One of you is going to die first
October 15, 2023
Welcome to The Retirement Tax Podcast, where hosts Steven Jarvis, CPA, and Benjamin Brandt, CFP, work together to bridge the gap between tax professionals, financial advisors, and their mutual clients to help reduce most people’s largest expense in retirement: taxes. Each week, they will dive into conversations around taxes, focusing on what you can truly control (instead of what you cannot) and how to set yourself up financially for your future.
In this episode Ben and Steven give a preview of the upcoming live webinar on October 25th centered around planning for the inevitable passing of the first spouse. It may not be a fun topic to think about but there are a lot of important planning considerations when it comes to your life and legacy. From how your tax situation will immediately change to proactively disclaiming assets our hosts share valuable insight and an invitation to join a live session to learn even more.
What You’ll Learn In Today’s Episode:
Read The Transcript Below:
Hello everyone and welcome to the next episode of the Retirement Tax Podcast, aka The Least Boring Tax Podcast. I’m one of your hosts, Steven Jarvis, CPA, and here with me as always, Benjamin Brent. Ben, how are you?
Oh man, I’m doing fantastic. Summer has come to an end here in beautiful Bismarck, North Dakota, and that means hockey season and all those other fun things are right around the corner, so it’s a wonderful time of year.
Yeah, it’s fun as the kids start going back to school and get back into all the different activities and whatnot, we don’t have the consistency like you of hockey, but between band and softball and archery and all sorts of things, the kids stay very busy.
Absolutely, absolutely. And you and I are going to be especially busy because we’ve got some fun content coming up. Is that right?
Yeah. Actually, by the time this episode releases we’ll have been together at a live conference for financial advisors, teaching financial advisors across the country how to do more with tax planning, and then about the time this comes out, we’ll be together in New Orleans spending time with other financial content creators, making sure that we’re continuing to refine our craft and improve what we’re doing here.
And in addition to that, we also have some podcast-related content.
Of course, we’re always excited about what we can bring to our audience and here just don’t have me do a countdown. Numbers aren’t really my thing, but here real soon, coming up later in October on the 25th, we are going to do our next live webinar. We did one back in May and had great feedback from everyone who attended. Hundreds of our listeners came and learned about things they can do to sand the rough edges off their retirement tax bill. And of course, as you might expect, this one will also be tax theme, but we’re going to take a little bit different approach to this next live session to be able to share some great things to be thinking about around taxes.
Right? Yeah, so we always want to talk about on the podcast the confluence of tax planning and retirement planning. Got this big bill that we want to sand the rough edges off. And so the big thing that we’re going to talk last time it was retirement tax. How do we quantify what that big bill is going to be? This is going to be a little bit more nuanced for, and it’s going to be for couples when the first person dies in your household, in your married household, there are some really, really big changes that happen. And so we’re going to go through those, how we can navigate what’s going to change, and then what preparations can we make to not overpay the IRS because things are going to be changing hands. There’s probably going to be a lot of taxes that are going to be deferred or owed or forgiven in some cases, and so we want to go through all those and make sure you’re on the right side of the tax ledger.
And while there is going to be this emphasis on what happens when the first one of you dies, so obviously a focus on couples, there’s a lot of things in this that will apply to single individuals as well. Ben, I know you put it more eloquently, but the idea being that we start this journey as a team, but we’re going to end it as an individual and while we plan for the best life that we can have at some point we’ve also got to think about our legacy and how this passes on first to our spouse and then to our heirs or the charity of our choosing or whatever that might look like or maybe it’s that last check bounces and we do that perfect swan song.
That is such a difficult part about retirement planning and financial planning in general is that we really don’t know. We know that chances of death are essentially one per person. Nobody gets out alive, but financial planning would be a lot easier if we knew exactly when that would be and if it’s going to happen early on in retirement, mid retirement, later retirement, we don’t know what our net worth is going to be. We know we have some ideas about where we want the money to go when we’re not here and we want to provide obviously for the spouse we leave behind or the people we leave behind that depend upon us, but it’s all just an unknown until it actually happens. So we’re going to spend some time in this webinar going through what that is, how to prepare for it, how to title assets, how to untitled assets, how to claim or disclaim, and then what happens if we’re going from a married filing jointly, tax return to a single tax return, and then all the things like Medicare that are going to be wound up in that big change, even head of household if you still have a kid at home, what things may or may not change and how we can be best positioned to not overpay in taxes.
Yeah, that’s definitely one that comes as a surprise. I think just about every taxpayer I work with is that change from married filing jointly to single because in the year your spouse passes away, you’re still going to be able to claim married filing jointly for that year regardless of when they pass away. People always make the joke that the best day to have a kid is December 31st because you get a tax credit for the entire year. Well, if we go on the morbid side of that, the best day to pass away is on January 1st because you still get married filing jointly for the entire year even though you weren’t technically married for the entire year. But what happens is that that second year after your spouse has passed away, you’re no longer eligible to claim married filing jointly. You now have to claim single, and I’ve worked with a lot of clients whose income will not significantly drop when the first spouse passes away because a lot of times the assets, sometimes the income streams just get handed over and maybe there’s some reduction in the level of benefits, but it’s usually not commiserate with how the income tax situation changes because in general, everything’s going to get cut in half the tax brackets, the standard deduction, which means that your taxes are going to automatically go up.
There just aren’t situations where filing single is a more advantageous tax situation than filing married filing jointly, which of course at that point you don’t have an option. We’re just dealing with realities here, but we want to plan ahead so that we’re not caught off guard by this, so we don’t suddenly get hit by underpayment penalties. We’re not withholding enough or paying enough in and that we don’t have to suddenly come up with all of this cash in March or April because we weren’t expecting a big tax bill.
And if you do, a lot of the things we talk about on the show, if you defer your social security, if you defer that bigger check as long as you possibly can to maximize the impact, that income stream doesn’t change when the first spouse passes away. If you’ve been investing for the longterm using low cost funds and your retirement account balances are fairly large, then you go and you look at that married filing or not married filing that single filer status, you’ll be shocked at how when IRMAA and things like that kick in, it’s not, you think about almost $200,000 for a married couple, that’s a lot of money, but cut that in half or even potentially not quite half for a single filer. When you’ve made all these plans with social security in your investments for two people, you’ll say, I’m not making that much money, but I am on an income-based Medicare payment plan now. And it shocks people that say, I’m not a rich person as a widow, but I am paying like I am for my Medicare. And it comes as a very unpleasant surprise for a lot of people.
Yeah, it’s certainly easier to avoid difficult topics like, Hey, my spouse is going to pass, one of us is going to pass away first. My wife and I will use the term joke about which one of us has to pass away first because the other one can’t figure out how to go on life without ’em. But that’s a different conversation. It is going to happen, and I mean it doesn’t always come up as we talk about Roth conversions or how we think about that, but when we think about this concept of, Hey, are you concerned at all that your tax rates might go up someday, this is one of the ways your tax rates will go up and go up significantly. It’s not that there are different tax rates for single versus married filing jointly. It’s that the brackets essentially get cut in half. And so now if the majority of assets are in pre-tax accounts, now we’re going to be paying a higher effective tax rate, a higher average tax rate when we switch to single compared to married filing jointly. So it’s not even just do I think Congress is going to change the tax rules, which they already are in 2026. It’s not just do I think I’ll have more taxable income in the future than I do now? It’s also, hey, inevitably one of us is likely to pass away first and then we know our effective tax rate is going to go way up. So it’s another reason that we think proactively about is there a situation where it’s better to bite the bull and pay taxes now as opposed to waiting for the future?
Right? Again, that it would be really easy to know when the first person is going to depart. It would be really helpful to know because then we could make some of these decisions even with more clarity. There are some decisions after the fact, after the first spouse has passed away. We look at the beneficiaries on IRAs and things like that and say, okay, this is kind of our last chance before we start to consolidate things. Do we want things to go exactly as planned or do we want to potentially disclaim assets? It’s a great time after we’ve given some time for grieving, we want to potentially do some more planning and say, okay, do we really need this much money in the IRA? Would it make more sense to disclaim part of these assets to the contingent beneficiaries so that we could start the 10 year clock so that we could think about all the other things that we need to think about with secure Act 2.0 and all the legislative changes that have happened over the last few years. A lot of new and interesting wrinkles in planning and a plan that might’ve been the perfect plan 10 years ago when you created your legal documents might have a whole new set of issues to deal with some positive, some negative.
Yeah. A couple of thoughts come out of that for me, Ben. One is that we bring it up on the podcast at times, but it’s worth reinforcing that when we talk about tax planning, you’re not just planning for your lifetime or even your spouse’s lifetime, you’re planning for the lifetime of your wealth, the legacy of your wealth, because we’ve got to think about who this is going to and what their tax rates might be, how they might handle that. And you mentioned Secure 2.0 and we’ve definitely talked about that this year on the podcast, especially around inherited IRAs. And really we’ve focused on what happens when a non-spouse beneficiary, inherits an IRA because that’s when the potential RMD rules kick in. That’s when the 10 year clock kicks in is for a spousal beneficiary. But you mentioned in there, and we’ll give specific examples on the webinar, but Ben, talk from a high level about this idea of disclaiming assets. That’s probably something that most of our listeners probably haven’t heard of before.
Yeah, this idea was brought to us by our lead financial advisor, Bret Mulvaney, and we had a version of this idea that wasn’t as good, but I’ll share it because it gives some clarity as to what we’re trying to accomplish. So we used to do an idea called beneficiary splitting where we would say, okay, Mr. And Mrs. Client, we think you’re going to have roughly 2 million in your IRA when you hit age 80, and that might be when the first spouse passes away. We don’t know. We’re just thinking hypothetically. So what we can do now is we can, now that you’re a few years into retirement, we could say, okay, I actually want my spouse to be 80% beneficiary on my IRA and my kids, my two kids to each be 10% beneficiary. Because what that’s going to do is it’s going to lower the amount for the spouse that they have to take required minimum distributions on, and that’s going to have a cascading effect to increase the amount of taxes that they have to pay.
And then the 20%, let’s say that’s of $2 million, that’s $400,000, 200,000 per kid, they can start the 10-year clock on their inherited IRA, and that’s going to have a cascading effect to lower their taxes as well. Now, where we improve on that with the beneficiary splitting method, the old method, we didn’t know exactly when a person would pass away. Now, if they died too soon, that 80%, 20% would be a bad deal for them because they have a lot more retirement that has to make that 80% last. But with disclaiming assets, we can talk about it and plan for it, but we don’t have to actually write anything in stone and change any beneficiary. We’d have to have a primary net contingent beneficiary, but we can say when the first spouse passes, whether that’s in two days or 25 years from now, we just have a tentative plan in our minds that we’re not going to make any changes.
We’re not going to do any spousal rollovers, anything like that for probably six months. We’re going to get all the death certificates together, we’re going to grieve, we’re going to do all those things. Then we’re going to start from scratch and create a brand new plan to say, okay, this is the income that I want as a single person. Here’s all the things I want to do, and we’ll reverse engineer it to see how much money we would need. And then with some margin of error, anything in addition to that could be a couple hundred thousand dollars, could be a couple million dollars, we don’t know, depending on how far in the future it is and how well the market does, then we can disclaim everything that we don’t need and that can go to our contingent beneficiaries so that me as the surviving spouse, I’ve got lower RMD requirements, then I’ve got less income for a single filer, I’ve got less income for my IRMAA questions, and my kids get a chance to get that money sooner when they might need it sooner, and they got their own tenure clock, and then when the second spouse passes away, we get to do all of it again with a second tenure clock.
So the amount of taxes that you can save by very intentionally putting these assets into pieces and timelines, I wouldn’t think it’d be far-fetched to say that could be a 600,000 or excuse me, a six-figure tax savings just with that idea of disclaiming assets.
Yeah, easily six figures because since I’m a bit of a numbers nerd, I actually ran the math on this recently just because the question came up. If we took a million dollars of an inherited IRA and took the entire distribution in one year versus spreading it over 10 years, just that single change can result in tax savings in the six-figure range. And so now what you’re describing takes that even another step further that now we can have multiple 10-year periods where we can take a large lump sum that otherwise might have been distributed all in one year and potentially spread it over two different 10-year periods. And the great news for people listening is that this isn’t something that you have to definitively map out right now. You need to make sure that you’re at least somewhat regularly reviewing your beneficiaries from a high level to make sure it’s in line with your wishes that you have a primary and contingent beneficiary set.
I love that the percentages don’t have to be decided today. So, Ben, I want to make sure I’m hearing this right. We could just leave it as the a hundred percent goes to my spouse as the primary beneficiary. I named my two kids as the contingent beneficiaries, and then if my spouse were to pass away or when I pass away, my spouse decides, you know what? I only need half of this, and so I’m going to disclaim the other half and let it flow through to my kids since they’re already listed as contingent beneficiaries. I can decide that later.
Correct. And really you have to decide to not make any big decisions right after your spouse passes away. Because once we start to combine those into spousal IRAs and things like that, we’re going to lose that ability because it’s going to have a new set of beneficiaries on it. It’s going to be totally different count, things like that. So you just have to be familiar with the plan. So it would be unreasonable to fully understand this the first time it’s explained to you, right? It’s something in the distant future and there could be a dozen different laws that change between now and then, and it’s sort of something that’s going to happen eventually, but we don’t know if it’s going to be soon or in the future. So our clients are on every three years on a rotation, so we’ll review their estate documents. We’ll have these kinds of conversations every three years or so, and then hopefully, God willing, we’ll have had this conversation five or 10 times before it actually happens, and then the clients will just be that much more prepared and the decision will be that much easier to make. So we’re essentially saying, here’s what we’re going to do very likely at some point in the future, and we’re going to just revisit the plan from scratch when that happens, and we don’t have to. There’s no strict timeline that we have to do it in the first week or month. It’s going to eventually happen, and here’s what it’s going to look like so both spouses can have a comment on it even though only one will be there when we actually do it.
So Ben, like you mentioned, this is just one of the things that we’re going to talk about on this upcoming webinar on October 25th. You can go out to retirementtaxpodcast.com to register. It’s free for our listeners and just like we did in May, we’ll get together live. We’ll be able to share our screen and have some real examples, walk through some of this and share some other great topics around this idea of, Hey, what do we need to plan for when one of us passes away? But so go out, get registered. We’ll be excited to see you there.
And as much as we love talking about these retirement planning and tax topics, the audio medium can only get us so far. So that’s why every once in a while we want to get in your ear and get in front of your eyeballs with some of these tax topics so that we can show you here’s a case study. These two people, this couple saved up a million and a half dollars. Let’s fast forward 10 years into retirement, 20 years into retirement. Fast forward to the first death. Let’s look at how these are going to be distributed and what the taxes are. There’s few things more boring. I know this is the least boring tax podcast to describe numbers in an audio format, so that’s why we want to dive into the webinar format every once, so to show you what that looks like. And of course, we’ll have some fun handouts and things like that and also get an opportunity for you to actually talk to someone about your unique situation. So that’s why we do the webinars and that’s what we’re excited to share with you.
Well, Ben, before we wrap up today’s episode, we had a listener send in a question that was actually, maybe not intentionally, but it was a follow-up to something we had started discussing a couple of weeks ago, but kind of hit at a different level of nuance to it because not that long ago, we were talking about IRMAA and the idea of whether contributing to a donor-advised fund would help with IRMAA came up. And so that’s what the listener wrote in and asked about that they’ve been meeting with their CPA. And if I have the right takeaway from the CPA basically said, sure, let’s contribute to this donor advice fund. It’s going to help reduce IRMAA, but it’s a little bit more complicated than that.
Well, in this specific question, I think they also asked about giving appreciated assets. So I think the CPA was correct, but there was some more nuance to it. So just to bring the audience up to speed on the question, listener Rodin, I floated this idea past my CPA about giving money to a donor-advised fund to avoid IRMAA. I was planning on using some appreciated stock outside of my IRA to do that gift. Will that help me with IRMAA and the CPA? A said yes, which is partially true and partially not true. So I think maybe we should go through when does giving to a donor-advised fund help and how we give does it help? So what can I do to move the needle for IRM is I guess my question.
Couple of important distinctions here. Donor-advised fund is basically a tool for us to be able to do multiple years of giving all at once so we can get a bigger deduction in the current year to get us over the standard deduction. So we’re getting a tax benefit from our charitable giving, which I always like to throw out. My general reminder here is these need to be organizations. You already plan to support. Spending money just for the purposes of saving taxes is never going to put you ahead. On the IRMAA side, our income related monthly adjustment amount that dictates how much we pay in Medicare premiums, the important number is our modified adjusted gross income. And so for most people, this is whatever income is reported on our tax return is going to contribute to this.
The biggest number usually.
Yeah, it’s usually the biggest number.
I should see the biggest number.
Yep. Because this is before, this is a really important distinction. It’s before any deductions come out. And so if that donor advised fund contribution is all cash, let’s start there. If I put a hundred thousand dollars into this donor-advised fund, I will get a hundred thousand dollars deduction that reduces my taxable income. But that’s not relevant for IRMAA and I haven’t done anything to change the income that’s going to be used to determine my Irma premiums. And so if I strictly donate cash, no effect on IRMAA. But in this case, they’re saying, well, what if I donate highly appreciated stock? And so now there’s a portion that we get a benefit from because we’ll get a benefit from the portion that now is being left out of our taxable income because we didn’t have to recognize a capital gain. And so if my basis in that highly appreciated stock is $25,000 and the current value is a hundred thousand dollars, so I now get to put a hundred thousand dollars of appreciated stock into this donor-advised fund, that $75,000 difference that otherwise would’ve been a capital gain and would’ve gone into my taxable, into my modified adjusted gross income, that now becomes a benefit towards IRMAA as well.
So to answer the question sort of right, the donor advice fund contribution itself doesn’t help with IRMAA, but avoiding the taxes that we would’ve had to pay on that capital gain will. So we’re half, yes, half no, but hopefully, that gets you a little closer on that general idea. Yeah, donor-advised, extremely helpful resources. As long as you are giving things away, especially in the instance of retirement where we’re getting a big lump sum this year, maybe we have stock that is being paid out or vacation pay or severance pay or anything that could be tied to ending our career. If we treat that like any other income, let’s say you get a hundred thousand dollars this year, it’d be reasonable to expect that some of that, if you’re a frequent charitable giver, would be you’re getting that money in 2023. I would’ve given some in 24, 25, 26, and so I’m not going to get any tax benefit in 25, 26, 2027.
Why don’t we use a vehicle like a donor-advised fund to try to get some benefit for future giving, even though we’re getting really lumpy income just this year. So it’s saying, granted, I’m receiving this income this year. I’m planning on giving this to charity in future years. Let me just get credit for it this year. And that offsets the income. It doesn’t help you for IRMAA, but it’ll help you in all the previous tax dollars because we’re trying to beat that standard deduction at least this one year. And then it helps us in future years because claiming the standard deduction, even though we’re giving to charity. So we’re able to, like many things in financial planning, if we plan ahead and bunch things together, we’re probably going to come out ahead.
Ben, I love that. Great feedback for that listener who wrote the question in and for all of our listeners, Ben, I think that takes us to the end of it for everybody listening. Again, come join us next week live on the 25th to talk about taxes and to see our beautiful faces. And Ben, as always, thanks for being here. It’s great to see you. For all of our listeners, good luck out there. And remember to not let the tax man hit you where the good Lord split you.
Steven (Disclaimer) (21:32):
Hi everyone. Quick reminder before you go. While Ben and I feel very strongly about the information we’re sharing on this podcast, it is for educational purposes only and should not be taken as specific tax, investment or legal advice. You need to make sure that you are working with a professional to evaluate how these concepts apply to your specific situation before you take action.