.58 million per person right now. This amount is due to sunset on December 31st of 2025 to an inflation adjusted $5 million. However, may drop even sooner, depending on what happens in November. So, if you're thinking about helping other family members or moving assets out of your taxable estate, now is a great time to consider a few strategies. So Rich, what's the Scott summer estate planning techniques? You may be familiar with the annual gift tax exclusion, which allows you to gift up to $15,000 per person per year to as many individuals as you like with no gift tax consequences. So you can use this exclusion to gift assets that have dropped in value to your children, grandchildren or other family members. You can make these gifts to an irrevocable trust to their benefit and allow those assets to appreciate outside of your estate. In addition, many of our clients are interested in helping adult children buy houses or make investments into a business. Now is a really great time to use the current low interest rate. Right now, for example, a nine year loan would be as little as 0.41%. And you can use this low interest rate to lend money to your family members on an interest only basis, allowing them to use the capital for investments into a home or a business. They're going to pay only a small amount of interest to you each year and repay the original principal at the end of the loan term. One of the things you can do is use your $15,000 annual exclusion amount to forgive the loan interest. So let's say the loan interest is actually less than $15,000 a year, you can use the additional amount up to $15,000 a year to forgive principal on an annual basis. So the principle of the loan could be reduced each year using your annual exclusion amount. Now, I'm going to discuss two other common strategies. Number one, very similar to the first one, but making a larger gift using all or a portion of your lifetime gift exemption. Remember, that's the $11.58 million that each person has available to gift with no gift tax consequences. And using some or all of that lifetime gift exemption, coupled with using low valued assets that you have, and that you expect will grow in the future, making this gift into an irrevocable trust for the benefit of your kids and grandkids is an excellent strategy. You can set up an irrevocable trust, not only for the benefit of your children, but also your grandchildren, great grandchildren and future descendants as well. Another commonly used estate planning strategy is a grantor retained annuity trust or GRAT. A GRAT is an irrevocable trust, usually short term in nature, and is meant to place appreciating assets in trust. And the grantor takes back an annuity during the term of the trust. Any growth of the asset over the hurdle rate, which once again is a very low 0.4% will go either outright or in further trust for the benefit of your children. If we make this GRAT a zeroed GRAT, you will not be using up any of your exemption amount since you're receiving all of the principal back, plus a little extra in the form of an annuity. For example, currently working with a client that expects one of her investments to appreciate tenfold over the next two years. So we're looking to place this asset in the short term GRAT to get the appreciation over and above the hurdle rate to our children without using up any of her exemption amount. So these are some of the ideas that would work really well right now, given not only the low value that we're seeing, but the current low interest rate environment and the really high gift and estate tax exemption we have today.
Rich - Which it sounds like, a good opportunity, great opportunity, actually I know it is being a planner myself. A lot of valuable information you shared with us. Well, actually, we both shared, why don't we try some questions in the q&a box but also some questions that we've received by doing some of these sessions as well as what we've heard from clients, one popular question that I've received, and I'll direct this towards you Joe is, do I need both a revocable trust and a will? Or can I just have one? Sometimes there's some confusion. Do I really need two? How do they work together? So I was wondering if you can address that Joe.
Joe - That's an excellent question. Well, let's take a deeper dive with this. It's really based on a number of items, your personal facts and circumstances, as well as what jurisdiction you're in, coupled with what your trust and estate attorney would recommend. After all, he or she is the one drafting the documents. I will say over the last 15 to 20 years, I've seen a number of New York attorneys drafting more revocable trusts than wills. But just to be clear, you can have one of the following estate plans, either a last will and testament, or a pour over will with a revocable trust. I will discuss the latter since that's what we're seeing. When you create a revocable trust, you also create what we call a pour over will. Both a pour over will and revocable trust work together. Having a pour over will accounts for assets that either you didn't transfer into the revocable trust upon inception, or assets that you later acquired and inadvertently did not titled those assets in the name of the revocable trust. The short answer is you can either have a last will and testament or a pour over will and irrevocable trust.
Rich - Thanks Joe, I really appreciate that. So let's go to another question. Somebody asked about tax shelters. What can I avail myself of? I have W2 income, though others are I'm sure interested in what are some tax strategies I should consider if rates go up? Somebody mentioned that if the democrats win, so why don't I take that, just to cover a few things at a high level because there's a number of things that folks can do to help their tax situation today, regardless, really of what happens in the future. Number one, review your investment portfolio, just make sure it's tax efficient, whether that's taxable bonds versus municipal bonds. They're tax free that comes to mind. But what's also important with respect to your investment portfolio is asset location that comes to mind. Do I have the right investments in the right type of account? So we were talking before about an IRA, a ROTH IRA, very similar to a 401k. I know there was a question too around 401k and IRA, what's the difference? But do you have the right investments in the right accounts in order to minimize your taxable income that shows up on your tax return, you'd want to address that with your advisors, just managing gains and losses appropriately to minimize the capital gains tax. So if you're availing yourself and reaping the gains that you have, take a look at the loss positions that you have. And if they're not proper investments, you can get out of them, apply the loss, offset the gain, and try to minimize that capital gains tax if it makes good investment sense, on the deduction side, bunching deductions in a specific year to get the most out of it. So there are many taxpayers out there that fall under the standard deduction. So when they itemize, they really don't get the benefit of itemizing, one big deduction comes to mind, the charitable deduction, you'd want to make that in a year where take advantage of it. So bunching deductions in a particular year to get you over that secondary deductions where you can take advantage of that, it's important. Consider as I said, consider what's in the tax law already. I mentioned IRA ROTH conversions. But even before that, you got to ask yourself, "Am I maxing out my contributions to 401k plans and IRAs "on a pretax basis?" But also after tax, especially the 401k. With the 401k, there are many employers that allow you to make after tax contributions to your plan, beyond the 19,500 limit. So you'd want to pay attention to that and take advantage of any matching that's going on. Another item, there's so many things, right? But we have the time, let me just run through a few more things. For those that are approaching retirement, have a 401k plan, maybe there was an investment option in the 401k plan that allowed you to invest in employer stock. If that's the case, there's something in the tax code called net unrealized appreciation where you can take distribution of your employer stock in a very tax advantaged manner and subjected to capital gains, right? Depends on your basis. There are some nuances there. But a lot of folks don't know about that and some don't pay attention to it. So I want to bring that everybody's attention for that small subset of folks that may apply to a college savings plans, 529 savings plans, tax advantaged account, take a look at that. And if you think that tax rates are going to go up, Biden's going to win, the democrats are going to sweep and we're going to see massive increase in tax rates will only accelerate income. That's if you think that's going to happen and be taxed at a lower rate. I'm always hesitant to pay the government before you have to or recommend doing that, but it just it may make sense, but it's just really honestly it's too early to tell. I think you would agree with that Joe. And these are just some of the things that folks can do, but I really urge everybody on the call to speak to proper town's tax council, making sure your tax advisor signs off on it. I'm not too sure if you have any additional bombshell.
Joe - Yep Rich, I have two additional thoughts to add to that. I would agree working with the client’s tax preparer is very helpful. Having them provide a tax projection to see whether or not it benefits them to take deductions this year versus next year is very important. And the same is true for income. The key really is coordination between the plan and the client’s tax accountant as well as the clients, other tax advisors. And secondly, there are some circumstances where permanent life insurance can also make sense for folks that are in a high income tax bracket. Life insurance policies by their nature have a tax deferral component to them. Where any cash value in the policy is growing on a tax deferred basis and can come out down the road in a tax advantaged manner. For some people who are looking for additional tax deferral strategies, having permanent life insurance can be another way to take advantage of that tax deferral.
Rich - But thanks, Joe, for adding that, I really appreciate that. And in terms of life insurance, if I could just tack on to that, and folks may be wondering, I talked about insurance and income replacement. But folks may be thinking about what type of policy, right? What's the best policy? I hear this concept of a whole life policy or a term policy. What should I do? Which is the best one? And the bottom line is when I was talking about income replacement, typically, generally speaking, you'd look to a term policy. Term policies is set up for a number of years five, 10 or 15 years. It's traditionally the lower cost of all types of life insurance that's out there. In as long as you pay your premiums every year, it'll be enforced but then it'll expire after the term unless you convert it to a more permanent policy. But generally term insurance is utilized for income replacement, what I was talking about before. And then when I was also talking about estate liquidity, right? And that estate tax, well, that estate tax happens at death, the past. And so you'd want to make sure life insurance is in force throughout your lifetime beyond what any term can provide. So it's there for you when in the event that you should happen to pass away. So that's when you would traditionally look at more permanent type of policies like whole life or some sort of guaranteed universal or universal or indexed UL, sorry for the jargon indexed universal life. So when you talk to your life insurance professionals, which we have here at First Republic, you'd want to make sure you match the right type of policy with the particular goals, goals that you have in mind. So, there are lots of few other questions in here. One asks if our distributions in retirement from 401k plans is taxed. Yes, they are taxed just like a distribution from an IRA. I guess it really also depends on what your contributions are in your 401k plan, because there are many 401k plans that have a ROTH 401k feature, and that ROTH 401k acts very much like a ROTH IRA. So if there are contributions in that bucket, it's not going to be taxed on distribution. If you have after tax contributions that you made in an after tax bucket, you went beyond the $19,500 limit and you were contributing after tax dollars. Of course, those dollars that you put in there, they won't be taxed as well. They've already been taxed, but the earnings on them will be so hopefully that answers that question. So I'm just going through these questions Joe. I don't know if you are, but there's another one, does having both an IRA and a 401k complicate the ROTH conversion? Not so much though. I think what really complicates the conversion is if you have what you call basis in a traditional IRA, where you did make after tax contributions or non-deductible contributions to it, and of course, that won't be taxed, but you have multiple IRAs. And so even though you may have one IRA that wouldn't be subject to tax on conversion, having other IRAs that would be would cause parts of that, perhaps significant parts of that to be taxed on conversion. So hopefully that helps. Here's another one, if I don't plan to die before 2025, does that mean my trust transfer max may go down to $5 million, therefore making it important to start transferring assets sooner than later? That's a great question. If it does go back down to $5 million, it's going to be indexed for inflation. So right now, if you index it for inflation, it'll probably be around $6 million. The exemption, and who knows what's going to happen to the exemption? It could go lower than that, depending on what Congress looks like, and if Biden wins or Trump wins. So there are certain wealth transfer strategies that folks can implement today, giving them the flexibility, depending on what happens to utilize the rest of their exemption, which is much higher than $5 million. There's some other questions around IRAs, which I believe I addressed. And then there was another question. How does the lifetime aspect of the exemption work if the law will change in 2025 or earlier if I gift $11 million before the law changes, then am I still grandfathered into the current higher limit? Yes, you are. So that's why we start early. If clients have the wherewithal to make those gifts, then we urge them, we urge them to do so. So we've taken, a bunch of questions. Joe, will, I don't know if there's any final parting comments that you have but if--
Joe - Richard, there's one more question I'm seeing and I can take it.
Rich - Okay.
Joe - Question comes up, can you make gifts to non-family members? And once again, I'll take that. So yes, the same concepts that we just talked about earlier can apply to non-family members like brothers, sisters, nieces and nephews. And just as a reminder, you can give away any number of individuals $15,000 per year using your annual gift tax exemption. So for example, if you have three brothers and sisters and seven nieces and nephews, you can give them each $15,000 a year for a total of $150,000. The same is true with the lifetime gift and estate tax exemption amount, that's the $11.58 million per person, you can give $11.58 million into an irrevocable trust, to benefit your siblings, or quite frankly, any other named beneficiary. And the same is true for GRAT so at the end of the GRAT term, you can instruct in your document, how you would like the assets to go and either that's outright or in trust, to benefit your sister, your brother, or quite frankly, once again, any other beneficiary. As you start to consider some of these estate planning techniques that leads to another question I just saw which is, how do I interview an estate planning attorney? Well, there's a number of items to discuss with them. Number one, your credentials. Look at his or her credentials. Number two, look at the size of the firm. Number three, how long have they been practicing? 10, 15, 20 plus years? Four, what does the typical client look like? And does it match your profile? How much do they charge? And do they charge a flat fee or hourly? And lastly, how will they notify you if there's a future change in tax law? So Rich now I'm going to turn it back to you.
Rich - Okay Joe, well, thanks for that. I really appreciate that. Additional commentary and answering some of those additional questions. I think Joe we'll end it there. I want to thank everybody for joining us today and I hope you will all enjoy the rest of your week and enjoy the rest of your summer as well and I'm sure we're going to have more of these sessions for our clients come the fall. So again, thanks for joining and looking forward to speaking with you all again sometime in the near future, take care.
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