Francisco Sirvent: Hello. Hello everybody. Welcome. My name is Francisco Sirvent, founder of Keystone Law Firm—attorney, advisor, author, speaker, all the things. Welcome. Today, we are going to hone in on a somewhat limited case study or specific situation. I hope to drive home some details for you all that don’t necessarily always come out when we talk more generally about this stuff, so we can really just discuss the specific things applicable to somebody in this situation.
So, welcome. This is the open webinar, and we are happy to do these. We’ve been doing these now for a while—myself, my partner Michelle Dexter, and our CFP Carmy Goodman—and we try to do them about three or four times a month. If you haven’t seen these before, we’ve been doing this for over a year now, and we’ve just got tons of them recorded. You can now go back and watch old topics at your own pace and at your own speed.
Accessing Resources and Webinar Housekeeping
00:07:46
Francisco Sirvent: They’re on our YouTube channel at YouTube.com/keystonelawfirm. It’s pretty easy to find. If you want to register or see what topics we have coming up in the future, we have those posted on our website, keystonelawfirm.com/events. You can see all the topics, what’s coming up, and what dates and times they are, and you can register right there. It’s open to the public; you’re welcome to sign up for any of them, or all of them. Feel free to share them with somebody if you see a topic and think, “Oh, my golf buddy was just talking about that,” and you want to send it to them. That’s fine; we welcome anybody to join.
The key thing about these being recorded is that they are recorded. I will have some time before we wrap up the content towards the end to deal with questions. I usually don’t get to them in the middle, but if you think of a question, you’re welcome to drop it in the chat box here, and I’ll catch those when we get to the Q&A section.
00:08:55
Francisco Sirvent: Alternatively, I’ll open the mics up at that point, and you’re free to say, “I have a question about this,” or whatever it may be. Just know that whatever you say on this is going to be part of the recording, so I don’t want you to disclose anything that you wouldn’t want posted on YouTube, okay? If you have a very specific question that feels private and sensitive, save that for a one-on-one conversation, or make it hypothetical and general enough so that the whole world doesn’t learn about your private details. I would never want that.
Anyway, welcome. We’re going to go for about 30 or 40 minutes on the content we’re going to talk about today. I’m also going to spend a little bit of time explaining how we work with clients after we get through the content, specifically regarding how we do this work for families in Arizona. This is so you know how we do things if you want to know.
Really, the main two goals for me, Michelle, Carmy, and everybody at the firm are, first, to simply share what we know. We’ve been doing this for so many years for hundreds, maybe even thousands of families now, that we just learn a lot of stuff. I’m a much better advisor now than I
00:10:16
Francisco Sirvent: was when I started in 2007. I’ve learned new strategies and new techniques. I’ve met with so many families, and over time you learn the dynamics. You realize, “Well, when this dynamic comes up, this is probably the kind of solution that’s going to work.” We just get better as we go, and we want to share this information. This is a great way for us to do that. It leverages our time, and it gives you the ability to learn from us without having to pay us anything; you just get the benefit of it.
Our first goal is really just to share this stuff so that the people who watch pick up one or two nuggets that they didn’t know before. In my opinion, if you can walk away with one or two nuggets and say, “Oh my gosh, that was a great idea, a great tip. I can take that and do something better in my life with it,” then this time was well spent. And you know what?
00:11:08
Francisco Sirvent: That’s phenomenal for us. We want that kind of reputation; we want to be those kinds of people.
Our second goal, of course, is business-related. We love working with the clients and families that we get to work with. If you’re looking for an advisor or a firm to help you with any of this kind of stuff, this gives you a very easy way to get to know us a little bit, see our personality, and see how we do things, how we communicate, and how we operate. As you can see, I’m a personable type of guy; I’m not a lawyer in a stuffy suit, right? If that stuffy look is what you’re looking for, you might immediately think, “Nope, Francisco is not for me,” and that’s perfectly fine. This is a great opportunity for you to just say, “Hey, what are they like? Because I’m kind of looking for some help.” So that’s our second goal. If you’re in that spot, great.
00:12:06
Francisco Sirvent: When I describe how we work with clients, you can learn a little bit about that and see if you want to meet. If that’s not you, there is no pressure. I am not a high-pressure sales tactic kind of guy. That’s why I also just have a goal of sharing this information, because if you learn a couple of good nuggets out of this, you’re going to do better for your family, and for me, that’s a win.
Legal Disclaimer and Setting General Concepts
Francisco Sirvent: Let’s dig in and dive into our content. Yes, we have to do the lovely legal disclaimer. Just to make sure you all know how to play with the system—Google Meet—a little bit, give me a thumbs up or a comment in the chat if you agree with these two main things.
Number one: this is all general information of an educational nature, okay? Everybody give me some thumbs up, give me an emoji, give me something in the comment box.
00:13:07
Francisco Sirvent: Perfect, we’re getting some responses. Love it, love it, love it. Great. All right, so that’s the first thing.
Second: because this is general information, this is not specific legal, financial, tax, or any other kind of professional advice for your specific situation, okay? If you need specific action or specific advice, obviously speak with an advisor to get that specific advice. We’re going to talk about general concepts. I would hate for somebody to take action on this without knowing how it impacts or affects different aspects of their life.
This actually happened to someone last year. An advisor told them, “I’m going to get you this great CD.” They did that, the CD came due, and when it did, it blew them into the IRMAA penalty bracket. They didn’t even think about the tax consequences of what that type of investment would do. So, take it all into consideration before you take action on anything.
The Shift to Next-Stage Planning
00:14:15
Francisco Sirvent: Really, the first big thing here is to say congratulations. If you’re in this category, you’re at the point where you’ve built a nest egg, and you want to make sure you use it well so that you can live the life and retirement you’ve been dreaming of, and maybe leave something behind. You are in a category of people who put in long years of discipline to ensure that how you earned money, spent money, saved money, and invested money was done in a disciplined, very intentional way. It’s a blessed place to be after going through those years and decades of accumulating.
I mean, I’m 46, about to be 47; I haven’t reached that point yet, right? I’m not there. But I’ve been doing this work for almost 20 years, and I’ve walked so many families through this process. Going from that accumulation stage of life into the next stage is a shift. That shift can feel bigger than a lot of my clients expect.
00:15:36
Francisco Sirvent: There is a feeling of changing gears. You’re going from fourth gear to fifth gear, or fifth to sixth—it’s a big shift. The transitions that should happen aren’t always obvious, and the steps are not always clearly laid out in front of you. Having that roadmap of what to do now is crucial. It’s like, “We’ve gotten to this point; how do we make sure we don’t make a big mistake that we didn’t even realize was an issue for the next 10, 20, or 30 years?”
So, I do want to congratulate you. This is a great stopping point to ensure that the decisions you make right now don’t end up with a severely negative consequence 5, 10, or 20 years from now for you, for your surviving spouse, or for your family. I want to start with that.
When I started out as a young estate planning attorney, the first time I got interested in doing wills and trusts was in law school. I thought, “Oh, this stuff is really interesting. There are a lot of opportunities, strategies, and cool ways to do things.” I
00:16:54
Francisco Sirvent: was of the mindset—probably from seeing Hollywood movies—that you do your will, you pass away, the family gathers around the lawyer’s conference room, and the lawyer reads the will. There it is: Susie gets this, Johnny gets that, and the surprise is this. That’s what I was picturing. It’s nothing like that anymore, of course. The world is different, and that’s not how anything works regarding estate planning or carrying out somebody’s affairs.
However, I understood this was a tough topic. A lot of people are kind of scared to tackle it head-on; it feels taboo. It feels like, “If I talk about it, it’s going to happen.” But I wasn’t scared of that because I saw how doing these kinds of things for the people you love the most was really an act of love. It is a very important gift to them, and in a lot of ways, it’s your last chance to make a difference in their lives and to show them that.
That’s what excited me to get into it, but I was really frustrated by the competition. In many circumstances, it was a negative type of competition between the estate planning lawyer, the financial advisor, the CPA, and the banker.
00:18:25
Francisco Sirvent: It was like everybody was at each other’s throats, vying to be the one who had all the knowledge, saying, “I’m right and they’re wrong.” It just felt weird.
On top of that, what I learned about wills, trusts, and the way the industry worked is that it was a “one and done” situation. You do it, and you never hear from the lawyer again. Then 20 years go by, and you go, “Wait a minute. The last time we did this, our kids were minors, and we were deciding whom to name to raise them if we passed away while they were young. This doesn’t apply anymore.” Lawyers just never followed up to check if their clients’ lives changed.
That’s just not the world we live in anymore. Lives change, laws change, taxes change, the economy changes, the market changes, and politics swing—all of those things impact this stuff. Putting this stuff in place one time is obviously critical, but if it doesn’t match what happens one, five, or ten years down the road, you now have a plan that is going completely in the wrong direction.
The Three Pillars of a Complete Plan
00:19:41
Francisco Sirvent: Early on in my practice, I said, “You know what? We’re going to do that differently. We’re going to get it done right and correctly for our clients, but we’re going to make sure we keep this thing up to date, because I feel like that is our responsibility as professionals.” It simply is not a “set it and forget it” thing.
It’s a lot like your car: you can’t get it maintained once and say, “I’m done.” It’s a lot like your house: you can’t buy it and say, “I don’t have to do anything to my house ever again.” It needs at least a minimum level of upkeep, and we’re going to talk a little bit about how that impacts what we do here.
These are the three big things that I’m going to talk about today. We talk about this a lot, but it’s going to be in a very unique and directed context for you guys.
First, the legal aspect: the laws control what can happen. While 60%, 70%, or 80% of them do stay pretty static from year to year or decade to decade,
00:20:54
Francisco Sirvent: it’s that 10%, 20%, or 30% that is changing that matters. If your plan isn’t tracking those changes, is that going to create a problem?
I met with a very nice family recently whose mom and dad put together a trust years ago. The dad passed away, and there are four kids, I think. The mom wants to make some changes—just some slight tweaks, giving to charity, things like that. Unknowingly, the trust they set up together years ago has these really convoluted tax strategies in it. They were very sophisticated tax strategies that were really well done back when they put it together, but those tax laws don’t exist anymore. When I showed her that, it meant that because those terms existed when he died, she now has to implement this ridiculously complicated tax strategy that is no longer going to save her any tax money, but it is mandatory. It’s just frustrating that she has to deal with all of that.
00:22:13
Francisco Sirvent: So, that’s one component of this: making sure the legal side is good.
Taxes are also a big driver of a lot of things these days. Even though the estate tax exemption has grown to about $14 million per person now—meaning it doesn’t affect most of our clients because you can pass $14 million on with zero estate tax—the changes in the last 10 or 15 years that affect your estate are way bigger, and they affect everybody. There’s no exemption amount. They have to do more with your retirement accounts and some annuities, and those taxes can eat up 30% to 40% of those accounts. So, tax strategies are a big driver of what we do.
Of course, coordinating things is the third piece: making sure your investments, real estate, cars, and bank accounts are all appropriately registered. We’re going to talk about all of this today. I obviously could go on and on about this stuff forever, but we’re going to jump right into it.
00:23:23
Francisco Sirvent: The shift is moving from looking at these things as separate, interdependent elements to looking at them as completely one thing. What I have seen is that families who look at these as separate but connected still end up with a lot of frustrating results for the surviving spouse or for their kids. But families who shift to a mindset where this is just all one problem that needs to be solved are the ones who get amazing results.
If they’re married, the surviving spouse has an actual step-by-step solution and knows what is going to happen and why it’s going to happen. Instead of facing a mandatory tax bill, they can see that a bunch of tax dollars have been freed up or saved, making either their life or their family’s life better. That is a shift that I’ve seen be really amazing over the course of my practice, and it’s something we started to implement about 15 years ago. Let’s dive into it.
Deep Asset Coordination and Trust Funding
00:24:43
Francisco Sirvent: So, what kind of legal plan does somebody who has a couple million dollars or more need to set up, or what do I recommend they set up?
The first and biggest problem occurs when you have a plan and a trust in place, but you don’t know how it plays with the rest of your life. A trust itself is only as good as what it’s coordinated with.
I’m working through an estate administration right now where a parent passed away somewhat young, leaving one child who is a young 20-year-old. They had a trust in place, and it was updated recently, but the law firm that updated it didn’t help with this coordination piece. So now, this young person has to go through probate, put all this stuff on the public record, deal with all the costs, fees, and delays of that process, and handle a whole bunch of debt that is going to be mixed into it because there is a probate, whereas it otherwise could have been protected.
00:26:09
Francisco Sirvent: Coordinating this stuff is so critical. If you have ever set up a trust, this is honestly the first thing I look at with clients who have assets to protect: a really intentional, strategic look at every single thing you have. Checking, savings, brokerage, IRAs, annuities, life insurance, cars, real estate, businesses, LLCs, crypto, mineral interests, second homes, boats—everything. We do a really tedious but deep-dive audit on that whole list and get paper proof for each one, showing how it’s coordinated back to your trust or some part of your plan.
Without that intentional coordination, it’s just like buying a car and not putting gas in it; it’s not going to go anywhere. So, that’s our first big thing that I want you to think about.
Community Property Dynamics in Arizona
00:27:47
Francisco Sirvent: The second thing is specifically for married couples. Whether you’ve been married a while or you’re newly married, you should know that Arizona is a community property state. As a community property state, there are very specific default rules that dictate how your property is characterized, whether as community property or separate property. Community property is the default if you don’t take very intentional steps to establish separate property. There are advantages and disadvantages to both, so it’s not all good under one or all bad under the other.
The first thing to know about community property is what happens when the first spouse passes away: all of the community property gets a step-up in basis. As a simple example, let’s say a couple has a house worth $800,000, investments worth $1 million, and IRAs worth $1 million. The first spouse passes away. If the original cost basis of the house was $200,000 and the basis of that stock portfolio was $500,000, the IRA doesn’t get the step-up, but the other assets have a lot of built-in capital gains. If you sold all of that, there’d be a big capital gains bill.
But because they held it all as community property, the surviving spouse actually gets to reset the basis on the house and the brokerage account all the way up to the fair market value as of the date of death of the first spouse.
00:29:13
Francisco Sirvent: That eliminates and wipes out tons of capital gains. It’s a huge tax strategy, but the assets have to be held as community property. So, that’s an advantage.
A disadvantage is that it is community property. Do you really want it to be community property? Do you want it to be presumptively 50/50 for each of you? You might if it’s a second marriage or a blended family of some type, or maybe you aren’t sure. Be intentional about that. If the default shouldn’t apply, I don’t want it controlling what happens, because a default application of community property is going to end up being very confusing for your heirs, especially in a blended family situation. Those default rules are ugly; they are hideous. Most lawyers don’t even understand them, and we end up teaching them.
So, community versus separate property: separate property can have some very positive asset protection benefits. For instance, if one spouse is in a car accident and gets sued, separate property might be exempt from that liability.
00:30:30
Francisco Sirvent: It also might be exempt from one spouse’s nursing home bills and things like that. So, there are pros and cons to both. My goal is not just to accept the default, nor am I saying one is universally better than the other. It is very client-specific. It’s about making very intentional decisions about the pros and cons of which structure fits your overall goals.
Privacy, Anonymity, and Fraud Prevention
Francisco Sirvent: A lot of folks are realizing now, with this humongous push online and AI being able to scrape the internet for information way faster than humans ever could, that their information is becoming public. If you haven’t yet, it’s an interesting exercise to go to one of the AI tools, type in your own name, and ask, “Who is this person?” to see what they know about you.
Keeping your information private is a valuable exercise simply because there all kinds of predators and scam artists out there. Second, when we do pass away, having less information in the public domain means what your family members are inheriting remains more private.
The other advantage to keeping things private is if you happen to get sued, or if somebody is even thinking about suing you. They are probably going to do some research on what you own and what you have out there just to see if it’s even worth their time. If it’s hard to find what you own, where you own things, or what you have, that can be a big discouraging element for them, making them think twice before even hiring a lawyer to go after you. A lawyer is going to ask, “Do they have assets to collect?” If they can’t find anything worth collecting, it’s hard to find a lawyer to take on that kind of case.
So, keeping things private—where you obviously know what you have, remain in control of everything, and can use it however you want, but it’s not open to the public—is a big goal for clients who have built up some money.
00:33:01
Francisco Sirvent: The easiest way to do that is with a specialized trust that maintains anonymity off the public record. If you really want anonymity, there’s a two-layer system we use that combines either a family limited partnership or an LLC with a specialized trust. With those, you can make it almost completely blind. Those are tools that anybody can set up, and it doesn’t change how you do your tax returns, nor does it change how you spend your money, save it, give it away, or use it; it simply removes you from the public records.
The typical structure we always recommend is setting up a living trust and keeping it funded. Everything in there passes to your heirs without having to file anything in probate court. The probate court is entirely public record. When someone has to probate mom’s house or dad’s estate, it all gets filed right there in the public record. And yep, that’s exactly how scammers and insane marketers start bombarding survivors with sales calls, solicitations, letters, and emails.
00:34:23
Francisco Sirvent: It happens. Unfortunately, we’ve gotten involved after the fact over the years when a couple of clients have been scammed. We had one guy who fell for an online relationship scam. A person from another country was able to scam him out of a couple hundred thousand dollars over the course of about six months. It was a relationship at first, then it was some money, then some more, and then it became, “Will you take out a loan to give me some more?” And he did.
It happens. As we age, we not only lose a little bit of our ability to critically think about things, but I also see people get a little embarrassed about it, so they hide those limitations as they come on. We can also get lonely, so it’s easy to fall into the trap of thinking we’re doing something that’s okay.
00:35:35
Francisco Sirvent: There are also people out there who are absolute scam artists presenting all kinds of new crypto opportunities and things like that. Everybody is susceptible to them. Having the right tools in place—specifically a regular trust or one of these anonymous ones—will help. What it also does is give permission to your successor trustee to step in and help you manage this stuff. There’s no way to completely protect yourself if you’re not willing to ask for some help. Keeping these tools in place and keeping them current is the best first way to do it.
Advanced Trust Features: Beneficiary Protected Trusts
Francisco Sirvent: The other piece before I jump onto the next topic is somewhat related to keeping things private, but it requires thinking about how your trust is going to be built—not only for you during your life, but for when it is inherited.
The typical thing we see when a trust is set up is that it just outlines giving the money to the kids, and the money goes right into their bank accounts. We wind up the affairs, pay the bills and taxes, split it up, and say, “Here’s your check, your check, your check,” or “Here’s your house,” right? That’s traditional. Historically, that’s what almost everybody did. They would set up their plan and say, “I want it to go to my spouse first, and then to my kids equally.” That was just the default.
Doing anything more than that used to be really complicated and difficult. About 15 years ago, maybe a little bit longer, Arizona added a whole bunch of new laws that made it drastically easier to give something better than that. We talk about this a lot with our clients: instead of just giving them a check, your trust actually gives them their own trust.
What I mean by that is not that you’re forcing your son and his wife to set up their own affairs.
00:37:59
Francisco Sirvent: Rather, you’re giving them their inheritance in a way that is structurally protected from all these bad things we’ve been talking about. It can’t be lost in a divorce if they happen to get divorced. It can’t be lost if your child gets sued. If your son has to file bankruptcy, or if he is a successful physician and loses an unfortunate malpractice lawsuit, this is the type of trust you build into yours so that the inheritance goes into it and your son or daughter can use it. They have permission to use it as you direct, and it can have wide, broad use for almost anything, right?
But if they don’t need it all, and they just save it, reinvest it, and do whatever they want to invest within the trust—they can buy a real estate portfolio, buy stocks, or let it grow—what they leave in there cannot be touched by anybody else. There are no involuntary distributions;
00:39:19
Francisco Sirvent: it is totally protected. This is something I recommend everybody at this wealth level consider adding because they cannot get this or give this to themselves after they inherit. Only you can put it in your trust for them. It essentially spawns after you pass away, and then it’s there for them. It’s a huge advantage. We call these Beneficiary Protected Trusts. It’s not a standard industry term, but that’s generally what we call them.
Essential Estate Planning Documents
Francisco Sirvent: Before I move on, there are all the other standard pieces of a trust that need to be part of every plan:
-
You’ve got to have your healthcare directives in place.
-
You’ve got to have your living will that states what medical decisions you want made.
-
You’ve got to have a durable power of attorney in place that says, “Hey, if I can’t manage my affairs because I’m disabled, I need somebody to help me pay the bills.” It says they can access retirement accounts, deal with the utilities, pay the bills, and so forth.
00:40:20
Francisco Sirvent: There should also be something called a pour-over will. You have your trust, but you also have this will that says, “Hey, if I forgot to title something in my trust when I pass, use this will to put it into my trust so it can follow and get the benefit of all the trust’s terms.” We don’t want to actually have to use it, because that means going through probate, but it’s there as a safety net.
Then, like we talked about earlier, you want every single thing in your life itemized: all your businesses, financials, assets, and accounts listed out in painstaking detail with specific instructions. Note how each account is owned and who the beneficiary is on that account—on the insurance, life insurance, annuities, IRAs, and Roth 401(k)s. Every single thing needs specific instructions and paper proof that the financial institution has implemented the change you requested.
Furthermore, ensure real estate titles and deeds are updated appropriately, and vehicles have something in place—a beneficiary form, joint ownership, or ownership by the trust—so that it all coordinates back to your legal instructions.
The Cost of Tax Mistakes and Gifting Pitfalls
00:41:33
Francisco Sirvent: Switching to our second topic: what I didn’t do at the beginning when I was a younger attorney was deal much with the tax side of things. I wasn’t familiar enough with it to properly advise people, so I didn’t focus on it. Over the years, I’ve learned it all—or at least, I’ve learned enough to know that this is actually a bigger driver than some other things.
The cost of going through probate if you don’t do all that legal stuff correctly might be $10,000 or $20,000, and it might take 12 to 18 months. It’s expensive and a pain in the butt, but that’s a pretty typical scenario. The cost of getting the tax thing wrong, however, is huge.
One of my early examples involved two daughters who came into my office. Their mom had already passed away, and they said, “Okay, mom passed away. What do we do? Here’s what she had: she had a simple will, the bank accounts were really small so we didn’t need to worry about them because we could just collect them,
00:42:46
Francisco Sirvent: and mom gave us her house a couple of years ago, so we don’t have to deal with that. What else do we need to do?”
I looked at it, and I immediately knew the issue. I asked the question again: “Your mom did what with the house?” They said, “Oh, she quitclaimed it to us a couple of years ago, so it’s already in our names.” I just went, “Okay… how much is the house worth?” At the time, it was worth about $400,000-something, and there was no mortgage on it. I asked, “And when did she buy it?”
00:43:37
Francisco Sirvent: They said, “Oh, she bought it forever ago.” They lived there forever and retired there. They had bought it for under $100,000 here in Arizona.
I had to tell them, “Your mom tried to do something really nice. She tried to make this easy for you, so there’s no blame here. She did what she thought was the best thing to do: get it into your names and give you the house. What she didn’t realize was that by gifting you the house during her lifetime, she created a giant tax bill for you that was totally unnecessary.”
She bought the house for $100,000, and it was now worth $400,000. That meant there was a $300,000 gain. When they sold it, they were going to pay capital gains tax—probably 20%, which is $60,000 in taxes on the sale. Her mom accidentally gave them a $60,000 tax bill, and it was completely avoidable.
00:44:45
Francisco Sirvent: That was early on in my career. I knew how that tax law worked, and it drove home for me that I had to make taxes a more important part of my conversations with clients. That was a $60,000 tax bill for a very simple estate where all she had was a house and a few thousand dollars in a bank account.
I have another one we’re going through right now involving a snowbird who splits time between Canada and Arizona. It’s a very modest estate; the house is worth about $600,000, and there’s a mortgage on it. Completely unknown to the mom who passed away, because of her status as a Canadian citizen and her status in the US, her estate is going to pay probably about $120,000 in taxes. It was a very simple mistake. She had a Canadian lawyer help her do her estate planning, and they didn’t think about the US tax issues on that Arizona house. It’s going to be a six-figure tax bill.
So, we decided a long time ago that we’re going to talk about taxes.
The Secure Act and Retirement Account Traps
00:46:07
Francisco Sirvent: Putting your trust together is not just about the legal document; it’s also about dealing with taxes. If you have any kind of tax-deferred retirement account like an IRA or a 401(k), those represent some of the biggest tax opportunities and risks that exist. As you start taking money out of those accounts, every dollar is taxed. When you hit a certain age—72 or 73—you’re forced to take money out through Required Minimum Distributions (RMDs). All of that is taxable income to you on your tax return every year.
What has changed and made this an immediate part of trust planning happened less than 10 years ago when the SECURE Act was put in place. It changed the tax laws regarding an IRA or 401(k) for those who inherit those accounts. There were some changes for us while we’re alive, but from my perspective, the bigger shift was what happens when beneficiaries inherit them.
00:47:28
Francisco Sirvent: What happens now is you leave an IRA to your kids, and it becomes an inherited IRA. When they take distributions out of it, it is taxable income to them, just like it was to you. The major difference now is that the entire account must be completely emptied within 10 years. There are some exceptions to the rule, but generally speaking, it all has to come out within 10 years from the date of death.
It used to be that beneficiaries could stretch those distributions out over their entire lifetime—a much longer time period. Most people inheriting an IRA are in their 40s, 50s, or maybe 60s, meaning they would have had decades to take these distributions. When you take out smaller amounts over decades, you keep yourself in a lower tax bracket, minimizing the tax impact. When you have to take it all out in 10 years, well, guess what?
00:48:36
Francisco Sirvent: When are most kids in their highest-earning years? It’s usually exactly when they inherit an IRA. If a parent passes away at 85, their kids are often about 30 years younger, making them 55. They’re likely in their highest earning years, meaning they are already in a higher tax bracket. Now, they have 10 years to withdraw that entire IRA balance, which pushes them into an even higher tax bracket.
This is why this is the bigger tax piece for us. And guess what? There’s no exemption here. It’s not as if this only applies to people who have more than $14 million in their IRA; this applies to every single traditional IRA from dollar one. Everybody has to deal with this.
It simply impacts people at your level more drastically because if you have larger IRA balances, you’re probably investing them well and they’re growing. They’re going to grow for your lifetime, and then a large balance goes to your children during their peak earning years, forcing them to add it to their income.
Roth Conversions and Strategic Tax Planning
00:50:00
Francisco Sirvent: What we usually look at and discuss as an option—and there are multiple options—is running the numbers to see if you can strategically manage that tax burden. We look at taking those IRAs you have now and thinking about what a Roth conversion would do for you.
For the most part, when we run a scenario analysis to see if a Roth conversion makes sense for a client during their lifetime, we look at whether it will make their life better. There is almost no scenario I can remember running in the last few years that showed a client was worse off by converting.
00:51:11
Francisco Sirvent: Granted, you have to swallow the tax bill upfront; I get it. But by moving assets to the Roth side, your future distributions are tax-free, and you aren’t forced to take RMDs as that account balance grows because Roth IRAs do not have RMDs during the owner’s lifetime. It’s not mandatory that you artificially increase your income during retirement. So, there are dynamic advantages just for your lifetime when doing Roth conversions. Again, we run the scenarios to see if it makes sense.
The other side of this equation is how a Roth conversion impacts your beneficiaries. It can impact them in huge ways. If they take a distribution out of an inherited Roth account, it is not income taxable to them; it is completely tax-free. All of a sudden, having to take the distributions out over 10 years is no big deal because it’s not adding a dime to their income when they are in their highest tax brackets.
00:52:35
Francisco Sirvent: Hallelujah, right? During that 10-year period, they can continue to invest it and let it grow, because even if it grows and they take money out, it’s still not an income tax burden for them.
So, while a Roth conversion might or might not make perfect sense solely based on your current lifetime numbers, look at the drastic impact it has on them. When someone inherits a traditional IRA, tax law does not allow beneficiaries to perform a Roth conversion on that inherited IRA. It is stuck; you have frozen it in its place. Thinking about making those conversions now for your beneficiaries is a huge idea. It changes the numbers significantly.
I don’t know what you think about tax laws right now, but do we think tax rates are going to be higher or lower in the future?
00:53:57
Francisco Sirvent: Give me a thumbs up, a thumbs down, or a chat message. Personally, I don’t see how tax rates can go down; I think they’re going to go up. The deficit is growing, and everything points to them having to catch up with that at some point. If rates are going to be higher in the future, then dealing with and paying the tax on something now is probably going to be at a lower rate than the tax rate your kids will face in the future. Even that gives us some justification.
Old trusts typically state that retirement accounts are inherited straight through to the beneficiaries, leaving them to pay the taxes. We want to shift that thinking to look at how we can avoid or reduce those taxes using the trust correctly.
00:55:09
Francisco Sirvent: That’s the beauty of the Roth conversion, because Roths don’t carry these huge future tax bills; they avoid them. They save money and can still be completely asset-protected for your beneficiaries inside the trust structures we talked about.
Planning Challenges for Married Couples
Francisco Sirvent: Switching gears a little bit, the last thing that I want to focus on—and I’m going longer than I thought I would, so I apologize, please start sending your questions in the chat—is focused on married couples.
We deal with a lot of married couples, as well as life partners who have literally been living together for 30 years and have never done the official legal marriage thing, but their whole lives are intertwined. If you’re in that situation, there are a couple of things I want to make sure you know about because things can get tough if this isn’t talked about.
The first one isn’t incredibly complicated, but it’s vital to know: if you are married filing jointly, remember that when the first spouse passes away, the survivor is going to end up in the single filer tax brackets, which are much narrower.
00:56:31
Francisco Sirvent: If you haven’t done the analysis, you might assume you’re fine. However, it often means your survivor will suddenly find themselves in a higher relative tax bracket when the first spouse passes, which can result in a significant reduction in their disposable spending income every month. Doing that number-crunching ahead of time is important because while you are both alive and married, you have options to adjust and pivot things so that when the first spouse passes, some of the survivor’s income isn’t taxable, helping keep those tax burdens down.
The second thing is to ensure there is a very intentional distribution plan in place for the survivor’s investments. You don’t want your survivor forced into a rote, automatic withdrawal plan from your nest egg that will eat away at your principal inappropriately during market downturns. We always say we want to buy low and sell high.
00:57:54
Francisco Sirvent: If one spouse has been doing all that financial management and coordination, there are always ongoing decisions to make. You want to make sure the other spouse understands how it works. Look, we don’t just sell a little bit of everything to get our monthly check; we look at the assets that are up and harvest from those. That is where the monthly income should come from.
It must be very intentional, because if you are selling across the board or selling the wrong things when the market is down, you might be unintentionally triggering a severe imbalance across the whole portfolio or locking in losses that you don’t want. Those are called sequence of returns risks. You want to make sure that your distribution plan matches the investment decisions and portfolio structure so that you don’t eat away at how it’s expected to grow, because that growth is what’s going to take care of the surviving spouse when they are alone.
The biggest issue, though, is that oftentimes one spouse does most of the financial stuff.
00:59:19
Francisco Sirvent: One of them might take care of the bills and set up the utility payments, while the other does all the other things. Frequently, it’s one spouse managing the finances, the investments, and the taxes—essentially quarterbacking the whole thing. If that spouse goes first, or if their health starts to decline, it becomes a monumental project for the surviving spouse to figure it all out in the midst of grief.
I’ve walked so many widows through this, and it’s heartbreaking. The case that sticks out in my mind the most involved a couple who had been married for 63 years and were just as sweet as could be. They came to me and said, “We finally need to get our stuff in order.” We got them started, but unexpectedly, he passed away two weeks later before we got anything legally finalized or implemented.
She came back to us, and we knew he was the one who did everything.
01:00:26
Francisco Sirvent: It literally took us six years to wrangle her financial affairs because, while he did a great job, it was all over the place. It was a very exhausting process for her.
In a married couple, the one who is naturally suited to that stuff should absolutely take the lead and run with it. But there has to be a system in place so that there is enough knowledge-sharing happening on a consistent basis and enough tools in place that the survivor can pick it up and say, “I at least know where it is, right? I know where to go when I need something. I know who to call for help. I’m not starting from scratch.”
Even for single folks, your heirs and beneficiaries are in the same boat. It happens to us all the time where somebody calls and says, “My mom died,” or “My dad died. They had a will or a trust—or they didn’t, it doesn’t matter—and we don’t even know where to start.
01:01:41
Francisco Sirvent: We don’t know where she banked, we don’t know who her financial advisor is, we don’t know who her CPA is, and we don’t know where she has investments, or if she even has investments. All we know about is where her house is.” Then it becomes a game of playing private investigator, which puts such a burden on them. It takes so much time for them to take off work, be away from their spouse, and be away from their kids, staying up all night going through boxes and files just to figure out the current state of affairs.
Having a system in place where this information is current is incredibly helpful. When we are named as a client’s successor trustee to handle that stuff for them, we don’t just let them put our name in the document. At Keystone Law Firm, we require them to build this complete profile out—very thorough, very detailed—and then keep it up to date with us.
01:02:43
Francisco Sirvent: It’s one of our strict requirements because if we get called on to do the job, we want to know exactly where we’re starting. We need at least that baseline information. So, that’s the final piece of the puzzle that I wanted to share with you guys.
The Retirement Management Office Approach
Francisco Sirvent: Briefly, I hope you got a couple of good nuggets out of that. To explain how we take care of clients: we started the first version of our holistic model in 2012 or 2013 when we partnered with a financial planning firm, and we added tax services to it shortly thereafter in about 2022. Gosh, it’s almost been four years now. That version was eventually bought by a larger company, and I restarted the second version, which is called our Retirement Management Office. We bring it all in-house here at our office in Chandler.
I recognize some of you on today’s webinar. We do it all under one roof: we have your estate planning attorney, your tax advisor, CPA services, financial advisor, and investment management. You get to approach it the way the Mayo Clinic does.
01:03:58
Francisco Sirvent: You’re not having to go to your general doctor just to get a referral to a cardiologist, who then tells you, “No, it’s actually a cardiac surgeon,” leaving you chasing answers around. You just come to one place, and we coordinate it all. If we say, “Hey, you should consider this tax strategy,” we’re not going to tell you to go talk to an outside CPA to figure that out. Or, if we say, “Hey, we need to make sure these accounts are funded correctly to your trust, registered like this, and have this beneficiary,” we’re just going to execute it on your accounts because it’s all under one roof.
We do that through Keystone Law Firm, which handles all the legal services and tax returns, and through our financial planning company, Lifestyle Planning, which handles tax strategies, wealth management, retirement projections, and investment management. All of it is coordinated by one team.
This model is not a fit for everybody, and I’m not suggesting that it is. But some people love it, and the clients who take advantage of it feel like they can finally hand stuff over.
01:05:03
Francisco Sirvent: There’s finally one central spot for all their stuff.
If you’re curious about this, we have an easy first step. It consists of two appointments, and there is no cost. As you can tell from my personality, I’m not a high-pressure sales tactic kind of guy. It’s really for us to figure out if we can add value. Most people who come through this two-appointment process are either already working with an advisor somewhere else and have been for a while, or they’re at retirement and everything is sitting in a 401(k) and they don’t really know what to do next.
The process is very simple. We do two appointments to determine if we can add value. Are we going to do work that will either take a ton of stuff off your plate, help you find tax strategies that nobody has told you about before, or just organize things so it’s easy for your spouse or your family when the time comes?
01:06:13
Francisco Sirvent: We want to ensure a positive return on what you pay us. The way we structure this is very similar to other offices, except we stack all the services together. We do it using our Lifestyle Map, where we spot-check all these areas of your life. We help you audit how you’re doing across the board—not just looking at your investment returns, which is just one piece, but looking at the whole picture—and then we help you understand what we would recommend. That lets you see if you think we would be a good fit. If we think we can add value and you think we’re a good fit for you, then we can talk about partnering together.
Again, it’s two appointments. There’s no cost, and there’s no hard pressure. It’s just a discovery process to get to know each other. We go through the legal audit and the tax analysis, and make sure the assets are aligned with everything.
Q&A and Wrap-Up
01:07:15
Francisco Sirvent: The way we start is just a quick first phone call with me. You don’t have to pay anything, you don’t have to know anything, and you don’t have to worry about preparing anything for the meeting. The appointment is online, and it’s just a quick 15-minute call where you and I jump on and talk about what you’re doing and what we can do. If you want to go through this discovery process, we’ll create that Lifestyle Map for you.
If you want to grab that time, I just dropped my calendar link into the chat. You can click on that to see when I’m available and book a time that works for you. I recommend doing it if you felt like the stuff we talked about today was valuable and you are interested in having somebody help you implement it, because I know knowledge is great, but if we don’t do anything with it, it’s not going to really help you or your family.
01:08:20
Francisco Sirvent: I’m always here to help us move forward and stop procrastinating on this stuff.
I went way longer than I said I would, but I do want to give an opportunity for questions, so I can hang out for a couple more minutes. Is there anybody who wants to drop a question into the chat? Go right ahead. I also just gave you the ability to turn on your microphone. If you want to unmute your mic and ask a question, you’re welcome to do that.
The other thing I will put in the chat is our upcoming webinar schedule: keystonelawfirm.com/events. You can see that link now in the chat and go check it out. The next five or six of them are posted there, along with the topics, dates, and times.
I also just posted the direct link to our YouTube channel. Since we post these recordings about a week or so after the live date, you will see this one posted there soon. I recommend going there to subscribe so you’ll get a notification whenever we post a new one.
01:09:40
Francisco Sirvent: You can look at the notification and say, “Oh, what’s the topic? No thanks,” or check it out. What I love about the YouTube platform is that you can watch these at a faster speed, too. You get all the info, but you can run it and listen to me talk super fast like an auctioneer.
I don’t see any questions coming into the chat, and I don’t see anybody raising their hand… let’s see. Okay, we do have a hand raised. Emmett, go ahead and unmute your mic and you can ask your question. You have to unmute it on your end, though; I can’t do that for you.
I can’t hear you, Emmett. I’ll let you try to figure that out. Emmett?
Captain Rob, are you trying to ask a question? You’re welcome to turn your mic on and ask away if you do.
Emmett, if you can’t figure out the microphone, maybe you can type your question into the chat box. No? All right. Look, you’re also welcome to send an email to hello@keystonelawfirm.com, and my team will be happy to get back to you.
Thanks for coming, everybody! I appreciate everyone being here. I hope you learned something new, and I look forward to seeing you in a future webinar. Bye.
