Good evening.

You've got More Than Money.

You've got Gene Dickison, your host, your personal financial advisor.

I say that every single week because it's true every single week.

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yeah.

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Just the way I'm about to answer our very first question this evening from Megan.

Megan, good evening.

Good evening, Gene.

Thanks for having me back.

Our first question says, My wife has a life insurance policy, of which I am the primary beneficiary with a death benefit of $129,580 and a net cash surrender value of approximately $79,000.

She is 80 years old and in good health.

I am 85 years old and likewise in good health.

We do not need the funds from the policy to support us in retirement.

We are considering accessing the available cash funds in the policy to assist in the high school education of our twin granddaughters.

We're wondering is this a financially prudent course of action, and if so, what is the most tax advantageous way in which we can access the funds for this purpose?

Thank you.

Well, that's a wonderful question and a wonderful instinct on your part.

High school education for twin granddaughters, I can only imagine gives you great joy.

Just the thought of being able to help must give you great joy.

The likelihood that this life insurance policy has a significantly positive impact on your lives, your wife and yourself is fairly low.

The likelihood that the cash available roughly $80,000 has a positive impact on your granddaughters is extraordinarily high.

So this instinct on your part.

Perfect spot on.

I get it completely.

Are there ways to use this cash value that are tax advantageous?

And the answer is yes.

We may even be able to connect up to that will provide some tax advantages to you.

I'll go through that here in a moment.

But before I do that, I want to point out, make an observation, as a lot of folks might find surprising.

If you're not familiar, if you're not engaged or involved with life insurance, cash values, etc., you may not realize that this life insurance policy will not have a death benefit of 130,000.

It has a death benefit of 50,000.

Now, wait a second.

It says right there, 130.

The cash value, the $80,000 it's currently in, the policy is already theirs.

So the insurance is the difference between the cash value and the death benefit, 50 grand.

So originally they had 120,000, 130,000.

Our policy now they have a $50,000 policy.

Doesn't make it a bad thing.

It just makes it very interesting that if they said we're done today, they don't lose 130,000, they lose a 50,000.

Our potential potential 50,000, our death benefit.

So how do we get this money into the hands of young people who may need it that you care about?

One consideration you should look at is bar going against the cash value of the life insurance.

If you cash in the policy, the IRS will ask how many dollars did you put in in premiums and what cash value came out.

And let's just pick numbers literally out of thin air.

You put 50,000 in, you're taking 80 out.

30,000 of that is considered a gain and you will pay tax on 30,000.

If, on the other hand, your policy allows in virtually every life insurance policy does allow you to borrow against that.

Maybe you don't get the entire 80,000, but maybe you get 70 or 75,000.

There's no tax.

It is the proceeds of a of a loan you're borrowing.

So the initial withdrawal is tax free.

That's a good start.

The second thing that you might do, you might connect to assisting your granddaughters is to take that money.

And to the extent that you are able, put it into a 529 plan.

Now, I'm using the rules in the state of Pennsylvania.

For those of you who are watching coast to coast and and border to border, check with your state rules in terms of taxation.

But in the state of Pennsylvania, contributions within limits to 529 plans are tax deductible to the state of Pennsylvania.

So money coming out could be tax free, money going through the 529 plan, might be tax deductible, might well be tax deductible, particularly if you're in the state of Pennsylvania.

And that pass through then can go directly to the educational expenses for your granddaughters could work out very, very well.

A little bit of icing on the cake, perhaps, as you borrow this money.

Eventually the insurance company wants to be paid back.

But they are patient.

They are willing to be paid back When the owner of the policy in this case, your wife passes away.

And then whatever the account balance is in terms of the loan.

Hey, I borrowed 70 with interest.

It's now 85.

Is deducted.

And then the balance of that comes out as a life insurance death benefit.

And in most cases, that those proceeds are also income tax free.

So tax advantages are to be found in a number of different areas.

Be sure that you're sitting with a financial advisor that is experienced in that you trust and is consulting with a tax accountant, a tax advisor also that is experienced and that you trust to put all the ducks in line and gosh, enjoy your granddaughters and hopefully that you'll be able to see for yourself over many, many years to come the benefits of this great gift that you're giving them.

Next, we'd like to give a gift to someone else.

We'd like to help them in any way we can.

Where do we go next?

Well, our next viewer, I think, is looking up, looking for a thumbs up or thumbs down on their situation here.

So let's see.

They said I'm 71, turning 72 in June of 2024.

I'm am I correct in the following for 2023 tax return?

No.

RMD is required for filing in April 2024 at the age of 71 two for 2024 tax return.

No armed is required filing in April 2025 at age 72 three for 2024 tax return.

I need to do RMD because I will be filing in the year 2025 at age 72 and four for 2025 tax return start paying RMD onward on the following investment accounts, IRA rollover IRA deferred annuity and non-qualified annuity.

Your valuable knowledge in assisting me is much appreciated.

Thank you.

Well, let's not put the cart before the horse.

Let's see what the advice is first and see if it's valuable.

But you're very kind.

You're very kind and cautiously optimistic.

I'm sure you have sadly made this far more complicated than it needs to be, and there's a current rules.

Your RMD age is 73.

It is irrelevant when you are filing the tax return.

We we measure your armed requirement by calendar year.

So based on current 71, 72 and 2024, 73 in 2025 is when you will start your RMDs.

You may begin, by the way, on the very first business day of the year.

So it is not relevant.

Some people go, Well, I know I'm, I'm 73 and in 2025, but not until December 30th doesn't matter.

Calendar year as far as the IRS is concerned, on January 2nd of that year, even though you are nearly a year younger than 73, you still must attend to your RMDs and you can take them out right away.

You wait till the end of the year, you can divide it up month by month.

You can pretty much do anything that you wish the IRS is agnostic on, on how the money comes out.

As long as during that calendar year, the required minimum distribution is made and and the part they're most interested in the taxes paid, that's the part they really care about.

So bottom line is 2025 for you, very straightforward.

You are correct.

Your IRA is subject to R&D rules.

Your rollover IRA is subject to RMD rules.

You have a deferred annuity and a non-qualified annuity.

These two require a little bit of examination.

A non-qualified annuity is not an IRA.

It's not a requirement.

It's not a retirement plan.

It is not subject to R&D rules.

You do not have to take any money out of that ever during your lifetime.

The term deferred annuity suggests to me that that is an IRA that happens to be invested in an annuity.

It suggests to me that you understand that many people do not.

So if you're looking at an an annuity and you're wondering, do I have to take our RMDs, the key is whether it's a qualified meaning, it's an IRA or a non-qualified meaning it is not.

If it is qualified, let's assume for our purposes that this one is.

Yep, you are required to take our RMDs.

Now, as we have discussed on many, many shows, you've got three IRAs.

You will need to calculate your arm out.

Very simple to do and then you get to choose.

Do I take some from each of the three?

Do I take all of it from one?

Do I split into two pieces?

Again, the IRS is agnostic.

They don't care.

As long as you take out an amount equal to the R&D required on the totality of your IRAs and you pay that tax, they're fine.

So you should be in very, very good shape indeed.

My head's scratched just a little bit at this age, an IRA and a rollover IRA not likely necessary to be kept separate.

I would likely combine those two.

It is unlikely that you will be able to combine the deferred IRA deferred annuity with your IRAs, but simplifying a little bit probably would be useful and I would certainly talk to a financial advisor about making sure that happens.

Excellent, excellent question.

Very insightful.

Megs, where do we go next?

Our next question comes from a mom.

She says, Thank you for continuing to host the most informative show on television.

I recently saw a question about Life Estates.

When my son's father passed, he left his home to me with the understanding that when I passed, the son would go or the house would go to our son.

I have been renting the house for three years.

What I learned from your show about Life Estates, I thought it would be a good idea to put my son's name on the deed.

My question for you is, since I do not at this time live in the home and will probably continue to rent it in the near future, can I still set up a life estate?

In other words, do you have to live in the home or just own it?

A very grateful viewer.

Thank you.

You're very kind.

Now, Jacob, can I talk to Megan for a second?

Megan, did did this woman say in most informative?

Yes.

She didn't say much.

Relevant?

No.

Informative.

Now, I don't even know if I can answer.

And I'm too emotionally distress.

I'm fine.

Thank you so much.

Your words are very, very kind.

Life estate can be applied to a property whether you live there or whether you own it outright and rent it.

That issue is very, very easy.

The question about whether you should put your son's name on the deed is a very different scenario, a very different question indeed.

Is it possible to have him be the owner of the property and you retain life right to life estate?

The answer is yes.

You can collect the rent, you can maintain the property, yada, yada, yada.

And at your passing, it's not yours.

It's not even in your estate.

It's already his.

That is very possible.

Is it?

In his best interest is a very different question for this reason.

Let's use a simple set in numbers.

The home is worth $200,000.

The original cost basis was 80.

So embedded in this property is $120,000 of capital gains.

If you were to do exactly what we just discussed, make him the owner.

You retain life estate and you pass away.

It is already his, as is the original cost basis.

If he decides to sell, he must pay capital gains taxes on $120,000 depending on his tax bracket.

It could be as much as eight 20,000, a 20% capital gains rate, in this case, $24,000 of tax.

Not a great result.

If, on the other hand, you set your estate up in such a way that it is guarantee, you go to your son, but it stays in your name.

The cost basis at your passing steps up to the market value of the property on the day that you pass away.

So if it's worth 200,000 now, you pass away.

Today, please don't.

But you do.

120 of of capital gains goes to zero.

He pays no capital gains taxes whatsoever.

He saves $24,000.

It is not without a cost.

It is not without cost.

The state of Pennsylvania has a death tax for a parent.

It's a child four and a half percent.

So in a $200,000 asset, it will still be $9,000.

Let's see, I would rather pay nine or whether I rather pay 24,000.

Well, that part's easy.

But the reality is my 24,000, our estimate is based on the top capital gains rate of 20%.

It's actually slightly higher than that.

Is it possible that your son might be in a much lower bracket?

The answer is it's very possible.

And might he be paying 9000 when he could pay zero?

The answer is yes.

The only way to know correctly and specifically is to counsel with a an experienced, trusted tax adviser so that you can compare your tax situation.

Your son's tax situation, and see where they intersect for the benefit of the family.

So I appreciate that you you found this informative, relevant.

But you've got to look very carefully at these alternatives.

Working with an estate planning attorney, tax adviser, financial adviser as your team, and make the decision as best for both you and your son.

Excellent.

Interesting.

Very interesting.

Makes it more interesting things back there.

Definitely.

This one is very interesting.

It says, I am the executor of my mom's estate.

My two sons and a granddaughter were each bequeathed $20,000 or 20% of the net estate since the biggest portion of her estate was in Vanguard funds and I was the sole beneficiary.

There is not enough funds to comply with her wishes.

The attorney has sent them the letter, which states that they are each to receive $4,500, which would be the 20% of the net estate.

It is my intention to have each of them receive the amount that my mother really wanted them to have.

Wondering is there any advantage in my funding the estate checking account with sufficient dollars and then write checks to the beneficiaries from the estate?

Is there any reason why I should not do it this way?

I can always just cut them my own check.

But the money is really coming from my mom's good intentions and the excess amount that was given directly to me.

Thank you for your time and wonderful advice that you offer.

Well, you're very kind.

There there are some things that occur to me that would cause me to say you should pump your brakes on the idea of adding money to the estate account.

First and foremost is taxation.

Money in the estate account is considered part of the estate.

So you would be adding moneys in that would then be taxed potentially twice the investment that you had that your mom had with Vanguard that you got automatically has is already accounted for in the estate.

If you take some of those proceeds and them back into the estate account, it's it least potentially a problem in that the the accounting for the estate may end up double counting that money.

I'm not sure that you gain anything other than your observation that you want it to be very clear that this was your mom's intention and that this money is coming from your mom.

I think that can be done in far simpler ways than the potential for this accounting.

What confusion maybe is a polite to muddying the waters?

Perhaps.

I think we can avoid that completely.

I think we can put ourselves in a position where your kids, in this case, her grandchildren, understand.

Absolutely.

This came from grandma and this is what she wanted you to have.

And and I'm going to darn well make sure that that happens.

Perhaps that's done with a lovely letter that goes with the check.

Perhaps that's done with a memorial or a time that the hey, let's all go out to dinner so I can share a story.

Grandma loved you so much.

She wanted you to have this, and so do I.

But all of those things can be done to be very, very clear with these young folks that it was grandma.

Grandma wanted this to happen, and I want to honor her wishes.

Even though from an estate planning standpoint, it didn't work out quite exactly the way that it might have.

In this case, you can make it right and you can make it right in so many wonderful ways without muddying the waters.

So I would strongly, strongly encourage you not to add money to the estate account.

I would strongly encourage you do it directly out of your own checkbook, but do it in such a way that it's very respectful of your mom, very respectful of her intentions, and that those intentions are really, really clearly communicated to her grandchildren.

If you believe, as I do, mom, still watching and you want to make her proud, so do it the right way and do it with respect to do it with love.

It'll be fine.

Just don't muddy the waters.

Max, can we clear up the waters for somebody else?

I think so.

We have a pretty short and sweet question, but we'll see about the answer.

It says asks, Can I do a 1035 exchange from a cash value life insurance policy to a fixed indexed annuity?

Thanks for all your help.

you're very welcome.

This is an interesting question and it kind of feeds back to our very first question that that that first question, our couple had 130,000 on our policy with $80,000 of cash value.

Could they?

In their case, they had very different goals.

But if their goals were to increase their income, could they take that $80,000, do a tax free exchange into a a single premium immediate annuity and start generating an income?

Yes, they can.

Yes, they can.

And you may recall from our answer to the folks who asked the very first question that taking all that money out normally is a taxable event, the life insurance company will issue a 1099.

You will then have to demonstrate to the IRS that you put in a X number of dollars over many, many years.

That becomes your cost basis and you pay tax on the difference.

A 1035 exchange is very different than that.

It takes the money directly from the life insurance contract and transmit it without you touching it into the annuity.

It's it can be a very efficient way to get money from a life insurance contract out without paying tax.

Now, single premium, immediate annuity sounds exactly what it is.

80,000 goes in and immediately they start sending out checks on on an 80,000 or a deposit could be as much as five or $6,000 a year.

That's very dependent on age.

That's one reason you might want to go to an annuity.

Another reason might be, hey, I'm not 80, I'm 60.

I got this money.

I don't need the life insurance anymore.

But gosh, I'm going to work another ten years.

It'd be great if I could build up some more retirement income.

There are annuities now that you can take that 80,000, drop it in at age 60 and that allows that annuity to, for lack of a better term, could for the next ten years.

And every year you wait the payout on that annuity goes up.

We've seen payouts over a ten year period go up to well over 7%.

So you've got an annuity, you've got dollars put in and every year you wait, it goes higher and higher.

That might be useful for you.

Another annuity you might look at is a hybrid annuity that provides long term care benefits.

So we take the money from the life insurance contract, put it into this hybrid annuity, and if sadly, we are in need of additional income to provide for the expenses of long term care, we can do exactly that from that annuity.

So you've got lots of different what flavors flavor views of annuities, lots of different characteristics, different characteristics of various flavors of annuities that may may fit your financial goals, may put you in a position where, hey, my life insurance that gosh, I bought it when I was young and I want to make sure my wife and kids are okay and now my wife's fine.

We've got great income and the kids are grown.

I don't need the life insurance.

Can I put it to better use?

And the answer in this case is almost always yes.

Just an interesting little wrinkle as a caveat.

Something for you to think about.

It doesn't go the other way.

I don't know why the IRS code does not permit an an annuity cash value to go into a life insurance contract.

It would make great sense if they were equal, if they could go either way, because in some cases, I don't need the life insurance, I could use an annuity.

In other cases, I don't need the annuity, but I sure could use life insurance.

And to be able to do that transfer without income taxes would be very, very useful.

But unfortunately, as of this moment, the rules do not permit.

Speaking of the rules, the rules are they will not.

Let me just go on for hours and hours.

We have a limited time frame for our more than money show.

So if you have found yourself informed, fantastic.

If you found yourself being even mildly entertained, I would call into question your good judgment.

But hopefully you picked up a couple ideas during the course of our show that you say, Wow, that's that's very, very interesting.

I think I can use that.

But if you're question your concern, your objective is a little different, has a slightly different twist or a vastly different twist.

Make sure you send those to us, Gene at ask MTM dot com G-E-N-E ask MTM dot com Can we answer every single question back to you?

We have a tremendous team, wonderful folks who are there for you.

There's absolutely no cost.

You get all that great information and maybe just maybe on a future share, you say, Hey, wait, everybody be quiet.

That's our question.

That's the one that we sent in.

That would be fabulous indeed.

Thank you for spending part of your evening with us.

We hope you were rewarded for that time and we hope you'll come back.

We're back here again in this studio to give you another edition of More Than Money.

Good Night