Dear Clients and Friends,
The goal of The Financierge is to highlight topics that reflect the diversity of planning and thought leadership we provide our clients. In this month’s issue, we start with discussing the merits of a Roth IRA and converting eligible IRA assets. We then cover risk management focusing on personal insurance and considerations you should make to protect your wealth. Next, we discuss why an Irrevocable Life Insurance Trust may be beneficial to your family. We round out our topics with a life balance focus on health and wellness followed by days to celebrate in June and perspectives on money. We hope you find something interesting for you and your family and friends.
Tax & Retirement Planning
Roth IRA Considerations
It may be a good idea to consider including a Roth IRA in your overall retirement planning. Investments in a Roth IRA have the potential to grow tax-free, which may help you save more over time. Plus, unlike IRA and 401(k)s, Roth IRAs don’t have required minimum distributions during the lifetime of the original owner. Also, Roth IRA assets may pass to your heirs tax-free.
There are two ways to set up a Roth IRA, the first is with a direct after-tax contribution. The second way is by converting eligible IRA or 401(k) assets. First, you can make direct after-tax contributions from earned income to a Roth IRA up to $6,000 (plus a $1,000 catch-up if you are age 50 or over). As your income increases, the amount you can contribute gradually decreases to zero. For example, if you’re married, filing a joint tax return, and your modified adjusted gross income is greater than $214,000 for 2022, you are not eligible to contribute. The good news is that any potential earnings grow tax-free and may not be taxed when you withdraw money in retirement. You can also withdraw your contributions at any time, for any reason, without taxes or penalties but withdrawals from account earnings cannot be withdrawn for five years and you may pay income taxes along with a 10% penalty.
Another way to set up a Roth IRA is by converting traditional IRA or old 401(k) assets to a Roth IRA. Anyone can convert their eligible IRA or 401(k) assets to a Roth IRA regardless of income or marital status. One big consideration is that you will owe taxes on the amount of pretax assets you rollover, so it is important to consult with your tax advisor about your income tax brackets and unique circumstances.
Another import factor to keep in mind is that distributions from a Roth IRA are qualified, and thus tax-free and penalty-free, provided that the 5-year aging requirement has been satisfied and at least one of the following conditions has been met: you reach age 59½, you go the Heaven, you are disabled, or you make a qualified first-time home purchase. All other distributions are non-qualified. Non-qualified distributions of converted balances are not taxed again (since they were taxed when converted), but they may be subjected to a 10% penalty unless it’s been at least five years since the beginning of the year of your conversion or one of the other exceptions applies.
Finally, there are also other important things to keep in mind. For example, if you plan to move in retirement and the state you are moving to has lower state taxes, a Roth IRA conversion might be more attractive later. If your portfolio or income tax bracket is temporarily low, it might be a good time to convert. Roth conversions are included in your modified adjusted gross income, and you may be subject to a 3.8% Medicare surtax if you earn more than $250,000 (married filing jointly) for 2022. Also, if you have children applying for financial aid, it can potentially raise your expected financial contribution and reduce aid. If you are required to take a required minimum distribution (RMD) in the year you convert to a Roth IRA, you must do so before converting. And the last point, it generally makes sense to use taxable assets rather than converted assets to pay taxes.
Personal Insurance Considerations to Protect Your Wealth
Risk Management is a key area of our comprehensive and holistic services. We believe there are certain life events that trigger not only the need for new or revised insurance coverage but also a review of current risk management practices. Here are some important practices we think are key to protecting your wealth:
Home(s) – Your home(s) should be covered in both your homeowner’s policy and your umbrella liability policy. If your home is titled in your trust or LLC, make sure it is added as an additional insured to the homeowner’s policy and umbrella. The legal entity should not be the named insured. The true value of your home should be insured – the “purchase price” and “rebuilding price” are very different. Rebuilding price is the cost to rebuild the home, at current material and labor rates, taking into consideration the size of the home, the quality of materials, demolition costs & professional fees. Also, older homes may require retrofitting and updates for carriers to offer coverage. This includes roof, water pipes, electrical systems, and heating & cooling. If this is your secondary home, ensure that the insurance carrier is aware if it is a vacation property for the family or rented out. If the home is secondary and unoccupied, there could be ways to mitigate the risk of damage such as water shut-off valves, and temperature monitoring. If you plan a remodel, this may require insurers to write the risk differently. Also, do a full background check on the contractor before remodeling begins. If your home is close to brush, insure the home with a carrier who has a wildfire defense team and reduce the risk of wildfire by creating defensible space. If you have a ranch or vineyard estate, special coverage will be required. Also, consider special coverage if you live in an area prone to catastrophic events like earthquakes, hurricanes, tornados, and floods.
Personal Collectibles (Jewelry, Art, Wine, Classic Cars, Collections, …) – Jewelry should have updated valuation certificates as gold and diamond prices fluctuate. Remember there are limitations of coverage under the dwelling section of policy so you might need a separate rider. Also, keep jewelry not worn in a lockbox or secured vault. Art and antiques should have current valuations to support values insured on the policy. Storage of art is particularly important – basements are not ideal. Ensure artwork is placed in appropriate locations in the home and not above fireplaces or near vents or in direct sunlight. Artwork should be hung by a professional and moved by a specialist mover. Also, if you loan your art to a museum or gallery, obtain a condition report pre-and post-move, “vet” the institution, and sign an agreement with the institution including a “hold harmless” clause. Wine has limitations of coverage under the dwelling section of a home policy. You should keep an inventory and valuation of the wine collection. As you may already know, the storage of wine is important. Keep in a temperature-controlled and monitored environment (especially when certain friends and family are visiting). Classic car insurance policies provide the broadest coverage and are less expensive. It is important to have appraisals to support the values of the policy.
High Net Worth – High net worth status leads to higher liability exposures which may warrant increased Umbrella limits. Your entire net worth is exposed in a liability suit. New asset purchases may also necessitate a change in insurance carrier due to policy or coverage limits. Also, when you travel in a foreign country, there may be kidnap and ransom risks, security risks, medical costs, closed borders, and repatriation.
Executive and/or Board Member – As above, your earnings and net worth are more exposed to liability suits, especially for a public company. Also, for a non-profit Board, you could have potential lower Directors & Officers (D&O) limits due to limited funds. Make sure you understand your coverage.
Teenage Children – Newly licensed drivers create increased liability exposure which may mean increased Umbrella limits. A defensive driving course can provide both a better driver and possible policy credits. Also, college students can create liability exposure due to their actions away from home. It’s important to may sure your Auto and Umbrella policies are written correctly. Ensure when they are away at school, their liability covers their location. Finally, for social media, there is a liability due to online presence such as cyber-bullying/defamation/cyber-theft. Monitor children’s online profiles to ensure they are safe.
Planes, Yachts, and Recreational Vehicles – Ensure yachts and recreational vehicles are correctly insured and noted on your Umbrella Liability policy. Purchase sufficient liability coverage due to increased risks. Personal liability coverage DOES NOT cover aviation or mega yacht risks.
Domestic Staff – There is a risk of employing staff because of their access to your personal information, money, assets, and family members. There are also personal injury or assault liability risks (accidents caused by staff). Your home should be covered in both your homeowner’s policy and your umbrella liability policy. When you hire, check backgrounds (drug, criminal, multi-state / country, MVRs, legal status), and have a contract outlining the job description, code of conduct, ongoing training, termination policy, and compensation and benefits according to law. Depending on the state, worker’s compensation coverage may be needed. You may need to purchase increased limits based on hours worked per week and exposures. It’s also important to include employment practice liability protection where appropriate as it covers wrongful termination, slip and fall, libel, defamation, and harassment.
The Benefits of an Irrevocable Life Insurance Trust (ILIT)
The ILIT usually has a grantor, trustee, and beneficiary. The grantor creates and funds the ILIT and gives up control to a trustee who manages the ILIT. The beneficiaries receive distributions. An ILIT offers several legal and financial benefits to beneficiaries, including minimizing taxes, protecting assets, and ensuring distributions are used as intended – for example, to provide immediate liquidity to pay for estate taxes. The following are the benefits of an ILIT.
Minimize Estate Taxes – When a life insurance policy is owned by an ILIT, the death benefit will NOT be included in your gross estate, and NOT be subject to state and federal estate taxation. The ILIT will provide liquidity to help pay federal and state estate taxes. Also, lifetime gifts can help reduce your taxable estate by transferring assets into the ILIT.
Avoid Gift Taxes – A properly drafted ILIT avoids gift tax consequences since contributions by the grantor are considered gifts to the beneficiaries. To avoid gift taxes, it is crucial that the trustee, using a Crummey letter, notify the beneficiaries of the trust of their right to withdraw a share of the contributions for a 30-day period. After 30 days, the trustee can then use the contributions to pay the insurance policy premium. The Crummey letter qualifies the transfer for the annual gift tax exclusion by making the gift a present rather than future interest, thus avoiding the need in most cases to file a gift tax return.
Legacy Planning – The generation-skipping transfer tax (GST) imposes a tax of 40% on both outright gifts and transfers in trust to or for the benefit of unrelated persons who are more than 37.5 years younger than the donor, or to related persons more than one generation younger than the donor. A common example is gifting to grandchildren instead of children. An ILIT helps leverage the grantor of the trust’s generation-skipping transfer (GST) tax exemption by using gifts to the trust to buy and fund a life insurance policy. Since the proceeds from the death benefit are excluded from the grantor’s estate, multiple generations of the family—children, grandchildren, and great-grandchildren—may benefit from the trust assets free of estate and GST tax
Government Benefits – Having the proceeds from a life insurance policy owned by an ILIT can help protect the benefits of a trust beneficiary who is receiving government aid, such as Social Security disability income or Medicaid. The Trustee can carefully control how distributions from the trust are used so as not to interfere with the beneficiary’s eligibility to receive government benefits.
Asset Protection – Each state has different rules and limits regarding how much cash value or death benefit is protected from creditors. Any coverage above these limits held in an ILIT is generally protected from the creditors of the grantor and/or beneficiary. The creditors may, however, attach any distributions made from the ILIT.
Distributions – The trustee of an ILIT can have discretionary powers to make distributions and control when beneficiaries receive the proceeds of your policy. The insurance proceeds can be paid out immediately to one or all your beneficiaries. Or you can specify how and when beneficiaries receive distributions. The trustee can also have the discretion to provide distributions when beneficiaries attain certain milestones, such as graduating from college, buying a first home, or having a child. This can be useful in second marriages to ensure how assets are distributed or if the grantor of the trust has children who are minors or need financial protection.
Health & Wellness
Extending the Length and Quality of Your Health
According to numerous doctors and nutritionists, healthy aging and longevity involve not only extending your lifespan but also improving your health and quality of life. Both genetic and environmental factors, such as diet and lifestyle, are believed to be involved in the process of aging. Age-related chronic diseases include cardiovascular diseases (e.g., heart disease and stroke), cancer, type 2 diabetes, and neurodegenerative diseases (e.g., Alzheimer’s disease and Parkinson’s disease). These chronic conditions are among the leading causes of mortality and contribute to a reduced quality of life. Fortunately, modifiable lifestyle habits can help prevent chronic disease and improve longevity.
There are uncontrollable and controllable risk factors for chronic disease. Uncontrollable risk factors include genetic predisposition, urban pollution, exposure to pesticides, early malnutrition, and delayed physical growth during childhood. Controllable risk factors include sedentary lifestyle, tobacco use, excessive calorie intake, excessive salt intake, excessive protein intake, excessive alcohol intake, obesity, and abdominal adiposity.
Diet can promote longevity. The following are some longevity-promoting nutrients and the food sources. Coenzyme Q10 (CoQ10) supports cardiovascular health by reducing inflammatory markers and oxidative stress. CoQ10 is found in organ meats (heart, liver, kidney), beef, pork, oily fish (e.g., trout, herring, sardines), spinach, cauliflower, broccoli, and oranges. Omega-3 fatty acids are anti-inflammatory, and their intake reduces the risk of chronic conditions (e.g., breast cancer, cardiovascular disease, bone loss, etc.). Omega-3 can be found in oily fish (e.g., herring, sardines, mackerel, anchovy, salmon, and cod). Prebiotics are fermented by gut microbiota to produce protective short-chain fatty acids, promote beneficial bacteria, and bacterial diversity linked to overall health and longevity. Prebiotics can be found in leeks, garlic, onions, asparagus, Jerusalem artichokes, chicory, oats, wheat, and soybeans. B vitamins help to metabolize homocysteine, a biomarker of aging and disease. B vitamins can be found in liver, eggs, tuna, lamb, legumes, brown rice, nutritional yeast, milk, and yogurt. Resveratrol is an antioxidant and anti-inflammatory and inhibits glycation associated with cellular damage. Sources in grapes, red wine, grape juice, berries, and peanuts.
Lifestyle factors also affect longevity. Regular physical activity, moderate alcohol consumption, and healthy diet help to reduce morbidity and mortality risk. Not smoking reduces the risk of death from cancer, coronary heart disease, and chronic obstructive pulmonary disease. In overweight individuals, weight loss of five to ten percent improves the metabolic risk factors involved in type 2 diabetes, cancer, and cardiovascular disease. A dietary approach known as calorie restriction (reducing caloric intake by 20-40% while meeting nutrient requirements) has been shown to promote longevity by improving cardiometabolic risk factors and promoting weight loss. Cognitive function in aging can be impacted by socializing, sleep, and physical activity. Research in older adults has shown that social activity such as conversation and physical activity such as moderate walking may protect against cognitive decline. Additionally, regular sleep-wake schedules have been associated with increased longevity and may prevent age-related diseases.
Just for Fun
“Every family that is successful in preserving its wealth is a reflection of the five virtues of truth, beauty, goodness, community, and compassion. Transcending all of these is its reflection of love.” – James E. Hughes, Jr.
Here are some fun days to celebrate in June:
- June 1 – Happy June Day!
- June 4 – Hug Your Cat Day – World Atlas estimates 400 million cats in the world!
- June 5 – Cancer Survivors Day, World Environment Day
- June 7 – National Chocolate Ice Cream Day.
- June 8 – Best Friends Day!
- June 10 – National Iced Tea Day!
- June 14 – Flag Day! Stand for the freedom of the flag and kneel for the cross.
- June 16 – Fresh Veggies (only) Day! Happy Birthday to my Mom (98) and my Lab (1)!
- June 17 – National Apple Strudel Day
- June 19 – Father’s Day and Juneteenth
- June 20 – The First Day of Summer! National America Eagle Day!
- June 23 – National Pink Day
- June 24 – Take Your Dog to Work Day!
- June 27 – National American Picnic Day! Helen Keller Day!
- June 30 – Blink 182 Day! (182nd day of the Year), National Work from Home Day!
Quotes on Money
Here are some famous quotes that remind us to keep money in perspective:
“Money never made a man happy yet, nor will it. The more a man has, the more he wants. Instead of filling a vacuum, it makes one.” – Benjamin Franklin
“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires.” – Ayn Rand
“You can only become truly accomplished at something you love. Don’t make money your goal. Instead, pursue the things you love doing and then do them so well that people can’t take their eyes off of you.” – Maya Angelou
“Every day is a bank account, and time is our currency. No one is rich, no one is poor, we’ve got 24 hours each.” – Christopher Rice
“Price is what you pay. Value is what you get.” – Warren Buffett
“Money is a terrible master but an excellent servant.” – P.T. Barnum
“Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed.” – Mahatma Gandhi
“There is a gigantic difference between earning a great deal of money and being rich.” – Marlene Dietrich
“Many folks think they aren’t good at earning money when what they don’t know is how to use it.” – Frank A. Clark
“It’s good to have money and the things that money can buy, but it’s good, too, to check up once in a while and make sure that you haven’t lost the things that money can’t buy.” – George Horace Lorimer
“A wise person should have money in their head, but not in their heart.” – Jonathan Swift
“Wealth consists not in having great possessions, but in having few wants.” – Epictetus
At The Bahnsen Group, our goal is to help you and your family to successfully plan and achieve your lifetime financial goals. Please reach out to me or your Private Wealth Advisor if you have any questions or if there is anything we can do for you.
Have a prosperous, healthy, and blessed month ahead!
Warm and best regards,
Don B. Saulic, CFP® CPA
Managing Director, Partner
Internal Revenue Service (IRS) is the source of all tax data