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Can a Charitable Remainder Unitrust Protect Your Heirs From the New IRA Tax Rules? - YouTube
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hi this is Jim Lange in this video
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series I have talked about the death of
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the stretch IRA which is the proposed
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law that would limit the ability of your
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children or grandchildren or other non
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spousal heirs to defer income taxes over
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their lifetimes with this proposed
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legislation known as the death of the
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stretch IRA and I've explained what a
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stretch IRA is and what the depth of the
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stretch IRA would do and I've talked
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about some various strategies but what
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this video will concentrate on is one
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strategy that will not work for most
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people but for the people who it might
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work for it could actually have enormous
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positive impact for your family and that
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is a charitable remainder trust the
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first thing you're saying it's way way
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way Jim I'm charitable but I'm not more
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charitable than leaving money to my kids
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I'd love to leave some money to charity
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but my kids are first so let's assume
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that all right let's assume that you're
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much more interested in providing for
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your children than the charity so why
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would I even start by considering a
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charitable remainder trust in lieu of
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money going to your children and by the
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way chair remainder trust is not the
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starting point the starting point
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potentially using the disclaimers also
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discussed in a prior video and discussed
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in the webinar which we will give that
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give you access to the end of this video
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talked about the language cascading
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beneficiary plan and disclaimers and
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flexible estate planning we're typically
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even with the proposal and this by the
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way is something that you should not be
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doing now but you should only be doing
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after the proposed law actually becomes
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law but let me give you one potential
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scenario and let's assume for
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discussions sake that you have a 1
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million four hundred and fifty thousand
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dollar IRA and let's assume for
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discussion say
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and let's let's leave your spouse out of
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it although typically we leave remain
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the spouse is the primary beneficiary
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but literally the spouse out of this
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analysis let's assume that you have a 1
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million four hundred and fifty thousand
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dollar IRA and let's assume that your
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beneficiary is your is your son and you
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only have one child so what would we
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recommend is at least one interesting
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possibility well first consistent with
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the proposed law is your son would it be
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able to shield 450 thousand dollars from
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the death of the stretch IRA
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registration would be able to stretch
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four hundred and fifty thousand dollars
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of the inherited IRA just like under
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current law but the problem is what
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about the remaining million so what
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would happen assuming that they pass the
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law you die with 1.45 million dollars in
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your I'm sorry 1 million four hundred
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and fifty thousand dollars in your IRA
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you leave four hundred and fifty
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thousand dollars to your child what
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happens to that million let's forget
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about growth for a moment within five
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years of your desk your child is going
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to have to pay income tax on that entire
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million dollars leaving him let's say
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six hundred thousand dollars alright
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well that's what's so wonderful so why
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the cherub remainder trust what's
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interesting about the chair of the
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remainder trust and here's altima tlie
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i'm going to oversimplify for a moment
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what a chair remainder trust would say
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it would say income and there be
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actually a technical definition of
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income that isn't exactly income but for
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our purposes what's oversimplifying
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called income income for the life of the
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child and then at the child's death
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whatever's left goes to charity alright
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so why how could that possibly be better
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than just leaving the to your children
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out right well if you leave it to your
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children out right again using that
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million-dollar example and they get
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whacked with a four hundred thousand
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dollar tax bill then may only get six
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hundred thousand dollars left and that's
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that they're earning income on six
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hundred thousand dollars
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the beauty of the charitable remainder
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unitrust is it is not subject to income
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tax until you actually take withdrawals
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for the child so that million-dollar
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stays intact it's not whacked in the
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first five years yes your child's going
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to have to pay income taxes on the
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annual withdraws but that's going to
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only be on the income or a portion much
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smaller portion and getting laughed at
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the whole time so let's oversimplify or
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is your child better off with the income
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on six hundred thousand dollars and the
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ability to eat into that income or or
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spend the purpose of that six hundred
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thousand dollars or are they better off
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with the income but again they lose the
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corpus or the principal at their death
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so the answer of course is I'm going to
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answer like an attorney it depends what
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is it depends on it depends on how well
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a bunch of factors but it really depends
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on how long the child's going to live
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because again the cut isn't going to get
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the big income tax hits isn't going to
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get the big income tax acceleration so
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why don't we compare two examples you
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leave a million dollars to a cut or a
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million dollars to I charitably I'm
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sorry million dollars twitch to a clot
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or a million dollars to your child out
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right under the proposed law again don't
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do this now and we do this when the
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proposal are actually passes so what you
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can see is if you leave the million
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dollars to your child yes he gets
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whacked with taxes he reinvest that
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money this red line becomes his lips a
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future ark using certain reasonable
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assumptions now instead and by the way
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we're basic to oversimplify we're saying
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okay the money is going to get whacked
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is four hundred thousand dollars left
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I'm sorry six hundred thousand dollars
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left that money is invested
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and we're going to add that investment
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or that interest income to the balance
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so it continues to grow all right
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alternative number to share the
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remainder trust child's getting the only
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the income not the corpus but he's
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getting it on the full million so he's
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starting at zero compared to say you
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know a million minus the taxes but he's
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getting income on a full million so he's
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going to eventually catch up the
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break-even point using the set of
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functions here that we're using a
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similar around 73 but ultimately be
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significantly higher by about five
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hundred thousand dollars over the
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child's life than if you just left it to
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the child all right so that looks pretty
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interesting however you also have to
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take into account some of the negatives
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the cost to draft it not free by the way
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the class adapted is relatively
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insignificant compared to the cost of
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maintaining it after you die because now
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you need a trustee you need a tax return
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you need a tax return the throws off a
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k1 so you're mocking up the
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beneficiaries tax return there are some
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qualification so we don't like doing it
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for small amounts and now if you look at
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the original book that I wrote about
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this which was called the ultimate
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retirement estate plan for your
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million-dollar IRA I was much more
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enthusiastic about share of a remainder
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trust because at that time we didn't
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know about the four hundred and fifty
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thousand dollar exclusion so in the
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original book he has a six hundred
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thousand dollar IRA and I went through
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some of this analysis it would lead you
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to think hey the club might be a pretty
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good thing on a six hundred thousand
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dollar IRA for for one beneficiary well
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since now we can exclude 450 does it
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make sense to do a chair remainder trust
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for 150,000 the answer's no because the
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cost of maintaining it would exceed the
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tax savings on the other hand if you
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talk about a million dollars after the
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exclusion for
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beneficiary is certainly something to
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strongly consider the way you say what
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if the child dies early then the green
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child's disinherited and that is also a
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legitimate objection and our answer to
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that is one you take some of the extra
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income that you received from the
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getting the income on the million
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compared to the six hundred thousand
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dollars by a cheap term life insurance
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policy on the beneficiary that is the
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child so if the child dies early the
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grandchild will be compensated by the
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life insurance policy anyway we've run
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numbers on that and that looks very
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positive so there's a lot of things you
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can do you know with a chair remainder
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trust it's obviously not for everybody
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now why wouldn't I say you should do
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this now because the existing law with
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the stretch IRA is much more favorable
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than the charitable remainder trust so
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unless you're terribly charitable or
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there's other very good reasons to do it
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I would not do this until the proposed
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law actually passes then check in with
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the drafting attorney or the estate
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planner see if it still makes sense if
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it does seriously consider using a
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charitable remainder trust as the
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ultimate beneficiary of your IRA instead
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of your children and the ultimate result
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assuming everything goes right and it's
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administered appropriately and it's the
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right amount is that your child will get
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a higher income whack get much more
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money on their over their lifetime maybe
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by a couple hundred thousand dollars or
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more charity is going to get some money
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at the end and the big loser is the IRS
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I hope this is helpful if you are more
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interested in this and related topics I
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would urge you to listen to our a little
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bit more than an hour but it's called
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hour-long webinar which you can access
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by clicking on the link below
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and there's other additional resources
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if you listen to that webinar will give
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you access to books and more videos and
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other resources that will help you make
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better decisions thank you
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