Intro: Royal Standley of Oregon Pacific Financial Advisors, offering securities through United Planners Financial Services, member FINRA SIPC, guides clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their lives by design. In these episodes, he relates his expert financial insights and discusses timely topics. Royal strives for excellence and has a passion for sharing his knowledge and supporting his local community. Now onto the show.
Aric Johnson: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Good afternoon, Royal. How are you today?
Royal Standley: I'm good. I'm good. This, this fall weather is just beautiful. I love that there's no smoke in the sky.
Aric: Nice.
Royal: It’s crisp. Occasional rain. You know, just what I, what I began to realize early on was just how blue the sky’s were after living through August of this year.
Aric: Oh man.
Royal: So I'll, I'll, I'll walk out and go, oh, wow. This is beautiful. So yeah, it's, it's, it's, uh, one of my favorite times of the year is the fall. Yeah, it's just, uh, it just gives me that energy.
Aric: That's good. Yeah. And. You know, that's how it is, right? With human nature, you, you don't realize how much you love something or miss something until it's gone for awhile. And, uh, so it's, it's always nice to have that reset button every once in a while. And, you know, you get that different perspective, I guess.
Royal: Yup. Grab that pump, pumpkin spice latte, and pop on the UGGS. And you're just good to go.
Aric: Yeah, I wish I liked pumpkin. I don't know. Pumpkin pie, pumpkin spice. Nothing. No, thank you. Apple pie?. Apple spice? I don't do they make an apple spice latte?
Royal: I don’t think so.
Aric: I don't know if that would taste good. Yeah, I don't, I don't know if it sounds good anyway, hot apple cider for me and that'll be just fine. That's what I like it.
Royal: Yeah. Nice. Nice. Yeah. You know, it's, it's a nice time we're getting towards the end of this year and, uh, yeah, just, just kind of ready for, uh, whatever 2022 will bring. I- I'm excited.
Aric: Yeah. I'm in a little bit of a pool, right? And I've got my money on space zombies for 2022. Zombies from space.
Royal: Okay...
Aric: I'm just not sure what's coming around the corner. You know, hopefully it's not like COVID, you know, 27, whatever,
Royal: [Laughter]
Aric: Whatever, variant we’re on now. Just forget that. I'll take the spaces zombies over, over Covid.
Royal: Okay. Okay. Interesting. Interesting.
[Laughter]
Aric: You're like, yeah, that's the end of this podcast. All right, everybody. That's a wrap.
Royal: You know, that's probably a better guess than like sharks with lasers,
Aric: True...
Royal: But you know, it's an, it's an oldie, but a goodie.
Aric: Yeah. I like the water and zombies can't swim. So therefore, sharks with lasers? Much worse than space zombies.
Royal: You know, it was interesting. My, my daughter got, she's, she's seven. She, she got watching a, uh, shark documentary on Disney+ and,
Aric: Oh, all right.
Royal: And got terrified of sharks,
Aric: Oh no!
Royal: And she's telling us, and, and, uh, her aunt and her mom are like, you know, sharks aren't, aren't nothing to be afraid of, you know, just, it's not that big of a deal, you know, that sort of thing.
Aric: Mm-hmm.
Royal: And so I looked up, you know, how many people actually die from, from shark bites every year, and, uh, worldwide. It's about eight people.
Aric: Mm-hmm.
Royal: Twice as many people die worldwide from champagne corks each year.
Aric: [Laughter] Okay. Now I feel like a bad human being for laughing at that because somebody died from champagne corks.
Royal: Yeah.
Aric: I thought you were going to bring up the cow statistic, which is like, I don't know how many times it is, way more than shark deaths. There are more cow deaths than, but I had no idea about champagne corks, and I guess it's good. I don't like champagne.
Royal: So now, now are you talking about, when you say cow deaths, are you saying human beings dying from interactions with cows? Are you saying cows being killed?
Aric: Oh no. Well we know that's skyrocketing, but no. Human beings being killed by cows.
Royal: Okay...
Aric: I'm not sure if there's like a group of thug rogue cows that are just going out and, you know, murderous rampages, or if it's just like random kick in the head kind of thing.
Royal: Yeah. Yeah. So, so that's, that's really where we should be worried.
Aric: Yeah. I, I, I agree. You just don't want, you know, champagne corks flying from the sky anyway.
[Laughter]
Aric: Yeah. So besides, you know, sharks with lasers and champagne-cork deaths, what are we talking about today?
Royal: So I thought I'd share a little of my presentation that I gave to the Southern Oregon Estate Planning Council in regards to the new rules that apply to, uh, IRA beneficiaries and some of the options that are available to folks, uh, when naming their, their, beneficiaries and the way they should possibly think about that and plan for that next generation.
Aric: Okay. Yeah, that would be great. I know that there's been a lot of changes, uh, not only proposed, but changes that have happened so far, so yeah. Let's walk through that. I'd love to hear it.
Royal: Yeah, absolutely. So, uh, the SECURE Act of 2019, uh, changed a lot of this. Before the SECURE Act, if you were the beneficiary of an IRA or 401k or any type of qualified retirement account, uh, you have the option of either taking out all the money over the course of five years, or, uh, you were able to stretch that, uh, account over your lifetime. The thinking being is you are able to take a small portion out as income each year and stretch that account out over the course of your lifetime. It made it very tax efficient. It was very easy to do planning according to that, uh, uh, timeframe, because you had a lot of different options. You could always take more out in a given year, as long as you're taking out your required minimum distribution each year. The SECURE Act came in and changed that pretty dramatically for folks. And the reason behind that is the government felt like they weren't getting enough in tax revenue, uh, and by making those changes, uh, they were able to accelerate the distribution of those retirement accounts much faster and therefore refill their coffers, which, you know, I know is the most important thing, uh, when the government looks at, uh, funding, all of their different programs.
Aric: Mm-hmm. Yeah.
Royal: So really what they did is they got rid of that lifetime distribution for most groups. And we'll talk about where some of the unique planning opportunities are there. They, they introduced, um, a new category called an eligible designated beneficiary and really caused this to kind of upend years of planning, uh, if you were using trusts or other estate planning options to have a little bit more control from the grave in regards to your IRA dollars. So, uh, we'll walk through what you should do if you do have a situation or a trust set up designed to distribute an IRA over someone's lifetime because that's no longer an option for a lot of folks. Now, the good thing is if you had an, a, an inherited IRA prior to 2019, you are still operating in those old rules where you are able to take a lifetime distribution. So the SECURE Act didn't change anything for anyone who passed away before 2019. However, going forward, those numbers are going to be changed, and that's where we want to kind of give an update here on, on the options for how best to kind of plan around this, depending on your relationship and your age to the, um, uh, deceased.
Aric: Mm-hmm.
Royal: So right now there, there's now basically two categories there's the designated beneficiary and then there's the eligible designated beneficiary. And the word eligible is the important part. If you fall into the eligible designated beneficiary category, you have the option of stretching that out over your lifetime and operating in the old pre-SECURE Act rules. And so everyone else is considered a designated beneficiary. And in that case, they're operating under a 10-year rule, meaning that they have 10 years to get all of the money out of an inherited IRA. So, the people who qualify as eligible designated beneficiaries: number one, a surviving spouse. And we'll take a moment here and just chat about the surviving spouse. So, if you're married and you have your spouse pass away, you actually have the most options on what you can do with your inherited IRA. First of all, you can always take all the money out if that's, that makes sense from a planning standpoint. You can stretch it out over your lifetime. Or you can actually reclassify that entire account or a portion of that account into your own IRA.
Aric: Hmm.
Royal: So, basically you, you inherit it fully and it just becomes your own IRA. So the question becomes well, why would you want to do a lifetime stretch of IRA funds if you can just roll it into your IRA? And really where that comes down to is the age of the surviving spouse. So, if a surviving spouse, who's, let's say 50 years old just takes, uh, the IRA she inherited and rolls it over into hers, what she has effectively done there is created a 10% penalty,
Aric: Mm-hmm.
Royal: If she needs to get any of the money out before the age of 59 ½. Because, since it's her own IRA, the 59 ½-year rule applies that says any money you take out of a qualified account, you're going to pay a 10% penalty on if that distribution happens before the age of 59 ½. So for younger, uh, surviving spouses, it makes sense to do a lifetime stretch, at least until they reach the age of 59½ to give them more flexibility. Because when you inherit an IRA, that 59 ½-year rule doesn't apply to your distributions.
Aric: All right, that's good.
Royal: So, the other interesting case here is minor children of the deceased are classified as eligible designated beneficiaries, meaning that they can stretch an IRA that they've inherited out over their lifetime, but here's the big caveat once they reach the age of majority, which in most states is 18, then it can no longer be stretched over their lifetime. And the 10-year rule applies.
Aric: Mm-hmm.
Royal: So for a lot of folks, something they need to monitor and make sure that those rules apply. The other eligible designated beneficiaries, disabled persons, chronically ill persons. And the last one, individual's not more than 10 years younger. So, this is an excellent, um, planning piece. If your beneficiaries, for instance, are, you know, your siblings or a partner that you've had for years where you have not been married. This allows you to take that stretch and really time those distributions, uh, over the course of the rest of your lifetime and make them as tax efficient as possible.
Aric: Okay. So, there are some good highlights to that.
Royal: Correct, correct. There are some categories that get to retain those, um, more beneficial pre-SECURE Act rules. Now for basically everyone else they're going to fall into the 10-year rule. So, what does that look like? Basically, what that says is, is once you inherit an IRA, uou have 10 years from the death of the deceased person to distribute those funds. Now, the difference here is, is there's no required minimum, minimum distribution at all. meaning that you don't have to take anything out in any given year there. But the question is, especially if you're inheriting a larger IRA, or if you're a naming, an IRA beneficiary, is thinking of the tax consequence to that person to move that money out. So for instance, I have clients where they might have a million dollars in an IRA, but only one child and their only beneficiary. So, in a case like that, that child is going to have 10 years to pay taxes on a million dollars plus of income.
Aric: Mm-hmm.
Royal: And how best do you do that? Uh, do you take everything out all at once in year one, pay the taxes and be done with it? Do you just wait the 10 years and then pull out that million dollars plus 10-year’s worth of gross, growth and have a much higher tax bill? Or do you stretch it out over the course of that 10 years and take a small percentage each year and try to gradually drain that account down? So, that's really where we want to look at a tax planning rules and make sure that we're trying not to pay as much tax as possible.
Aric: Yeah.
Royal: That's ultimately our goal. It is um, to avoid really putting you up into the highest tax bracket, which can happen if you're going to distribute the entire thing injust one or two years.
Aric: Yeah. That makes a lot of sense.
Royal: Now, the other thing that all these changes did is if you are charitably minded, this once again, just reinforced how beneficial it is to look, to use your IRAs, to fund your charitable giving, especially as part of your estate plan. Remember, you can always name a charity as a beneficiary of your IRA or 401(k), and that money passes to the charity without anyone paying taxes on it. It's a big difference if you're looking at leaving an endowment in your will, where those assets are going to the charity, you've already paid taxes on those, those assets in a lot of cases, or you're getting a step up in basis on those assets, versus leaving your qualified accounts or a portion of your qualified accounts to charities. Because in that case the way the government looks at those is, um, you know, 70 to 80% of that money is yours, but we're we're, we're going to get our taxes back,
Aric: Mm-hmm.
Royal: That you were able to defer into it. So, by leaving your IRAs to charity and using those as a vehicle to fund your charitable intent is really the most tax efficient way of doing it. So, I just encourage anyone who is looking at their estate plan and wanting to support, you know, their church or favorite charity is really having that conversation with your CPA or financial advisor, uh, about naming a charity as the beneficiary versus leaving an, an endowment or a bequest in your trust document.
Aric: All right. A lot to consider.
Royal: Yeah, absolutely. Absolutely. The other thing that this does is, this rule also applies to Roth IRAs. Now remember Roth IRAs are tax-free accounts for all intents and purposes, meaning that you've already paid taxes on the money when you put it in. After five years and the age of 59 ½ you can pull those funds out tax-free, uh, not only what you put in, but also that growth as well. So those assets, um, are still going to be affected by these new beneficiary rules. But the major, major difference here is. Um, if you are a designated beneficiary that falls into that 10-year rule, from a planning standpoint, assuming you don't need that money to live on, you would, you can just leave that money in the inherited Roth IRA for 10 years and then pull all the money out of it in the 10th year. And you've actually received 10 years of tax-free growth and you're not paying anything in taxes to pull that money out of the Roth at the end. So a very, very powerful, um, planning point here is, uh, I think for a lot of people, when they're looking at passing on assets, this makes the idea of doing Roth conversions even more attractive,
Aric: Mm-hmm.
Royal: Um, because you can pay taxes early on that, let that grow over the rest of your lifetime. and then another 10 years of tax-free growth for your beneficiary. So some powerful planning concepts in here and kind of a reshuffling of the landscape when we talk about planning for the future for that next generation.
Aric: Yeah, absolutely. And I mean, again, there's, there's huge differences between the Roth IRA and a regular IRA and you spelled it out beautifully. And so again, it comes down to individuals, situations, their, their plans, their hopes, and dreams and desires. They've got to talk to somebody. So again, we'll give contact information at the end of the show so people can reach out to you. Um, but what else did you have in your presentation?
Royal: Yeah, yeah. The other thing, um, that just to touch on some individuals may have had a trust drawn up that basically, uh, specified and had language in it that said, you know, the beneficiaries are able to stretch their IRAs out over their lifetime and take out the RMD. With this change to the rules all of those trusts need to be reviewed by an estate planning attorney,
Aric: Hmm.
Royal: To make sure they fit the new rules. Also, if you, you were working with an insurance company with an annuity, for instance, where you had specified how you wanted that death benefit to be paid out for qualified money, that needs to be reviewed as well. So those are the two areas where some additional planning needs to be done, uh, to make sure that the planning you did years ago still matches up.
Aric: Mm-hmm.
Royal: And then finally, the, the other part of all this is just looking at the IRAs in general and the best use of those funds. You know, one thing that we just keep coming back to over and over again is if you have charitable intent and you're past the age of 79 ½, you should really be looking to use your IRA to fund your charitable giving. There is something called a qualified charitable distribution, which was kind of put in place and solidified in the law with the passage of the SECURE Act. What that does is that allows you to direct your IRA, to pay a distribution directly to a charity. What this does is it will satisfy your required minimum distribution need that you have come into effect at the age of 70, but it doesn't count as income to you. Now, you don't get the charitable deduction, but you already avoided realizing that income by sending it directly to the charity. So, we are really looking at maximizing the taxable effect we can have by making these gifts as tax-efficient as possible. So, we encourage people to, uh, take a look at their charitable giving and make sure they're getting the full benefit from that.
Aric: All right. Royal, this is, this has been a lot of great information. Um, any other points, tips, things to think.
Royal: Yeah, I think the, the biggest point I would have is doing all this planning takes collaboration, both between your financial planner, your CPA, and your estate planning attorney. So, you want to make sure that those groups are communicating and on the same page of how best to transfer these assets to that next generation. That's something that's very important to us here at Oregon Pacific Financial. Is making sure that we're keeping those other trusted advisors our clients have in the loop so that we are able to provide the best possible advice and that kind of everybody knows what's going on and what the situation is. We do a lot of chatting with our clients’ CPAs and attorneys, just to make sure that all the planning they did, you know, five, 10 years ago is still applicable, uh, accurate, and really what the clients want for that next generation.
Aric: Mm-hmm.
Royal: Um, I think it's so important and it's something I just don't see a lot of, uh, other advisors doing where, uh, really sitting down, you know, in a room going over this, uh, with those, those other advisors we just see the value to be immense in that. So that's something I would encourage. Ultimately. It really comes down to making sure that you're working with a financial planner that is looking at all of this and not just the investments. I say it over and over again, the investments are extremely important, but if you're losing money to taxes, uh, if your estate isn't being distributed the way you want it, um, if you're not able to kind of pass along, not just the money, but also the values to that next generation, uh, something's broken there. So we encourage anyone who doesn't feel like they're getting that level of service to give us a call and we can discuss what that would look like and give them some options of planning for the future.
Aric: All right. So, let's give them the number.
Royal: Yeah, you can reach our office at (541)772-1116 or go to our website at opfa.com and schedule an appointment right there.
Aric: All right. Fantastic. Royal, thank you again, a lot to think about. Sounds like it was a really good presentation.
Royal: Thank you. Thank you.
Aric: You bet. And our last, thank you goes out to you, our listening audience. Thank you so much for tuning in and listening to the Life by Design podcast with Royal Standley. If you have not subscribed to the podcast yet, please click the subscribe. Now button below this way when Royal comes out with a new podcast, it'll show up directly on your listening device. This makes it much easier to share these podcasts with your friends and family. Again, thanks for listening today for everyone at Oregon Pacific Financial advisors, this is Aric Johnson reminding you to live your best day today. And we'll see you next time.
Outro: Thank you for listening to the life by design podcast, click the subscribe button below to be notified when new episodes become available. The views expressed are those of the presenter and may not reflect the views of United Planners Financial Services. Material discussed is meant to provide general information and is not meant to be construed as specific investment tax or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation. Seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investment. Planning and advisory services offered through Oregon Pacific Financial Advisors, Inc. Securities offered through United Planners Financial Services of America, member of FINRA and SIPC. Oregon Pacific Financial Advisors, Inc. and United Planners Financial Services are independent companies.
