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I’ve Inherited Money, Now What?

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Hello folks! We are excited because this is the first podcast in a 3-part series called “I’m Dead, Now What?”. That’s right, we are covering the exciting topic of death!

  • I've Inherited Money, Now What? – Should you spend it, save it, tax implications, your family legacy?
  • I’m Dead, Now What? – A discussion on estate planning. How can you pass on money to your heirs in the most tax-efficient manner possible?
  • I’m Disabled, Now What? – A discussion on becoming disabled during your career. What if you lose your medical? How much income will you have to live on? For how long?

    Although a very difficult subject to face, these topics are important to plan around. In this first podcast of the series, we discuss what happens when you inherit money. We talk about the emotional decisions that must be made, the tax consequences, and how we believe inheritances should be handled.

We’re thankful for the feedback we have received on the Pilot Money Guys podcast. We are striving to bring useful insight on important financial topics to you. If you have suggested topics, questions, or comments for us, please email us at info@leadingedgeplanning.com.

See you next time!

I've Inherited Money...
Charlie: ladies and gentlemen, welcome aboard the pilot money guys podcast, where our mission is to help clients build and protect wealth to achieve their dreams and goals. This podcast is brought to you by leading edge financial planning without further ado. Here is your host, Robert.

Rob: Tip of the cap to you.

Thank you for joining us at the pilot money guys. Welcome to you. We're going to be doing a new, uh, series and it's gonna be a three-part series. So hang with us here. It's called I'm dead. Now. What? Part one of that we're going to be doing again, three of those, the second uplifting,

Charlie: uplifting series.

Rob: Yeah. I can tell everyone's really excited on the edge of their seats right now.

Click, turn it

Charlie: off.

Rob: Darn it. Um, episode two or flight two, if you will, will be I'm dead now. What, excuse me, let me back up episode ones. I've inherited money now. What? But it's all part of the somebody

Charlie: dead. If somebody. Yeah, I'm inheriting money. You're not

Rob: dead and I'm dead now. What? And the third one is I can't now what?

We're, I'm disabled now. One. Yeah. Wow.

Charlie: That's it. Which is, yeah, maybe it's wrong. Maybe I'm just messed up, but I'm excited about this year.

Rob: Well, we all know you're a little messed up then. Yeah, that's perfect. All right. Hey, I'm your host, Rob, back then. We've got been depicted. The advisor, Mr. Cowbell. And of course Charlie Mattingly, certified financial planner, the godfather, we got it.

We got us all here. All three of us. Uh, we're missing mark today, but uh, we're ready. Ready? What do we got for aviation news? Ben. Charlie, what do you got? Ben, Charlie

Charlie: Ben. Well, first we've got to one of these days. We'll have to give you a call sign. I've just been thinking about that. Well, that's Lisa, she's the bullet.

Oh, she's bulldog. Yeah. You're the MC MC hammer. Oh, there we go. That might be all right. Hammer. The hammer

Rob: standardization, evaluation pilot. So, oh, I

Charlie: need a hammer for sure. Yeah. So

Rob: a soft hammer. Yeah, exactly.

Charlie: Like a rubber mallet

Rob: or something. Santa Claus,

Charlie: wherever from the ballot. So Ben, you start us off today because you've looked more into this one than I have, or so you've said anyway, about this trans air flight 8 1 0 that ditched in the water in Hawaii.

What's up with that? Yeah, no, uh, pretty crazy. I was, uh, when I woke up in the morning, uh, after the, I think it was like July 2nd or something, I woke up and saw, saw the news. Uh, pretty, pretty wild. Um, it looks like it was a cargo plane, um, out of Honolulu that, that crash had it, or had a ditch into the, uh, the water at about one, uh, one or 2:00 AM local time there.

And luckily the two people on board, the captain copilot were, rescued and were safe. First officer. Yeah, first officer, I'm sorry. You know, I'm still learning guys. I'm still learning. Um, but they were rescued by the coast guard. So good on them, obviously, a pretty crazy experience. I was telling you, you guys, before we started that.

You know, one thing as me just not being a pilot or knowing much about it, I was like Landon water. I didn't realize it would tear up the plane like it did. And, uh, give them such a hard time, but it looks like there was debris field, a huge debris field and everything, uh, that for the coast guard to have to spot them in.

But, uh, yeah, pretty crazy. Thank God everybody survived. Um, absolutely double engine malfunction. I, I don't, I'm not exactly sure. Yeah. Is that, does that, what you all T engine? Yeah, they lost one. And then, uh, they S they were talking to air traffic controller and they said, Hey, we're going to lose the other one.

We think we're going to, you know, I guess it was overheating. Plus the plane was like 30 years old. I believe it was. Boeing 7 37, not 200, not a max, not a max, not a max. Uh, that's what the article kept saying. Stressing, not a max. Yeah. So those things and, and I'm thinking maybe that's why it broke apart as well, you know, but anyway, no, I think it's very difficult on an airplane when you hit the water because you're hitting it at an angle.

It's very, very difficult to land completely flat, which is what you might be envisioning. But, um, we rarely practice. Um, multi-engine or, or a complete engine failure, Robin. I think they, they, I, it, Southwest. Anyway, they talked about doing it. You may have just done it at your recent SIM, but when I was there, we never did it.

We had a, like a memory item, but we never practiced it. So you all just practiced, right? Yeah. Yeah.

Rob: In the air force, we practiced it quite a bit. It seems like. Yeah. But for Southwest, we just practiced in this last AQP

Charlie: session. Yeah. Are, are there, uh, are there emergency exits in the cockpit? It's called a window.

Yep. There's window windows.

Rob: Yeah.

Charlie: Yep. You got windows. Do you have ropes ropes coming out, coming out of the windows? Oh my God. Yeah. The technology they got these days. It's crazy. It's crazy.

Rob: Crazy. Yeah. That was funny. It's a 7 37, 200. Thank goodness. Both pilots survived

Charlie: They were the only two people on there. So that was. You know good because who knows what would've happened? Had somebody been in back because it did break apart, like you said. .

Rob: Yeah. What else, what else? You got anything? So,

Charlie: so the next bullet here, I'm looking at my notes and, um, I guess these are shown notes, right? As what we'll call these things. Yes. So I've got what's going on with the airlines and why do they suck so bad?

Right?

Rob: Oh, I'm not lying.

Charlie: Oh my goodness. It's uh, it's pretty crazy out there. Let me give you. Rob the non-pilot perspective now in, and a passenger being Ben or passengers now. So then you can give us the, the insider, but, um, you know, we were stuck in, when we came to visit you if a couple of weeks ago, you know, we got stuck, right.

We got, I suppose, to take off, we're supposed to land at our, uh, in Knoxville at 1130. We in Atlanta, I think I walked into the door, Ben and his. Girlfriend were kind enough to drop me off. I've walked in and got in bed probably about 5 38. So that was painful instead of about in 30 minutes. But anyway, that was, that was whether there was a lot of weather in the Midwest.

There was weather and yeah, so, uh, it was painful, but people are, you know, testy in the airports. Uh, now, especially they have mask on everybody's kind of angry, whatever, but I will tell you that. I'll look at this as like a business kind of thing. And then you can give me the other side, but I just can't imagine running a business.

And at one month it seems like you're trying to offload as many employees as you can, to, to stiff arm bankruptcy, to, uh, just not run out of money. And in fact, every airline would have run out of money. It had it not been for the government, but, um, so one month you're doing that. The next. You got full airplanes again?

I mean, again, I'm exaggerating a little bit with this full, , next month thing, but man, a laugh, can you imagine not to mention getting everybody back instantaneously, it's not going to happen. There's still lots of unemployment benefits out there that people are on and, um, maybe affect the motivation to return to work.

However, getting a bunch of pilots. You know, is, um, is not easy because everybody needs to get retrained. Yeah , I made the call to get all the captains back. What, when was that call maiden? April, may. And then they said, come back in July. So there's some lag time just on the callback alone, not to mention the training, but right.

Rob: Yeah. It's, it's, it's crazy out there right now. Uh, Ben, you, you were in the airport, you saw it, right?

Charlie: Yeah, it was so crowded. I mean, everyone's, everyone's going on vacation traveling around right now, schools. I mean with school out and everything too, I think. Uh, but yeah, it, it was wild. We saw some, some altercations, actually a flight I had before this one to Denver.

Uh, the last one that was a couple months ago, but there was a mask incident on, on my plan. Uh, and it was just like people. Are so wild up right now. It seems like with this, uh, everything that's going on and, and I mean, like our flight, Charlie, luckily we had you there cause I was probably getting pretty frustrated, but uh, you know, I mean, it's weather.

I mean, what, what can you do? There's nothing that you can do. I mean, they have to wait, wait it out. Luckily we got to get to our destination that night, but,

Rob: um, you know, it's tough, right? It's not cool. You got to kind of have the perfect storm. Uh, you've got, yeah, you got weather and those kinds of things that we're used to dealing.

But use most of the time of the airlines is fully, you know, fully functioning. And right now they're not even close to fully functioning. You've got that. Then you've got the airports that are packed. Cause there's all this pent up demand, like you said, vaccines are going great. Everyone's recovering. Um, so you have all that pent up demand.

And like you said, summertime kids, right school. Let's go. Unfortunately, the flip side of that is that, like you said, there's so many benefits out there from code. That you know, the airports aren't, aren't fully functioning either. Not, not, not to talk about the airlines, but also the airports are, I think, I think the airports are actually functioning worse than the airlines.

If you can even imagine that. Um, and it's an index across the board. It's not just, I would love to point the finger. Yeah. One airline or another, but I think it's across the board. Um, I don't know anyone who's doing really, really well right now.

Charlie: Yeah. It's a matter of who can. Who can suck them the least, right?

Yeah. In the airline world, who's the least terrible. Who's the least terrible, but, but you're right. And you go to the airports. There's no, you can't get food. , some of these places aren't open because they don't have any workers in there

yeah. It's a tough time. We're gonna have to just, just suck it up for a while. Right. But it's a wall street journal article that, uh, that I was looking at to prepare for this as, uh, aviation consultant at McKinsey said, airlines had to make choices about summer staffing before they knew how quickly the man would come back.

Many of those decisions were made at a time when we, as a country, Optimistic about the recovery of air travel. That's, that's his, uh, his opinion now, Rob, you know, you, and I've talked to that day was like, well, you can't necessarily just give the airlines a pass either, you know?

Rob: Yeah. .

That's one of those things. Well, if that were true, why did you schedule so many flights? Like, yeah, I mean, yeah, up at the top, it's a different ball game, but you're trying to, you know, schedule flights and then you can pair back and obviously you don't pair back when there's all that demand. So yeah, it's tough.

And

Charlie: it's not easy. You may have to start flying again. Yeah. Sorry. No, they're not that desperate. I promise you.

Rob: , . All right. Anything else on the, uh, aviation news? Okay. Well, moving along, we've got, uh, you know, just a quick break here. We're before we jump into the I've inherited money.

Now, what we're fiduciary fee only advisors. This is brought to you by leading edge planning. If you need, if you have a question you need, uh, some financial planning help re you can reach us at 8 6 5 2 4 0 2 2 9 2 or that good old electronic mail we've been talking about. At info@leadingedgeplanning.com.

All right. Okay.

Charlie: Right on. I bet. Ben, I've been, your phone has blown up since the last podcast, mostly with spammers spam calls, but yes, it has your stuff. Love it. Yup. Yup. You can't talk to a lot of people that have inherited money from princes. Exactly what money from you? Yeah. Yeah. That's always interesting.

They always want my credit card.

Rob: Mother's maiden name. All right, let's do this. I've inherited money now. What Charlie, what do I do

Charlie: now? All right here. Here I go. Let's say you inherit a million bucks, man. I'm going to quit my job. I'm going here.

I inherited a million bucks. Well, that's a, if we, if we look at the 4% rule, what's that about $40,000 of income per year before tax. So, you know, a million bucks, that's a lot of money. It really is. And I'm not scoffing at that bunny by any stretch. But sometimes I think in our minds we might go, oh my goodness.

That's, uh, that it changes everything. I'm quitting, I'm quitting. I'm going to print a vacation will not really right. , I think that is the emotional thing that sticks out in my mind for the most. What about, what about you guys?

Rob: Yeah, I, I think it's one of those things.

Yeah. A lot of times you get that, you get that windfall, if you will. And people are thinking, okay, I've got this money. I'm also hurting because I probably was pretty close to the person I just lost. Yeah. And they wanted me to have this money. So, um, it seems like a lot, like you said, that 4% rule in the millions 40,000 that's, that's not a lot of money, but you can't think of it like that.

Most people are thinking, oh, I've got a million dollars. This is great. And I think that's where people can get themselves in. Um, one of the statistics I came across was by it from, uh, Elizabeth O'Brien, I guess one study found that a third of the people who received an inheritance had negative savings within two years of the event.

So even if they were great savers beforehand, you get this money, this million dollars and the budget they were on and their spending habits kind of go out the way. Because they've got this million dollars, they maybe don't have an exact plan for it. So they're just kind of spending and going along and you can outspend your income easily, even when it's an inheritance.

So yeah, I think they, they get into that trap. And then all of a sudden, you know, at some point that inheritance has gone and not only have they lost that inheritance money, but they've lost the good spending habits. So they really get themselves into kind of a bind. They're being deliberate with whatever inheritance you have.

Charlie: , , I think you have to write down your goals I've got to send my kids to college. We have his house payment when they really start digging and going, these are all the expenses that I'm going to incur in my lifetime. You can almost attribute, , that money to the, to the goals and. And again, you get to see how far it goes or doesn't go.

And then you get a real, a reality check on how much is it. We really have, how much is it? We really have left over to spend after all those goals are accounted for. And part of that goal process is going, whoa. If I save this money and invest it , at a reasonable rate, how much income will I have when I am ready to.

You know, I think those are just absolutely critical to do.

Rob: Yeah. I think you're exactly right. I think you, if you've already are talking to a, you know, a good fiduciary financial. You're probably on some kind of a financial order checklist or a financial order of operations or whatever you want to call it, that goes through those priorities. And you can just fit that money right into those priorities, if you want, you know, um, it, it's a, it's one of those things.

If you've already thought about it, you already have goals written down. Like you said, Charlie, and you already know what you're working towards this money. It can go right towards it. It doesn't have to be anything new or special.

Charlie: I think the closest thing I've seen to this , and again, we've we just had clients last week told us they inherited some money, but they're like you said, they're the ones you just said, Rob, they are on track.

They've got their goals, all laid out. They knew exactly where this is what really a surprise, but they're not going to go. You know, do something too crazy. They're going to have some fun enjoy that. That's great. But the closest thing I've seen to this, um, in a negative way is someone that I was close to.

And in fact, a family distant family member, their husband, her husband passed away at an early age and they thought he had plenty of life insurance, , Hey S 500,000 sounded like a ton of money and it is a lot of money.

. But when you start to take inventory, , her kids are going to private high school. That was very important to her. That's what her family had done for generations. Then they got to go to college. She needs to retire at some point and she needs, , she's, doesn't want to cut her lifestyle in half or have to sell it.

That $500,000 was, was accounted for really quickly, ? And, it was pretty amazing, , that's just one of the things that I saw firsthand, a couple other things that I think are really important if this happens, , and if you're anticipating this happening is that things may become important.

Now, planning wise that weren't important before, such as uh, estate planning. You know now, uh, have this inheritance, is it going to be protected when I pass away? Maybe that was an issue before, maybe it wasn't, maybe it just became an issue because now, , have a whole lot more money, uh, liability.

Thanks. , w what kind of liability risks do I have out there? , if somebody gets injured on my property, if somebody's driving my kid's car, or my child wrecks my car, , or am I going to get sued now? They're just much more at risk is what I'm saying. So there's a couple of other things to think about, and I know we're going to get into it in a minute, but taxes, you know, when you inherit it, you know, that's going to be a big issue.

Uh, maybe I should say, maybe we'll get into it, but what about. Again, when I pass it on to my children, I want to create a legacy for my family. You know, as I get older, I start thinking about that more than I did when I was, when I was Ben's age, you know, but I would love to raise my children and, and, uh, create a legacy.

And, and that takes a lot of work, a lot of responsibility and a lot of planning.

Rob: Absolutely.

But it's one of those things. I think it was at the notorious VIG set at the best.

Charlie: Oh, I love it. When you call me big Poppa,

sorry

Rob: that one also, but when you get all, you know, you get this windfall of money, you got to make sure, or one of the things you would want to make sure you don't got to do anything. You want to make sure that your taxes are covered. And I think , we're going to get into that.

But, Charlie tax consequences of inheritance.

Charlie: Yeah. So, , somebody out there listening and you're thinking, Hey, I'm, I'm possibly gonna going to inherit some money here in the near future, , parents or whatever, then, , you're probably wondering, Hey, am I going to owe taxes on this inheritance?

And the answer as always is it depends. Let's start with a very, very basic, uh, the easiest one. And that's the federal estate taxes. Let me back up even one more level and just define it. What the heck are death taxes. That term gets thrown around a lot. And, um, and I've kind of had to clarify that myself because it's some of the verbiage is like, well, what are you talking about?

You say death taxes, because I know we have inheritance taxes. We have a state taxes. Uh, what are death taxes? Well, death taxes is just a generic term to describe all of those. So we're going to talk today about mainly state, federal, and state. Uh, state taxes. I gotta, I gotta say that it's the federal state and federal, uh, estate taxes, and then there's an inheritance tax.

So we'll talk about those. Now the easiest one to delineate right off the bat is the federal estate tax. Right now, there is an exemption, meaning you're not going to pay any estate taxes. If you pass away and you have $11.7 million. Correct me if I'm going to say, oh yeah, let me double check my numbers.

$11.7 million. As of now that adjust each year to inflation as of now, or if you're married, it's $23 million. So in other words, Rob, you and Janet can leave me $23 million and you won't. Yes. Thank you. And you will not put here me. You will not, you will not pay any tax. Any federal taxes, state taxes. Okay.

Um, now what about Colorado? What about the state of Tennessee? If , if your S your, your son inherits that money in Colorado, he's not going to pay and your, your state is not going to pay a state taxes, because if you have less than 23 million, but is it going to pay, are you going to pay state estate taxes?

And, uh, Colorado let's see, are they on the list? I think they are not on the list for the state or inherited. Okay. So, you know, there are some states, in fact, there are a, I believe 12 states, that still have in a state or inheritance tax. Okay. So there's a little bit confusing. So let me explain again, the difference between estate and inheritance.

If you pass on an estate, Rob, then you're going to take in your house, your cars, your IRA, 401k. And they're going to add all that together. That's the value of your estate. Okay. Now, if you pass on a $10,000 to me, you know, then I'm going to pay. If I'm in one of those states, I'm going to pay an inheritance tax.

If that state, uh, ha has an inheritance tax. So a lot of states recently have gotten rid of those inheritance taxes, but I'm going to stop right there. Cause that's maybe very confusing. And maybe I didn't say that really well, but what do you think?

Rob: I think you got it, you know, you got the Federalist state taxes.

That's what most people are thinking about. And if you, uh, I think it was a flight too. We talked about, uh, the Biden tax plan and what might happen. And we've got that sunset, uh, a state tax exemption that basically is going to expire in 2025. And I believe. It will revert it back

but, uh, right now, if nothing, if, if nothing else happens and, and Congress doesn't act, or the president. It's going to expire and a revert back. So something that all of us who plan on living past 20, 25, want to think about is more estate planning because you know, that 23 million for, for couples ish, uh, will be, um,

Charlie: won't be exempt.

Won't be 23. Yeah. So, you know, there's a couple of things there I'll, I'll, uh, clean up a little bit. If you're again, if you're going to inherit some money, I'm from Kentucky. So Kentucky does have an inheritance tax. So let's say my mom leaves me some money. Well, I'm not going to have to pay inheritance tax because most of these states that have them, they have exclusions.

Like, uh, if you're passing it onto your children, then you're excluded. But if you're passing it onto your. They're going to pay some inheritance tax. Now, most people that if I'm going to leave money to my buddy and I'm from Kentucky, then I'm going to put in my will that just take the inheritance tax out of my money and then pass the rest onto my, my buddy.

That's usually how it would work. So there's a lot of exemptions in a varies wildly by state, but let's do talk about that sunset provision, Rob. Cause that's, that's really important because people go, wow. That, uh, you know, we don't have 23 million now, but it's, uh, the sunset provisions coming in and, you know, we might one day have a decent estate, you know what, meaning a lot of money.

So it's going to go down to a five point, basically 5.8 million per person, which is still a pretty good amount. And I can't remember what year it's reverting back to. I was like half it is half. It is still half you're. Right. It has happened and, and, and by the time 20 and that's adjusted to inflation. So by the time 20, 26 rolls around, it's going to be a little more than that.

Uh, but, but for today's discussion, it's going to revert back to $5.8 million per person, or about 11.6 million per married, couple. , so. If you have, let's do a quick example, let's say you're single and you have, your estate is worth 10 million. And after the sunset provision, uh, uh, 20, 26, you pass away and you leave 10 million you're exempted, uh, amount is 6 million.

So there's 6 million of the 10. I do not have to pay a state taxes on. Now, usually, I don't know what the, I can't remember what it's going to revert to, but usually above that exempted amount, you're going to pay anywhere between 35 and 45% tax rates.

So 10 million amount of 6 million, which is my exclusion leaves me for a million. Let's say it's 35% and I can't do the math that good, but let's say it's about two and a half million dollars. Check me on that. Ben. And, and so you're going to pay two and a half million dollars in estate taxes, which is disturbing to a lot of people because, oh, by the way, I've probably already paid tax on that money once.

So that's a little disturbing. So now we've got a lot of clients. Our average client range is probably in their fifties or early fifties, but we have some people that I think. , down the road, they very well could be in this, in this situation. If things don't change, , one day they might be looking at a state taxes and going, how can we avoid this and how can we prevent this?

That's the other part of that. So again, that's a lot of talking, but, uh, what do you guys have to fill in or add on to? Yeah, just say one thing that I've heard is just that, uh, the trust, you know, being, being used or coming back into favor, once those provisions come back in, um, I've heard that, you know, , a lot of people.

We'll start using trusts more to avoid those estate taxes. Um, and so, especially if you hadn't been considering that before, um, and, and you may be in the category, .

Yeah. Yeah. So let me address the trust because it's it's can be confusing now prior to like back in the Clinton administration and maybe even the early Bush administration, we had the exclusion again. Let's just say is 11.7 million per person. Back in the day, I remember flying with people and talking about this, cause it was, uh, it was low.

It was like a one and a half to 2 million. So even though that was back in the early two thousands or whatever, I still wasn't that much, because if you have an insurance policy, let's say you got a million dollar insurance policy, half a million dollar house, half a million dollar 401k, that's $2 million estate.

You know, if the exclusion is 1.5 million, I'm going to pay 45% of 500,000, which is about 200,000 in taxes. So again, I went through all that , really quick, but the point is more people were, were, um, included in that then they thought they were going to be so, um, So back then there were things called bypass trusts.

You know, there was a lot of very sophisticated, uh, state planning using trusts, but let me be clear right now, you cannot go out do just to your standard old, plain Jane living trust and think you're going to have it. Estate taxes. It's gotta be a very sophisticated bypass trust, which are basically irrevocable generation skipping , stuff that estate planning attorneys get into, you know, into a lot more detail.

They haven't done it in a long time because it's not been necessary as necessary that could come back into, into Vogue, so to speak. But I just want to be clear that a regular old trust has no tax benefit whatsoever . , but one of the things people used to do, if they had large estates, especially like, uh, back in the day, these farmers big farmers out in Midwest, let's say they had, they had a huge farms, all this equipment, and let's say the farm and the equipment was worth 10 million bucks.

But the farmer let's just say they're making a hundred thousand a year. Um, they don't consider themselves wealthy, but next thing you know, they pass away. The farm gets put in the estate and oh, by the way, now you got a $15 million estate in the, in the family is like, wait a second. Okay. We're going to owe millions of dollars in estate taxes.

So that was a big deal. People were losing family farms, , and that, again, this is way back in the day. So, uh, but what those people did to protect. I know you're going to cringe when I say this, Rob permanent life insurance. So back in the day, uh, permanent life insurance, , when people say I want whole life or whatever, or universal life, I'd be like, why , and one of the few reasons, uh, uh, answers to that other than just like, I just, what I want is what I prefer.

I understand that. But one of the other, you know, techniques. Uh, we have an estate tax problem, so we need permanently life insurance and they had even the, the, uh, the life insurance trust, the islets. I forget what the, I first honest stands for. But anyway, it's a very specific strategy to allow that permit life insurance to pay those estate taxes.

So that's why people had permanent life insurance. And so, uh, so again , those are just a couple of things that, that may come back in. You're revokable thank you. Irrevocable life insurance trusts. Thank you. It's been a while. Those were all the rage, not just, not just five or 10 years ago, you know, a lot of people had those and they'll probably have them again, if, if these things become an issue.

Yeah.

Rob: Yeah. For sure. Yeah. Let's pivot just a little bit and maybe back up a little bit when you inherit, you know, this month. Well, obviously what a lot of our listeners have and, uh, maybe their parents have, uh, or whoever they're going to inherit the money from our 401ks and IRAs. And I think that's something that we need to touch on a little bit.

It it's important to know that if someone dies and they had an IRA and they were required to take a required minimum distribution out of that IRA, If they've died and they're past the age of 72, where they're doing that, you're going to also have to take in required minimum distribution, an RMD on the year they died.

They haven't already something to keep in mind. If they've had, if they have multiple IRAs, the IRS treats all of those as one pot, if you will. So they might've paid the RMD out of one pot and you wouldn't have to pay it. So something you're wanting to think about, um, when you get, go down that.

Charlie: Yup. Yup.

That's good stuff. Um, because we've seen this happen before and it, you scramble to kind of go, Hey, has the RMD been paid? , again, it's, you're dealing with people who are dealing with a lot of stuff and, uh, it's awful, , it's just awful, but, but it's just one of the many things you've gotta account for.

Otherwise. There's a, there's a huge penalty on not paying RMDs. Yeah. , it's just one of those things, but, um, And, and you're probably getting to this Rob or, or, uh, at least it's on our script anyway. So I'm going to tell you about the importance. You know, what, if I do inherit a 401k, an IRA, what are the laws now?

What are the rules now? And this starts, uh, the secure act of 2019. So if someone had died, um, 2019, , if, if they died prior to that year, then what I'm going to say is very different. But after the security. The stretch. IRA is basically. So, uh, without, without muddying the waters too much, I used to be able to inherit an IRA and then I could take out an RMD for the rest of my life, just a small portion for the rest of my life, so I could stretch it.

You know, that was a big, big deal. That's pretty much gone. Uh, the rule now is, uh, whether it be a Roth or, or a non. IRA or 401k. You've got 10 years, 10 years to draw it all down. So I'll throw in a plug real quick again for Roth conversions. You know, Ben, you and I are working with one of our clients, a father, son duo.

And we're like, Hey, maybe we should do Roth conversions. So that, yeah, at a lower tax rate, , when, because he's retired, he's, uh, he has a lower tax rate. His son's a pilot. So when his son inherits this money, someday, it's going to go right on top of his income. He's got to take it out within 10 years and he's going to be taxed at the marginal highest margin rate, you know, that he's in at that time.

So, so that's, that's an idea. That's a strategy that, that might work. 10 years is the, is the date is a timeframe. Now there's some exceptions as an, every IRS regulation out there. There's some exceptions I'm going to read those because it's important. And these

Rob: are, these are called eligible, designated beneficiary.

Yeah.

Charlie: So it's a 10 year withdrawal rule unless you're a surviving spouse. A minor child of the account owner, a disabled or chronically ill beneficiary, and a beneficiary who has not more than 10 years younger than the original IRA or 401k participant. So, uh, So basically,

Rob: and that's just a throw in, on the disabled and chronically ill.

It's, it's a pretty high bar to reach, I think. Yeah. You have to be, you know, medically qualified for that. It's not just, if you have, you know, chronic tinnitus or something, you gotta have a, you can't do more than two of six activities or something like that. So

Charlie: it's a high we're counting, you know, we're counting on.

Most of the beneficiaries having 10 years, you know, and again, a spouse is completely different. Um, just to throw out another nugget here, a spouse has the option to roll it, make it their own IRA, or roll it into an inherited IRA. And there's some decisions to make there. Unfortunately, again, we've had this experience as well, and we decided to have the spouse use an inherited IRA because that meant she could take out money, you know, without paying penny.

So that's something to think about, you know, if you're under 59 and a half, you know, so, so something to think about there as far as, uh, the options that people have.

Yep. Excellent. There's a lot of misunderstanding around gifting and estate planning. And so again, if some of our people are like, Hey, my parents, uh, they're getting up at night age and maybe they should just start giving us money. Well, just understand that, , a lot of people think, well, there's that 15,000 a year a gifting limit.

And there's a ton of confusion around that. So, so in, in that limit changes a little bit every year, but I think it's 15,000. All that means is if, if someone were to give you Rob $20,000, that person does not have to pay gift taxes and you don't have to pay gift taxes, they just need to file a gift tax return to account for the gift above the $15,000 a year.

Exclusion. In reality, again, this is today's numbers. You could give away $11.7 million and never pay gift tax during your life. So again, I just want to clarify those rules. It doesn't mean that your, your elderly parents are start gifting you money right now. I'm not saying that at all. In fact, the step-up in basis is something you got to take into consideration.

If someone passes away, you're going to inherit a home or, or a capital asset, a non IRA, a non 401k. Then right now there is a step up in basis, which means you're going to inherit that potentially tax. So that's, that's something to think about.

Rob: And they're in, they're thinking about doing away with that.

Am I correct? And you are correct talking about doing away with that step up in cost basis. Yeah. And that

Charlie: requires a little clarification too, because , the media has a field day with some of these, but the, the real, the real, uh, proposal is that it would be excluded for gains in excess of 1 million.

For a single person in $2.5 million for a couple. Yeah. So that's changes it drastically and oh, by the way, people have been trying to get rid of the step-up in basis for a long time and it never happens. So the likelihood of that happening is very low, , if nothing else, for the reason of, can you imagine people going back 30, 40, 50 years and going, Hey, what's the, what's the cost basis?

I mean, there's no way people are gonna be able to do that. It's just way too common.

Rob: Yeah,

Charlie: Bitcoin. Jesus, what do you got? Yeah, you can leave me some money. See what I think you should gift me some money. Yeah. Well, you did build that house and maybe, maybe I should. I need some gifting.

I can do. I got, I'll put you on my will, but you can have like my old baseball trophies or something. I get you some of my cryptocurrencies as well.

I'm going to inherit something with losses in it. No. Yeah, no, I think this is a great topic though. And, um, it's pretty confusing. So maybe we should, we can do a little recap here of some of the things we've covered, because I know we've kind of jumped around a lot.

Rob: Yeah. Well, here's a little fun fact. Uh, we talked about the penalized, the penalty, the penalty for not taking an RMD.

And you said it was, yeah, it's 50% if you miss. So God forbid something happens. Uh, to someone you love and you inherit that money and they're required to do RMDs on an IRA or 401k then, and you miss it. It's 50% is the penalty that RMD not, not the entire amount, but, but I'll be RMB. They had to, they had to take, you can ask for forgiveness on a fancy IRS form, but, uh, That if you don't ask for forgiveness, that's what you're paying 50%.

Yeah. That's high. That's deep. Yeah, it is.

Charlie: It is. And, and I'll do, I'll take a hack at re you know, kind of rehashing what we've talked about today. Cause I think the most important thing we talked about early on was just chill out, recover for a year. Don't do anything and, and then find someone you can trust to get some good guidance.

And then you've got to, I think you've got to get a plan and I don't care if that you write down on a legal pad. All the things, all the costs, other things that you want to do because that money is going to go away faster than most people think. I believe bar bar napkin is my favorite. Yeah. I use a bar napkin, whatever.

And then, um, neighbor. And if you, yeah, if you think,

okay, if you think that, um, you know, at some point in the near future, you're going to have some inheritance coming your way. Um, think about taxes, estate taxes at the federal level, a state taxes at the state level inheritance taxes, which is just a few states, uh, that it applies to.

So look those up because there's a lot of moving parts at the state level, a lot of moving parts, but most likely if you're. A son or daughter and you're inheriting, then you're probably not going to pay state inheritance tax. Okay. So that's, there's some exclusions. There is what I'm saying. , estate planning, estate tax changes coming our way, 20, 26, no reason to do anything drastic right now.

But a trust bypass trust revokable trust, permanent life insurance may come back into play if you're above these limits and they're still pretty hefty limits of right now, but basically $5.8 million per person. , last thing is we talked about the step up in cost basis. I don't believe that's actually gonna happen.

Take it for whatever it's worth, but if it does, it's only for gains above $2.5 million per married, couple of 1 million. Per into individuals. So, so that's my, uh, attempt at a summary. .

Rob: . It's super important with those 401ks and IRAs or anything or insurance policies that you have beneficiaries named at that. And that they're accurate because what that does is that bypasses probate. And that is key because then you don't have to wait for all that time for the probate courts to do their thing.

And for debtors. You know, the water guy or the lawn guy or the pool guy are all the debtors that come out of the woodwork, uh, during probate to go after that money, they can't do it. It goes directly to that beneficiary. That's why beneficiaries for you, military folks out there, they always make us make sure that that those are correct, because it's so important because it passes directly through you to that, to that person, uh, without having to go through the probate court.

So anyways, yeah.

Charlie: Check your accounts, check your accounts. And if you need any forms filled out for that, just let me know. Ben's the one they can do it@schwab.com. Ben. Oh yeah, that's true. Yeah, no forms, please do yourself. Yeah.

Rob: Perfect. Perfect. Uh, the other thing is you got 10 years and unless you're an eligible, designated beneficiary to take out that money.

IRA RA even a Roth IRA. You gotta take that out within 10 years, even though the ROS have already been taxed. So that's good. And remember, there's a difference between IRAs, 401ks, IRAs and 401ks, even Roth 401ks have required minimum distributions. So, uh, that's all I got. What else you got? Yeah.

Charlie: Bear inheriting money.

Uh, contact us, please. And we'll put spin by Ben Dickinson as a beneficiary. Contact me

Rob: planning doc. Uh, all right. That's all we got. We've arrived at our final destination. Couple of leave you with a couple of quotes. They're kind of related here. They're all just, uh, um, dealing with investing in finances. The first one is from PTC. Money is a terrible master, but an excellent servant. Think on that for a bit.

The second one is from a fellow pilot, Amelia Earhart. The most difficult thing is the decision to act. The rest is merely tenacity. That's

Charlie: it?

Rob: That's all we got. We're at the end of a flight 11. Thanks for joining us here at the pilot money guys podcast. If you like, what you heard hit that subscribe. And we want to hear from you, even if you didn't like what your, we want to know that too.

So just shoot us, uh, shoot me an email@robertatleadingedgeplanning.com and has always remember the world makes way for those who know where they're going. So plan accordingly from

Charlie: all, all of us here at leading edge Godspeed. We out see you next time. See ya.

Thank you for listening to the pilot money guys podcast. It has been our pleasure to share some information with you today. Give us a call to discuss absolutely any investment question. You may have click on the subscribe button below to be notified when new episodes become available. Visit leading edge planning.com to learn more.

Take care. The information covered and posted, represents the views and opinions of the guest and does not necessarily represent the views or opinions of leading edge, financial planning, LLC, leading edge financial planning, LLC. Leading edge is a registered investment advisor. Advisory services are only offered to clients or prospective clients who are leading edge and its representatives are properly licensed or exempt from license.

The information provided is for educational and informational purposes only, and does not constitute investment advice and should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investors, particular investment objectives, strategies, tax status, or investment horizon.

You should consult your attorney or tax. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-thinking. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected any projections market outlooks or estimates are based upon a certain assumptions and should not be construed as indicative of actual events that will occur.

Always seek the advice of your financial advisor or other qualified financial service provider. With any questions you may have regarding your investment planning.


Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this Podcast will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 07/26/2021 and are subject to change at any time due to the changes in market or economic conditions.
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Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.