Personal Wealth Law News

This was the only quote I could think of to introduce a discussion of planning with Roth IRA and retirement plan benefits. In response to this statement, Groucho Marx said: “Is Roth here too? Tell Roth to wax the Dean for a while.”

Delaware Sen. William Roth gave his name to this type of retirement benefit. It’s simple, sort of. You don’t get a tax deduction when the contributions are made, but you don’t pay taxes when the account is distributed at retirement. You give up a current tax saving in exchange for a greater one later. Is this a good deal? The answer is definitely, sometimes.

If you knew that you would pay a higher tax rate in retirement, Roth tax treatment would clearly be better. Conversely, if you knew that your tax rate would be much lower in retirement, it might be better to stay with the traditional method of planning: a deduction up front and taxation later. Opinions vary on this subject, and studies have been made to try to determine when and whether one method is superior to the other. There are some unknown elements: not only your own tax rate but tax rates in general. Who can predict what income tax rates will be 10 or 20 years from now? Or that Roth treatment will still be in effect?

For now, here are two situations in which Roth treatment makes sense. First, if you have a child who has a summer job, it makes sense that the child have a Roth IRA. In most cases, kids with summer jobs have little or no income tax liability anyway, so a deduction for an IRA contribution is of no value to them. Then, they will have many years in which the Roth IRA can grow tax-free. When the funds are distributed, perhaps 50 years later, the small contributions from summer jobs could be a large amount.

Here’s another possible benefit: Roth IRAs do not have minimum distribution rules, unlike standard IRAs and qualified plans. If an individual has other assets such that he or she won’t need the Roth money, the balance can be left in for the rest of the individual’s life and be paid out only in the next generation. This extremely long-term accumulation period, followed by no tax on distribution, can make Roth a valuable planning benefit.

People with standard benefits can convert them to Roth benefits by paying taxes on them now. After that, any distributions will be free of tax. The ability to convert is limited to those with income below certain levels, but that restriction will end by 2010. At that time, anyone will be able to convert to Roth treatment. This opens up the possibility of interesting estate planning with Roth benefits, which we’ll discuss in another blog.

Republished with permission of The Legal Intelligencer.

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This was the title of a series of lectures to help spouses, mostly wives, understand financial matters. It addressed a very real problem that families face when the “financial spouse” passes on.

What bills do I have to pay? Will I have enough income to cover my expenses now that my spouse is gone? Will I have to sell my home? Or, will I have enough to make gifts to children and grandchildren during my life? These kinds of questions, which arise frequently in estate planning and administration, demonstrate the need for a kind of planning that incorporates knowledge of retirement plans, financial planning, elder law and estate-planning concepts. Lawyers practicing trusts and estates have most of these skills and need to understand the importance of having a wider view of the planning client’s requirements.

I have discussed with clients the preparation of a template during the lifetime of the financial spouse, setting forth what expenses need to be met and how they are paid:

• Bills paid every month, such as telephone, other utilities, car payments.
• Bills paid on a regular but not monthly basis, such as auto and homeowners insurance, life and disability insurance premiums.
• Bills paid as expenses are incurred or are chosen to be paid, such as credit cards, contributions, medical and dental expenses, veterinarian (if you live at my house), car repair, home repairs.

A second part of the template is things to do during the course of the year:

• Car inspections.
• Home inspections.
• Medical and dental checkups.
• Memberships in various organizations, such as ambulance services, that are useful to families.
• Required distributions from retirement plans, depending on the survivor’s age.
• Filing tax returns and paying any required estimated taxes.

A third part of the template is a list of the people to contact for assistance:

• Lawyer (always the top of the list).
• Accountant.
• Insurance agents.
• Home service and repair people.
• Car repair services.
• Other specialized assistance.

And, finally, it’s important to have good organization of the information. There’s no point in assembling information if the survivor can’t find it. I’ve had some clients who went a little overboard on this (”walk three paces to the left”), but it is important that the survivor know where things are. As the large Baby Boom Generation moves toward retirement and beyond, it will be important to help them plan these practical aspects of the balance of their lives.

Republished with permission of The Legal Intelligencer.

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