Throughout the life of our podcast, we have been asking you to send us questions you’d like us to answer. Today we dive into that mailbag with Scott Voss and Jadin Winberg from Mariner to help answer them. Questions answered today include:

• Can family members use funds earned by doing chores to contribute to an IRA?
• My attorney who created my estate plan has died. Is there anything I need to do?
• Where should I be keeping important documents like my will?
• What’s the difference between a revocable and irrevocable trust? Are there taxes associated with gifting?
• I just received a letter from the IRS. What do I do?

Transcript

Brian Leitner: Welcome to Your Life, Simplified. My name is Brian Leitner, and I’ll be the host of this podcast. Today’s show is a bit different. And for those of you who have not listened in the past, we have something called Mariner mail where listeners of the show can email in their questions as it relates to their own financial plan or other questions they may have, and we’ll do our best to answer those questions. Leveraging advisors we have and other experts on the team here at Mariner. So today we’re going to walk through a series of questions and to help us answer those questions, I’ve invited Scott Voss and Jaden Winberg, employees here at Mariner, to answer these questions. The goal of the show is not only to answer the questions, but to be a resource for future questions that our listeners might have to help you make more informed financial decisions. So again, for those of you who have not listened to the show in the past and are new to it or haven’t emailed questions in, you can always feel comfortable to email questions to [email protected]. So guys, thank you very much for joining the show today. I appreciate having you here. Before we get started, maybe just spend a minute introducing yourself and what you do here at Mariner. So Jaden, let’s start with you.

Jadin Winberg: Thank you, Brian. I’m Jadin Winberg, and I lead Mariner’s trust and estate services. Two main things we do for Mariner is provide corporate trustee services for our clients, as well as what I refer to as state advisory services that can be anything from estate planning reviews, to helping develop additional estate planning strategies for our clients. I’ve been with Mariner since the inception of the trust company in 2013, and prior to coming to Mariner, I spent almost 10 years with a large bank trust company. I’m an attorney and also have a master’s in tax law.

Brian: That’s good. Scott?

Scott Voss: Thanks Brian. I’m Scott Voss and I’m a CPA with 20 years of experience in tax. My team provides multiple services to Mariner’s clients and internally to wealth advisors as a resource for tax questions or issues that may come up. We also provide planning and tax preparation services to clients.

Brian: So taking a look at the questions here that we have in front of us. This first one’s a tax question. So Scott, I’ll start with you. But if anyone wants to chime in, whether it’s this question or other questions, please feel free. So the first question is, we pay our 14-year old daughter to do some chores around the house. Can we use these funds, or can she use these funds to contribute to an individual retirement account? Scott, you want to take that?

Scott: The short answer to that is, the IRS would strongly frown upon that. And the logic being that it’s a related party, a relationship, and there’s not really earned income, per se, that would be needed to make a contribution to either a Roth or a traditional IRA or any type of retirement account for that income. Now conversely, if she’s babysitting or mowing yards or doing something else for third parties and actually getting paid for that, keeping track of that information and also to the extent that a tax return would be required for that income. Filing that with the earned income and reflecting in that way would be a vehicle that would allow for contributions to a traditional or Roth IRA.

Brian: So if I hear you correctly, the two biggest issues there are, who is actually paying her and whether that’s a related party, meaning relative. And the other is, is she actually reporting this on a tax return. And so checking those two boxes, it might be possible if that were the case.

Scott: Agreed.

Brian: Great. Thank you. The next question we’ll turn to Jadin, because it’s more of an estate planning question and the question is, my attorney who created my estate plan has died. Is there something that I need to do? How do I get copies of that? And is it still in effect? Jadin?

Jadin: So there’s not necessarily an immediate need for action as many people know with estate planning, typically you’re not dealing with necessarily time-sensitive issues. Further, clients generally have copies of their estate planning documents that the attorney will provide to them at the completion of the drafting. In addition, they typically will give them the originals. Many attorneys do not like to hold onto originals and so most of those documents should already be in a client’s possession. If there is an immediate need for something or you need to follow up with an estate planning attorney, of course, some additional planning, things like that. If the deceased attorney was with the law firm, typically they have a succession plan in place for that attorney. And so it may just be simply a matter of contacting that firm to find out which other attorney within their estate planning practice has taken over for that attorney’s clients. And then from there, you would just simply want to meet with that attorney, make sure it’s a good fit. And if it’s not, just like they way you found them initially, you would just go out and try to find a new estate planning attorney to finish up any of the work that you would need.

Brian: So that’s it. That’s excellent. What if they’re not part of a law firm that has multiple attorneys? So in that example, obviously you can go see a different attorney, but what if it’s just one individual? It’s private practice. What do you do then if that person’s no longer around?

Jadin: If it’s a private practice situation, the first place you’d want to start is if they did have any staff, a secretary, maybe a paralegal, or somebody else in their office who helped them with their work, you would want to contact them to find out if there was any sort of succession plan put in place that they’re aware of. You also could check with the deceased attorneys, trustees or executors of their estate plan to see if they did any sort of planning on the estate side and if the trustee or executor can lead you in the right direction. If all of those options lead you to nowhere, what you would need to do is actually contact the state bar association where that attorney practiced and find out their procedures for having an inventory done on those files and forwarding those files to the appropriate clients. Each state has their own process for that.

Brian: So Jadin, based on the fact that a lot of attorneys do not retain the original copy of the estate planning documents, then I guess it’s on the client to make sure that they’re keeping these in a safe place. Where do you generally recommend they keep these documents?

Jadin: So there’s a couple of different options. One of course is at Mariner we have what’s called the MarinerGPS system, and many of our clients will upload their important financial documents, including estate planning documents to that system if they don’t choose to, to take advantage of that. What we typically recommend is a safety deposit box at a bank, preferably because what you can do there, when you do pass away, your trustees and executors actually have the option or the authority to do what’s called a will-check in your safety deposit box and where the bank will allow those authorized individuals to come in and check that safety deposit box for those original estate planning documents.

Brian: Thanks Jadin, appreciate that. So if someone’s attorney does die, those documents are still in place, they’ve still been executed. So nothing changes from their overall estate plan that they’ve put in place. They just need to figure out who they’re going to work with going forward as that person has changes within their own financial plan.

Jadin: That’s correct.

Brian: Hey, just a quick note to our listeners, if you have a topic that you want to hear on this podcast, or you have a question about your own personal financial situation, please don’t hesitate. Go ahead and send us an email at [email protected], and we’ll have an advisor reach out to you directly. And now back to the episode. So the next question is an estate tax question, will an individual have to pay estate tax when he or she passes? Jadin, why don’t we start with you?

Jadin: Sure. So estate tax is a tax on the value of the property that you own at your death. And this can include several things. Obviously anything that you have in your individual name, assets that you placed into revocable trust are part of that estate, property in which you have what’s called, incidence of ownership. And that that’s a term of art that I won’t expand upon here, but that is included in your estate. Property in an irrevocable trust can be part of your estate if you’re granted certain rights and retain powers under that trust document over that property. And it can also include property that you have given away within three years of your death. And so several things can comprise your estate, to answer your question of, Will you have to pay taxes on that? Oh, it’s a maybe you will, for most people you will not have to. And I’m talking about federal estate tax here. Under the federal estate tax laws, there’s actually an exclusion of up to 11,200,000 per individual of estate assets that are exempt from federal estate tax. So if your estate is less than that exclusion amount, you would not owe any federal estate tax. Obviously if you’re above that, how it works is, any dollars above that estate exemption amount would be taxable at the federal estate tax rates. Furthermore, there’s also a net estate tax or a net estate that’s taxed. And so there are certain deductions that you’re allowed to use to offset your gross estate, such as charitable distributions, funeral administration expenses, certain creditor claims and debts and mortgages. So those things can help decrease the value of your estate when you pass away.

Brian: Jadin, thank you. With the exemption being so high, just over $11 million, you’re right, most Americans aren’t going to be subject to this. But for those who will, it obviously can be impactful. And for those who are married, that $11 million-plus exemption, actually doubles, is that correct?

Jadin: That’s correct. It actually doubles to $22,400,000 for married couples and that can be done simply through what’s called a portability election, so you don’t even need very much estate planning to take advantage of that exemption amount.

Brian: You mentioned the difference between the words revocable and irrevocable trust. Can you just spend maybe 30 seconds on explaining the difference, because I know people get confused by that especially those who are hearing it for the first time.

Jadin: So a revocable trust is exactly what it sounds like. It’s a trust where you’re granted the authority over that document to revoke it and make any changes, amend it, etc.. When we walk our clients through the estate planning process, that’s going to be part of a basic estate plan that you create during your lifetime. You own it, you pay the taxes on it, you can do what you want with that, with those trust assets. Contrast that with an irrevocable trust, which is like the name implies. It’s a trust where you actually do not have the authority. Once you create that trust and place assets into that trust, you no longer have the authority to change the terms of that trust. Where it gets pulled into your estate is the irrevocable trust can grant you the ability to retain certain rights and powers over those trust assets. One example would be a general power of appointment at your death where you can direct where those trust assets go when you die. Those types of things can cause inclusion in your estate.

Brian: But in general, assets that are inside an irrevocable trust will avoid that estate tax

Jadin: The assets themselves potentially, right? If you don’t have those certain powers that are also included.

Brian: So Jadin, while this question wasn’t necessarily asked, I’ll ask it, because it’s a common question as it relates to estate tax and gifting. When someone gifts someone assets, whether it be stock or cash, is there a tax associated with that, either by the person giving the gift or by the person receiving that gift?

Jadin: How the estate tax laws work is the exclusion. The $11,200,000 individual estate exclusion is actually a unified amount, and it’s unified between what you own at your death and what you may give away during your lifetime. So you can do any combination of the two. For example, if you give away $1 million of your assets during your lifetime to your kids or grandkids, when you pass away, the available exemption that you would have to offset any potential estate tax liability would be reduced by $1 million. Many of our high-net-worth clients will do a combination of gifting during their lifetime and using that exclusion at their death. So there would not necessarily be taxed when you make that gift. It just reduces that amount that you would have available to offset estate taxes when you pass away.

Brian: That’s great, thank you. So the next question is, as it relates to taxes, this individual said that he had done his own taxes for years and recently received a letter from the IRS. What should he do first? Scott, I think you were the most qualified to answer that question.

Scott: Well I think the first thing to do is, don’t panic. Most notices from the IRS these days or from states are system-generated, in that there’s a piece of information that wasn’t included with the filing. There’s documentation issues. Most of the time, it’s not a “we’re going to come get you issue.” So I think the first step would be to compare what the notice says versus what the data that you’ve accumulated is, and make sure that the IRS or the tax authority is in line with what should be filed and responding accordingly. The other piece I’d say is, it may fall into a category of a simple fix, so responding back to them and letting them know if you agree with it, or if you disagree with it, and why. If it’s a more in-depth issue that requires further analysis, I’d suggest working with your wealth advisor to get advice from a CPA. And staying in touch with the IRS for communication purposes is key.

Brian: Thanks, Scott. And from what I’ve seen, in that situation, it’s key to keep a paper trail of the person you’re talking to, whether it be a field agent or whomever at the IRS, and making sure that you have copies of everything as it relates to your tax return, so you can produce that when asked to do so.

Scott: Absolutely.

Brian: So guys, those are the questions that we were going over, but while I have you here, I thought I’d just ask you guys maybe just one question. Over the past few weeks, what’s a mistake that you’ve seen people making? It could be something that relates to your specific area or something else you’ve heard about and would like to share that knowledge with our listeners today.

Jadin: From an estate planning perspective, the biggest mistake that I usually see, are estate planning documents that are inadequate, outdated or poorly drafted. Inadequate documents are an example of that would be a client with a very substantial estate or a complex composition of estate assets, closely held business interests, things of that nature, and their estate planning just doesn’t adequately address those issues and concerns within their estate. And outdated estate plan would be something where, for instance, a trustee whom you have named as successor is someone who you no longer have a good relationship with or whom your spouse may not get along with, if your spouse is the one who survives or your children, and he or she has to work with that trustee. And then poorly drafted are simply estate documents that usually are done by an attorney who is not well-versed in estate planning. And that’s usually very apparent with a document, or he or she has attempted to do several amendments to a document to the point where it’s, the whole thing becomes very convoluted and hard to follow. What we typically would recommend in that instance is to restate the whole thing from scratch.

Brian: Jadin, those are great points. I mean, just something as simple as I had my estate plan done, I spent money doing this, but you know what, after it was done, I sort of put it on the shelf. I didn’t keep it updated. And the reality is that life changes, tax laws change and that individual says, we met with the attorney, we should be good. And he or she doesn’t think about what’s changed in their his or her life since those documents were drafted.

Jadin: That’s exactly right.

Brian: How often should someone update their estate plan?

Jadin: The rule I like to go by is what I call the three P’s, and it’s people, property and plan. So if there is a change to any of those situations, it’s a good idea to update the estate plan. People would be: births, deaths, marriages, divorces, things like that. Property would be, if your wealth has grown substantially, maybe your business has really taken off, or you’ve had a big liquidation event, or you’ve inherited a lot of money. And then plan would just simply be if your values and objectives with your assets have changed. For instance, you maybe were going to leave money to a niece and nephew, and you no longer wish to do that, and you want money to go to charity. Those types of things usually always warrant a review and often an update of your estate plan. And then every three to five years, it’s a good idea to just pull those out and take another look at those documents.

Brian: Thanks Jadin and Scott.

Scott: I’d say the biggest mistake I see clients coming up with is really a lack of communication. And when I say that, two examples immediately leap to mind, a lot of tax planning goes on between the wealth advisor and a client. And sometimes that information doesn’t make its way to the person who’s putting the numbers into boxes and completing the income tax return. And two specific incidents of that I’ve seen is folks making contributions to a donor-advised fund with appreciated assets and those assets not making their way onto the schedule A, because no one tells the CPA. The other item that’s out there that I think is going to get more traction with the increase to the standard deduction is, taking your RMD and making a qualified charitable distribution directly to the charity. And instead of getting a deduction on your schedule A, it’s a reduction to your taxable distribution on the IRA. But if you’re taking the standard deduction at $24,000, you may not have been exceeding that number with your itemized deductions. It’s critical that fact gets communicated to the CPA, because the tax forms that come out don’t indicate that a qualified charitable distribution is being made from the RMD of the IRA.

Brian: Those are good points. Communication is absolutely critical with your financial planner and others.

Brian: I want to thank you guys for being here. I appreciate your time and expertise, and I’m sure our listeners will certainly benefit from this conversation. So that that wraps up another show. Again, if you guys have questions about your own personal financial situation and would love to have answers to those, go ahead and email us at: [email protected]. Don’t forget to subscribe to us wherever you listen to your podcasts and please feel free to go ahead and rate the show, because that helps the show. We know that your time is incredibly valuable and we hope you find this podcast a worthwhile investment of your time. Thank you for listening.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, or tax considerations. It is not intended to be personal legal or investment advice or a solicitation to buy or sell any security or engage in a particular investment strategy.

The views expressed are for commentary purposes only and do not take into account any individual personal, financial, legal or tax considerations. As such, the information contained herein is not intended to be personal legal, investment or tax advice. Nothing herein should be relied upon as such, and there is no guarantee that any claims made will come to pass. The opinions are based on information and sources of information deemed to be reliable, but Mariner Wealth Advisors does not warrant the accuracy of the information that this opinion and forecast is based upon.

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