Intelligent Investing #60 - Glenn Leest, What happens to a client's investments when they pass away?

In this episode, Glenn breaks down the procedure that occurs when transferring a client's investments over to the beneficiary as well as what happens to the estate when they pass away. 

• The process that happens when transferring investments over to a beneficiary
• The process that happens when transferring investments over to the spouse
•  How this impacts the estate 
• Does the will take precedence over the beneficiary? 

Thanks for joining us on Intelligent Investing with Glenn Leest! Your go-to source for navigating the complex world of finance and becoming an intelligent investor. We appreciate your trust in us and your commitment to your own financial future.

Connect with Us:

Glenn Leest
Senior Investment Advisor
WT Wealth Management
Office Phone: (928) 225-2474 Office
Email: intelligentinvesting@wtwealthmanagement.com

Website: https://www.wtwealthmanagement.com/team/glenn-leest
Instagram: https://www.instagram.com/intelligentinvestingwithglenn/
Facebook: https://www.facebook.com/GlennLeestIntelligentInvesting/
YouTube: https://youtube.com/@IntelligentInvestingGlennLeest?si=d6S0y14lghz0eaHa


**Don't forget to subscribe, rate, and review our podcast on your favorite platform.
Your feedback helps us provide you with more valuable content.

We'll be back with more insights into intelligent investing and how it relates to your world.
Stay informed and make those smart financial choices.
Until next time, this is Intelligent Investing with Glenn Leest, helping you make your money work for you.
...

Transcript

Welcome to Intelligent Investing with Glenn Leest. In today's episode, we're going to be talking about what happens when a client passes away. What's the, the procedure for getting, uh, monies over to the beneficiaries settling the estate. It's actually something that happened to us recently, and so I think a lot of people have questions of the whole procedure of that.

So going to be a great episode. We're going to cover what that looks like and more on intelligent investing.

All right. Good morning. I'm here in the studio. It. It's a couple days after Turkey day. Um, I had a great Thanksgiving. Cody, how about you? Same here. Co. Cody's in the studio. He's my advisor assistant, and uh, he graduates and, uh, we're about three weeks now, three weeks time's flying by time’s flying. Uh, he has his finance degree and so he, he'll be graduating with that.

And then, we were actually talking about Cody going back to school and getting his, um, advanced degree, like as a certified financial planner or chartered financial analyst or something else. So, he's young and got the time and energy. So, but what I wanted to cover today on today's episode is when I've been doing this about 10 years as a financial advisor, and unfortunately, um, I've had to deal with a few of my clients, uh, passing away, um, sometimes unexpectedly, sometimes unexpectedly.

Um, and it's always. For me, it's actually hard when, when that, that happens because a lot of times my clients, I have a really good relationship with them and I really do care about them. And so, um, usually, you know, a family member reaches out and just says, Hey, I found your card and so and so's desk. Um, just wanted to let you know they had passed away, got some of their mail, looks like they have some investments with you.

Um, and, and usually what happens is that, um, the. Notification would be to let me know that that individual's passed on what date. And then from there we really can't do anything legal wise or account wise until we have the death certificate. So that is necessary that we have the death certificate to do anything.

And with Charles Schwab, you know, kind of how it works is you submit the death certificate along. Um, any relevant information for the beneficiaries. So, say you've got, you know, Johnny and he's got a hundred thousand dollars account and he's got four, four kids and he split 'em up, uh, one fourth each, so 25% or uh, 25,000 each, you know, to each, uh, beneficiary.

And you can change percentages however you want. You could say, I want one kid to get 90 and the other kid to get 10. You can do whatever you want, but say in this scenario, got four beneficiaries. So, what would happen is as soon as I. That the individuals passed away is I'd reach out to the four beneficiaries and say, hey, um, kind of want to let you know the process of things.

Uh, we need to open up some accounts for you at Charles Schwab. So, say Johnny had a regular investment account or a brokerage account. We would then open up a brokerage account for the beneficiary so that way the account's open and they can make the transfer internally at Schwab. They can say, hey, that 25,000, we can now send it over to that brokerage account.

Um, if the individuals that passed on say it's a, an IRA, then what we need to do is open up an inherited IRA. So, say same scenario, say you've, One account, it's an IRA, traditional IRA, and Johnny passes away a hundred thousand dollars for beneficiaries. You know, say it's his four sons. Um, each one of the sons would have to open up an inherited IRA, um, to be able to receive the funds.

Now, if one of the beneficiaries is as a spouse, they can just send the money directly into their. Their retirement account, as long as it's a traditional IRA or pre-tax retirement account, but that's only for spousal. Um, anyone that's not a spouse has to open up their own inherited IRA account. And in those, the reason why you have to inherit IRA, um, you can actually just take a one lump sum distribution.

I, I didn't talk about that. So, say, you know, Johnny's got his traditional IRA and. And Joey say it's his son and he says, I just want my $25,000. Now I don't want to open up an investment account, just send me the check. Well, that $25,000 is going to count as 100% income for, um, for Joey. So, a lot of times, you know, taking the money all as a one lump sum distribution may or may not makes sense depending on your tax situation.

Um, and you can have your inherited IRA anywhere you want. It doesn't have to be, just because the original accounts were at Schwab doesn't mean that's where you have to open up accounts. However, it does make it a little bit easier, um, to do everything at Schwab because it can all be done internally and I can facilitate it all.

So, kind of going back to that first example, um, Johnny has an account, it's a hundred thousand dollars brokerage account. You know, one his son, you know, Joey decides. Move the money into his brokerage account. So, the $25,000 would just move over. Um, you can liquidate the account and send over cash, or you can just send over everything as stocks.

So, say that a hundred thousand dollars account has a hundred shares of a company, you could just say, Hey, each, each one of the beneficiaries received 25 shares. And then you would just calculate, so that way, um, each one of the individuals gets, um, 25%, whatever that looks like between the stocks and investments and cash, all that.

So that was actually something that came up with one of our clients is that, um, the, the father that had passed away had bought a bunch of Amazon stock and, um, each one of the kids are young and they just said, Hey. We don't want to sell Amazon. It's a good, good, good solid company. In fact, one of, one of the kids actually works for Amazon.

So, he is like, no way am I selling this stuff. This is a great stock. And usually what happens is, if it's in a non-retirement account and say, you know, that 25,000 or $25,000 worth of investments and shares transfers over to the, uh, brokerage account for the beneficiary, they usually get what's called a step up, uh, at cost basis of death.

So, meaning that whatever the day of death was, The original account owner, that is the cost, the starting, uh, cost basis for the person that receives the money. So that's actually really important because, um, you can run into situations where maybe you bought a share of Amazon, you know, at a $1 and you never sold it, and now it's worth, you know, a hundred dollars.

Well, that, you know, that could be an embedded gain that you haven't realized yet. So, if you're just to transfer those over in another way, um, and you don’t. Step up at cost basis of death, you'd have like the beneficiary would have $99 worth of gains for each share so they could actually be hit with this huge tax bill.

So, making sure you get the, uh, step up of cost basis at death is huge because they now, Amazon's worth a hundred dollars a share and they are actually able to utilize that in the scenario well then the beneficiary. They're getting Amazon, they're basically, it's as if they purchase it at a hundred dollars.

So that's their new cost basis. So, um, that's huge because you know, whenever you have an estate, you want to have it be a blessing. You don't want to have it be this huge tax burden that your beneficiaries are incurring. Um, at least that's just in my opinion. So, um, with the inherited IRA in that same scenario, those.

The IRS has never taxed that money. And so, they basically put a, put some stipulations on when, uh, you have to start taking money out. And so, for example, say, um, Johnny has this traditional IRA, he's got a hundred thousand dollars in it. And that money has never been taxed. The IRS is saying, hey, we, we need to eventually tax this money.

Um, usually the individual Johnny would start having to do distributions at age 72 and a half. But if they passed away at say 50 or 60, you know, the IRS hasn't gotten those distributions yet. So, what happens is, um, the beneficiary who receives it has 10 years to, uh, distribute out the account, um, and do those, uh, distributions.

Now it can. All in year one, it can be none in year one and 20% in year two and then 10% of the next year you just have to have it done by the 10th year. So normally what happens is, um, if we have an inherited IRA, usually this is where doing some strategic planning is really huge because say, say the individual's got $25,000 in this inherited IRA, so we need to get that out over 10.

And, uh, we want to try and reduce our taxable liability, what we could do. So, Joey, you know, I, maybe I talked to him, he says, yeah, I want to work with you, Glen. I'm not going to just cash it out. I, you talked me off of that and why that's not a good idea with the taxes. So, I'm going to open up with this inherited IRA and what we can do is we can, um, pull money out each year and then use that same dollar amount to fund that individual's traditional IRA.

So, good example is say they've got 25,000 that's inherited IRA. Joey isn't funding any of his retirement accounts. Um, so he'd be able to do 6,000 per year in just his traditional IRA alone. So, we could technically do pull $6,000 out of that inherited IRA in account as ordinary income, but then we're putting $6,000 into his traditional IRA, so then it washes it out.

So basically, you could do that over a little, over four, four years and be able to get all the money out of this inherited IRA into a retirement account for Joey and not have incurred any taxes. Now, the only caveat with that is Johnny. Account, or Joey's account's going to be in a traditional IRA, so he's then going to have to wait until he's 59 and a half to withdraw it.

And that's like his retirement bucket. So, um, some people, you know, they like that idea and they want to reduce all the taxes. Some of them, they say, well, maybe I'll fund half of it into the IRA over the years and half of it, I'll just take his distributions or whatever. So, it's really up to the individual.

But that's something that I, I think a lot of, uh, individuals, as I've talked to them, had no idea that was even a possibility. And in fact, one of our, our clients that have passed away as meeting with the family members, one of them is self-employed, so he, he's got his own business. And so, we said, Hey, we can actually open up a, um, solo 401K and really contribute a, a substantial amount into your retirement account.

So, we could, and I think he was inheriting like maybe $80,000 out of a retirement account that would go into his, uh, inherited IRA. He could then say, okay, each year I'm going to fund roughly around 25,000 into my 401k. My. 401k that I, um, set up through my own company. So, he's the employer and the employee, so that would be a little over three years that he can make distributions and pretty much get that full 80 something thousand out of there and into a 401k with no taxable liability.

Um, now it's in his 401k. So 401ks have their own tax restrictions. You know, it's, it's pre-tax, it's uh, tax deferred growth, all that. But um, that's something that, you know, when. Here's what I say. When clients, um, if I have a client that passes away and say it's their kiddos or someone within the family that inherits the money, usually, you know, in that first phone call I say, hey look, um, so and so, and I have been working together for eight years or seven years and they really thought we did fantastic work.

Um, and so if you trust this person's judgment that passed away, you know, if you think they've got a good you, good acumen for picking great financial advisors. Um, why don't you try working with us for six months or a year and see how you like it? Um, you don't have to work with us. We don't want to, but why don't we give it a shot?

Um, I think you'd really like the work that we do, and we can keep everything here at Schwab, all that. Um, and so a lot of people are like, okay, yeah, let's do that. That sounds good. Some people, they. You know, unfortunately seen some people just take the cash and run and, uh, I had one, one client that passed away and his son picked up like 1.5 million or something.

And um, I have no idea what he did with it. He just, Distributed out the money. Um, and I think some of it was, is all an irate too. So, uh, who knows what the tax impact on that was. So, um, but yeah, that's kind of the status of things. When someone passes away the process is you, you have to first have the, the death certificate and then each of the beneficiaries we have to reach out and say, hey, what do you want to do?

You know, if you want to work with us, we'd love to, we can get the process started, get it all done on Schwab. Um, and even we can get it started now and get the process done, and then we can decide, you know, in the next couple weeks if you want to work with us, but we can at least get the process done for you, uh, as a courtesy to you.

And you know, that, uh, the, uh, original client that had passed away, you know, just to say, Hey, I, you know, worked with them for so many years and they were great. You know, I wanna, you know, offer this, you know, just help you, you know, through the process. So, um, interesting thing about beneficiaries is, um, if you're married, you have to have your spouse's beneficiary unless your spouse signs off on them not being a beneficiary.

So, you could technically, you know, husband and wife. The husband's IRA could, could technically have the kid as beneficiary, but the wife has to approve of it. Um, and then if you're not married, you can have whoever you want as beneficiary. Um, all you need is their name, date of birth, and if you have their social, great, but if you don't, that's fine too.

Um, I actually had one client years ago, um, that had passed away kind of unexpectedly in uh, and. Put someone in their life as beneficiary. That wasn't family. They were just really close. Um, and this person didn't even know it. He was like a young guy. And, um, I remember calling him up and said, hey, so and so passed away.

Um, uh, I, you know, I was managing, managing their investments and, um, they left you some money. Uh, when do you have time? Uh, because it's a substantial amount., it was in the six figures. The guy was kind of like floored. He was like, what? And I was like, yeah, you know, this individual had bought some stock, I think they bought like APS stock or something like that, like 30 years ago and they just never sold.

And so, it accumulated all this, uh, growth in it. Um, so yeah, you can have beneficiaries, whoever you want. Um, I usually family is usually the first place to go, but you could have, um, charities, um, I've got a couple clients that have listed charities. You know, say they say, hey, half my account goes as charity.

The other half goes to family, and you can change your beneficiaries at any point in time. The one thing we did find out Cody, was, um, and, and I will say this with a caveat, I'm pretty sure this is the way it goes, but I'm not an estate planning attorney, so, uh, double check on this, but I believe the, the up the will or the updated trust documents, um, Supersedes whatever's on Schwab for beneficiaries.

Because we had this set set up where, you know, the individual had passed away, had four, four kiddos, and, um, each one of the kiddos in Schwab was list as 25%, um, beneficiary. But, um, in the last, like week before the client passed away, they'd actually gotten married. And, um, so now their trust and their will document had actually, um, been updated to say instead of it being split four ways, we're actually going to add my current spouse in there and split five ways.

And so, before we even had a chance to update anything at Schwab, the client had passed away. And so, um, when I submit all the documentation to Schwab, you know, I just said, here's the most updated version of the will. Please note that, you know, we have one other beneficiary on there, splitting it five ways instead of four.

And. We're good. You know, that's, you know, what the most updated will, you know, sometimes can supersede the beneficiaries. I don't know exactly how that works on the, the legal side, but that's just what I was told by Schwab as far as that works. Um, and then usually the turnaround time. So, from the day that I have all the paperwork needed, um, and the client or the beneficiary decides to work with me, it's usually about a week, week and a half turnaround time before.

The account is open and any, uh, money sent over. So, it's actually pretty quick. Um, and I think the slowest, um, part of the whole process for a lot of people is getting the death certificate, um, just because of covid and, and uh, backups and labor issues. I think a lot of times it's like three to four weeks sometimes.

So, um, you know, in that. That limbo time, there's not really much you can do. Um, if you call the custodian and you say, hey, you know, this particular client has passed away, they'll restrict the accounts. Meaning they'll say, okay, now that we know this person's passing away or passed away, you know, we will restrict them as like um.

As an estate account. And so, like no one can actually make any changes on it until the estate is sorted out. So that's one thing. If you let your custodian know that they passed away, they'll automatically, you know, just put that restriction on. And that's, I think, across the board with all custodians, which makes sense, you know, that that's how it should be.

So, um, I guess one of the things I want to kind of leave with today is, um, in my last episode I talked about my near-death life experience, near death experience. Um, and it really kind of shook me up. I was, um, my airway swelled. Two and a half millimeters when normally it's supposed to be like 20 something millimeters.

That's what the guy said. Um, so it was like the size of a tiny straw. Um, and it almost swelled all the way shut. I'm, I'm super glad I went to the hospital when I did because they pump me full of oxygen and gave me all sorts of drugs to reduce the swelling and, and all that, but, One of the things I, you know, made me look again, is I, um, I had actually probably about a couple months before that got a bunch of different life insurance policies set up.

I've always had life insurance, but I recently added a whole lot more life insurance coverage. And, um, the last thing I need to do in my own situations, I need to get a, uh, a will and a trust set up. So, the idea is this life insurance policy, I've got one on me, one on my wife. They're both about the same because even though.

I work, you know, the actual day job, my wife's contribution to the equation is just as valuable. She stays at home, home schools a kid, uh, home schools all three of our kids. And so, without her, I'm equally, you know, um, devastated financially and then obviously emotionally and all that. But from a financial standpoint, I look at it as husband and wife, both have equal value, um, in that equation.

So, I think we, I recently bumped up my life insurance. Three, three and a half million or something like that. Um, which I was always doing like a hundred to a hundred, 500,000. But then someone had told me that you want to, you know, calculate all your debts plus at least 10 to 15 years of your income. Plus, if you have plans to, you know, send your kids to college, or pay for a wedding or you know, whatever.

And so, you start looking at it and go, wow, I do not have enough coverage. And so, I've got the coverage in place, which I was glad. Was kind of a little bit nerve wracked that I didn't have a will or trust set up. And I kind of run most of the finances. So, my wife kind of has a good, uh, uh, pulse on what's going on, but she doesn't know all the details.

So, one of the things I want to do after that event is really get everything detailed. Um, like in a binder you can say, here's all the accounts, here's the balances, you know, here's who you want. To, um, I have it set up basically, so if something happens to me, the firm will, you know, they'll be able to help manage the money, um, and, and, you know, get it distributed out properly.

Um, that really makes me feel good too, because then, uh, I know it's, uh, something my wife can be taking care of something ever happened to me and it's not a burden. Um, and I've got kind of the people in place to help manage that, but I, I don't have the will and I don't have the trust. And so, the will just to kind of give you a quick summary is like your basic document, so and so gets X amount of dollars, so, and.

This so and so gets the kitchen China, you know, so and so gets half the house or whatever. It's kind of your basic document. Um, a trust is much more complicated. It has a lot more you can add in like caveats to say, you know, little Johnny gets $25,000 when he turns 25 and then another 25,000 when he turns 35, and then another 25 when they turn 45.

And this is all contingent on Johnny not being incarcerated, Johnny. Being, you know, on drugs or Johnny, whatever you want to do. Like you can put, um, stipulations in, in a trust, um, or you can even take it a step further and say, hey, we're going to open up an investment account for you in the name of the trust and you'll get income off of it so that way you can safeguard.

Um, cause one of the things I've seen that has really been challenging is if someone that's really young gets a large sum of money, the temptation for them to just blow through it. Massive. And I've seen it happen. Unfortunately. I had one client that, um, they had came into some inheritance money and they were maybe like 19 or 20, it was like 350, something like that, a thousand dollars.

And they blew through all of it in two years. And it wasn't even on anything like noteworthy. They blew it on like food and going out to the movies and buying like clothes at Ross, it was kind of like mind boggling that they could go through that much money. So, um, we're actually going to do a full series on.

Planning, uh, we actually just acquired a estate planning division, um, out of, uh, Oak Creek, and then we'll also have a Flagstaff, uh, rep. Um, so we, we'll actually be able to do, uh, estate planning and trust accounts in house. So that's a definitely plus for my clients is that they get the investment side. If they want to have help on their taxes, they can get help with that, you know, in house.

And then they also have an in-house, uh, estate planning attorney. So, we're. Our game plan is to be the family office. So, with that, thanks for joining us today. Make sure to check out our other episodes, like and subscribe. If you want to gimme a call number here is (928) 225-2474. Or you can email me at intelligentinvesting@wtwealthmanagemeant.com.

Glenn Leest and Cody Harmon signing off. You guys have a great rest of your week.