There are a lot of priorities from the Biden-Harris Administration Immediate Priorities, American Rescue Plan, and the American Jobs Plan, just to name a few. Attorney Carcone will help us to break down what changes are expected in the next few years.

Guest:

Colleen Carcone J.D., CFP®, is a professor at California Lutheran University, as well as an Income Tax and Estate Planner, and author. Colleen is a tax attorney with more than twenty years of experience who has escaped practicing law and now works in-house for a financial services company partnering with high-net-worth individuals. Colleen has been teaching estate planning and income tax planning for various programs for twelve years. An estate planning expert, Colleen co-authored Principles of Estate Planning, the third edition of which was published in 2018 and has been quoted in many articles. Colleen has served as a Director of Wealth Planning Strategies for TIAA for more than 14 years, where she has been serving the firm’s high-net-worth families with specialized advice and sophisticated financial, income tax, and estate planning strategies.

Host:

Hossein Salehi, Ph.D., CFP® is an assistant professor in Financial Planning at California Lutheran University. He has a doctorate in personal financial planning and is a Certified Financial Planner (CFP®). He also has an M.Sc. in Personal Financial Planning from Texas Tech University, an M.A. in Economics from Texas Tech University, and an M.Sc. in Financial Management from Tehran University.

In the Estate Planning Section from the comprehensive financial planning, we often recommend clients to write a “final letter of last instruction.” A final letter of last instruction details the client’s wishes regarding the disposition of specific tangible property, as well as funeral and burial wishes.  But, this letter is a communication tool between the client and his or her estate’s executor, in the event of your death.  Will that be enough to help your clients go through the three stages of Widowhood? We are so glad to have Dr. Rehl return to continue the discussion of what matters the most?

Resources of the legacy letter.

Guest:

Kathleen M. Rehl, Ph.D., CFP®, CeFT® wrote the award-winning book, Moving Forward on Your Own: A Financial Guidebook for Widows after the death of her late husband. More than 75,000 copies of this book are in circulation. She owned Dr. Rehl Financial Advisors for almost 18 years before retiring to a six-year encore career empowering widows and their advisors through her speaking, writing, and doing research about widows. Her work has been featured in articles published by the New York Times, Wall Street Journal, Kiplinger’s, CNBC, USA Today, and many others. She happily “reFired” on her 73rd birthday in 2020. Kathleen and her new husband, Charlie, concentrate on family, fun, focused-purpose, friends, and fitness. She enjoys writing legacy poetry and stories plus assisting nonprofits. Her website is at https://kathleenDr. Rehl.com.

Host:

Chia-Li Chien, Ph.D., CFP®, PMP®, CPBC, is an Assistant Professor and Director of the Financial Planning Program of California Lutheran University. Before her academic role, she held several senior management positions in Fortune 500 companies, including Diageo, ABB, CIGNA, and RSA Insurance Group. Dr. Chien is a frequent speaker about succession planning at national conferences and has published three books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” She publishes research on succession topics in a variety of academic and practitioner research journals. Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®). Chia-Li Chien is pronounced Jolly Jan.

Certified Financial Planner or CFP® often recommends the clients set up a trust when their financial situation warrants such a valuable tool.  One out of five financial advisors is a CFP® accordingly to CFP Board or Certified Financial Planner Board of Standards, Inc. There are three general business models in the financial service industry. In this interview, Mr. Cosentino will help us better serve the clients an understanding of what trust companies do and how to communicate that with the clients.

Guest:

Eric W. Cosentino, CTFA, is a Vice President and Private Wealth Advisor with FineMark National Bank & Trust. Mr. Cosentino has nearly 30 years of experience in the financial services industry, with half of that time in Southwest Florida. He works directly with clients to build and preserve their wealth while developing meaningful relationships in Lee and Collier counties. Mr. Cosentino holds a Bachelor of Arts from the University of Massachusetts at Amherst and has earned the Certified Trust and Financial Advisor (CTFA) designation. He also completed National Trust School at the University of Chicago and the National Graduate Trust School at Northwestern University. Mr. Cosentino currently serves as a board member and volunteer for the STARability Foundation, a local non-profit that provides educational, vocational, and social services to individuals with disabilities. He also serves as the Treasurer and volunteer for Delnor-Wiggins Pass State Park, Community Service Organization.

Host:

Chia-Li Chien, Ph.D., CFP®, PMP®, CPBC, is an Assistant Professor and Director of the Financial Planning Program of California Lutheran University. Before her academic role, she held several senior management positions in Fortune 500 companies, including Diageo, ABB, CIGNA, and RSA Insurance Group. Dr. Chien is a frequent speaker about succession planning at national conferences and has published three books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” She publishes research on succession topics in a variety of academic and practitioner research journals. Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®). Chia-Li Chien is pronounced Jolly Jan.

California Lutheran University has a not-for-credit course in Introduction to Personal Finance. The course is designed for working adults to enhance their financial journey. The course provides an overview of the financial journey and necessary tools in earning, tax, credit scores, loans, housing decisions, savings, investment, retirement, and risk management. Our goal is to help participants reduce spending/debt and increase saving/wealth.

CBC Federal Credit Union sponsors this course. Space is limited to 20 faculty or staff of California Lutheran University. If you are interested in a complimentary not-for-profit college course, valued at $955, please register by Nov. 13, 2020.

P.S. Wiley sponsors the textbook.  Envestnet sponsors the financial planning industry’s top software, MoneyGuidePro.

PPS. Upon completion of this course, you have the option to sign-up for one-on-one financial counseling/planning sessions.

CPE-NCR950 Intro to Personal Finance Flyer

We could all agree that 2020 is an outlier year compared to the historical cycle. The new normal shapes our life going forward.  In this session, we will discuss the following questions:

• Tax Code Refresher
• Retirement Accounts
• Health Savings Accounts
• Tax Loss Harvesting
• Asset Location Optimization
• Charitable Donations

Register now, you will receive a confirmation email containing information about joining the meeting. This is a webinar you won’t want to miss!

About Jeremy D Witbeck, MBA, CFA, CFP®

Jeremy D Witbeck, MBA, CFA, CFP® is a Partner with Polaris Greystone Financial Group, LLC. Before joining Polaris Greystone, Jeremy worked as a Portfolio Manager at a Registered Investment Adviser in the greater Los Angeles area where he built customized portfolios for high net worth clients and developed client relations.

Jeremy has an extensive background in the financial service industry and holds the Chartered Financial Analyst (CFA®) charter and Certified Financial Planner (CFP®) designation.

What is International Financial Planning?   

As globalization becomes more apparent in our lives, there is an increase in the number of people moving around the world and owning properties in more than one country. We are all global citizens which means we have the ability to live where we choose, however, what happens to your finances and taxes when you make the big move? 

Ashley Murphy is a tri-citizen of the USA, Australia, and the UK. He has had years of first-hand experience of what it is like to not only move to another culture but deal with the side no one really talks about – finance, insurance, and tax. His niche of international financial planning developed from his experience when moving from Australia to the USA in 2005. He spent years looking for more information on international financial planning but couldn’t find what he was seeking. Murphy decided to bring the information together and help others who are in the same boat. He is a CFP in America and is currently studying the CFP in Australia which will make him one of the few financial advisors to be qualified in both countries. 

International financial planning is working with clients that have moved, are moving, or own properties, in two countries. The clients Murphy works with are in various stages of their expatriate journey, someone who has been sent by their firm to a foreign country, there has to be something already in motion, he said. Whether that is a job offer, or they have already moved, or the dream the couple had is finally being planned. The clients come to him with a set of concerns or questions, seeking the answers they need to continue their motion of moving. 

Financial Planner’s Change in Australia 

In Australia, there has been a recent decrease in the number of those working in the financial planning field due to regulation changes, Murphy explained. Last year, there were 2400 departures and just 15 entrants into the financial planning field. The commissions have now been restructured to be fee-only changing the way planners work and interact with their clients, Murphy said. This new change is difficult for any financial institutes to adopt, including CFPs.

This new commissions structure is different from how commissions work in the US. In the US there are typically three business models; the first model is commission only, the second model is commission and fee-based, and the third model is fee-only. 

Murphy shared an example with the webinar about how this new change in Australia is creating an expensive barrier. “If someone with a 401K plan is seeking advice for their average funds, they will want to move from a high-cost structure to a low-cost structure,” Murphy said. This is a relatively simple and easy answer that people are seeking the recommendations for but the high fees are creating an expensive barrier, he said. The commission restructuring has changed the way financial planners need to work in Australia.  “Having clients in different countries with different complexities, we’ve really had to tweak how we work with them to make it profitable,” Murphy said. 

Knowing Your Countries

Every country is different with their taxes, retirement plans, insurance, etc. therefore as an international financial planner it is important that you know both the countries you are working with, he said. Taking on a client with countries that you are not specialized in, nor have worked with before, is a huge challenge and it will consume your time with trying to learn and understand how it works for the client. It sounds very ethnocentric, he said, but it is important to concentrate on certain information. There is not enough time in the day to work with clients who have a multitude of living in other countries. As a planner, you must know your limits of much you can take on and help your clients. Therefore, you must know when to turn them to someone that can help them more than you can.

Murphy’s specialty in Australia and America is what makes his business effective. He understands the financial services and planning of both countries and has even had first-hand experience of living in both.  “Clients are seeking to reduce the number of contact points. People are busy, so if they can meet with someone that understands both environments and has this knowledge set, it is beneficial to them. You need the US financial knowledge, the knowledge of the foreign country, and the knowledge of how the two work together. It’s going to be unique” he said.  Every combination of countries is different which is why it is important to have your niche. 

Murphy also explained that when working with an international financial planner, it is best to work with someone who lives in the same country you are currently living in. Murphy works and lives in the US, therefore, although his knowledge of Australia’s financial planning is fantastic, it will never be quite as good as someone who is currently living there. “Someone that lives and breathes the news cycles, the updates in retirement and tax laws, they are hearing about the changes that are happening,” he said.  

Working with Tax

Each country’s tax treaty differentiates, he said. It’s important to know when the treaty came into existence in relation to the other country. This is why it is a good idea to work with a handful of tax attorneys to seek their advice and bounce it off one another as they will all have varying opinions. Further, you need to have trust in the service providers, but also in yourself. Take the time to weigh in your thoughts even if you’re not an expert by using knowledge and interpretations, Murphy said. 

“You need to be competent,” he said, “The riches are in the niches.” When a client works with someone who has made it their career to specialize in those countries, it helps them more and you. 

The Future

When many clients move across borders they have the benefits from the employer but still need help. They have tax help but it is more compliant for the employer with little to no focus on personal finances. “I think we’re beginning to see the very start of executive cross-boarding financial services,” Murphy said. 

The generation of baby-boomers is beginning to move into retirement. During this time, many decide to migrate to another country and live their dreams on a warm, tropical beach or an apartment in a European city. Retirement cross-border planning could be a niche that the financial industry may see developing in the next few years. 

About Ashley Murphy:

Ashley is a tri-citizen of the USA, Australia, and the UK. In 2005, he ventured to the United States to pursue his dreams in the San Francisco Bay Area.

He has been quoted in the Wall Street Journal and was profiled in Financial Advisor Magazine. From 2014 – 2017, Ashley taught aspiring CFP candidates at UC Berkeley Extension and Golden Gate University. Presently, he is a Knowledge Circle host for the International and Cross-Border Knowledge Circle with the FPA and a regular conference speaker. He was awarded the CFP® designation in 2012 and voted Secretary of FPA NexGen the same year. Ashley is currently undertaking CFP® studies in Australia which will make him one of the few financial advisors qualified in both countries when completed.

About the Host:

Dr. Chia-Li Chien is a succession program director at Value Growth Institute, a succession consulting practice dedicated to helping business owners increase their firms’ equity value. Before her private consulting practice, she held several senior management positions in Fortune 500 companies. Dr. Chien is a director of the financial planning program at the School of Management at California Lutheran University. Dr. Chien is a frequent speaker about succession and retirement planning at national conferences and has published three award-winning books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®).

About the Author:

Rosie Baker is an undergraduate student at California Lutheran University, graduating in May 2021. She is studying Communication with an emphasis in PR and Advertising and has a minor in Creative Writing. In July 2020, she published her first book, Mirrors & Windows: Unlocking a New Framework to Envision Your Success, with New Degree Press. 

Dr. Chien interviewed Ashley Murphy, CFP®, AIF® on “What is International Financial Planning?” on Dec 2, 2020, at 1:00pm PST.

Globalization fuels the need to move top talents to enable them to expand their markets. As a result of these talents who are working outside of their home countries, their wealth grows internationally. Hence, international financial planning becomes complex. In this session, we will discuss the following questions:

• What are clients with dual or tri-citizen typically looking for in planning?
• What can financial planning professionals do to help dual or tri-citizen clients?
• How about a non-us citizen spouse?
• Why is international financial planning in demand?

Resource: Global Financial Planning Institute

 What is Section 1202?

The Qualified Small Business Stock (“QSBS”) gains exclusion is known as Internal Revenue Code Section 1202. Section 1202 allows a portion or 100% eligible capital gains from QSBS to be excluded from federal income tax. The exclusion applies only to QSBS held for more than five years, and the percentage of eligible gain excluded by Section 1202 depends on when the shareholder acquired the QSB stock. If a taxpayer acquired QSBS after September 27, 2010, he or she might exclude the 100% eligible gain on the sale of the QSBS.

What is a Qualified Small Business?

In 2018, the Tax Cuts and Jobs Act (TCJA) added section 199A of the Code for the benefit on the Qualified Business Income from a Qualified Trade or Business. For section 199A purposes, Qualified Businesses under section 1202 are also Qualified Trade or Businesses under Section 199A. According to the definition of Qualified Trade or Business, most businesses involving services performed in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, consulting, athletics, financial services, or brokerage services are not Qualified Business for Section 1202. A business such as banking, insurance, investing, also does not qualify (Lee, 2019; IRS, 2020).

While the tax benefits for Section 1202 are very generous, a QSBS must meet all of the following tests:

• It must be original issuance stocks in a C corporation (that is, not S corporation stock).
• It must have been originally issued after August 10, 1993.
• As of the date the stock was issued, the corporation was a domestic C corporation with total gross assets of $50 million or less (a) at all times after August 9, 1993, and before the stock was issued, and (b) immediately after the stock was issued.
• You must have acquired the stock at its original issue (either directly or through an underwriter), either in exchange for money or other property (other than stock) or as pay for services (other than as an underwriter) to the corporation.
• During substantially all the time you held the stock: The corporation was a C corporation; At least 80% of the value of the corporation’s assets were used in the active conduct of one or more qualified businesses; and the corporation wasn’t a foreign corporation (IRS, 2020).

The Benefits of Section 1202

Although Section 1202 requires the QSBS to be C corporation’s stocks, companies currently operating other types such as partnerships might benefit from Section 1202 by converting under state law, being a C corporation, or transferring their assets to a newly organized corporation. The eligible gain is calculated on the date the assets contributed to the C corporation. Besides, Section 1202 permits taxpayers to hold QSBS through any partnership, S corporation, RIC, or common trust fund.

It is worth noting that the gross assets test is based on an adjusted basis rather than the fair market value of the assets. That cost-basis rule is more favorable to the business owners or investors who contribute high appreciated but low adjusted basis assets to a C corporation. However, if a taxpayer contributes property (other than money or stock) to a qualified small business corporation in exchange for stock in the corporation, the stock’s basis will be no less than the fair market value of the contributed property. As a result, taxpayers have the opportunity to increase tenfold the amount of gain subject to partial or complete exclusion by contributing appreciated property (Lee, 2019). 

Furthermore, Internal Revenue Code Section 1045 allows a taxpayer to roll over the gain on a QSBS disposition into another QSBS of a different issuer. The QSBS must be held for more than six months prior to disposition, and the rollover must occur within 60 days. That might provide a planning opportunity for those investors who wish to delay the capital gain from Section 1202.

To learn more about the Financial Planning Program at California Lutheran University contact Graduate Admission at clugrad@CalLutheran.edu or visit us at https://www.callutheran.edu/fp​.

About the Speaker:

Hratch J Karakachian, CPA, ESQ, is a senior adjunct faculty member in California Lutheran University School of Management.  He has been teaching in the MBA in Financial Planning Program since 2013.  He has taught Principles of Estate Planning, Income Tax and Strategy, Managerial Accounting and Foundations of Accounting and Finance courses.

About the Host:

Dr. Chia-Li Chien is a succession program director at Value Growth Institute, a succession consulting practice dedicated to helping business owners increase the equity value of their firms. Before her private consulting practice, she held several senior management positions in Fortune 500 companies. Dr. Chien is a director of the financial planning program in the School of Management at California Lutheran University. Dr. Chien is a frequent speaker about succession and retirement planning at national conferences and has published three books, including her most recent publication, “Enhancing Retirement Success Rates in the United States.” Dr. Chien serves on the boards of various national financial service associations. She holds a doctorate in financial planning and is a Certified Financial Planner (CFP®) as well as Project Management Professional (PMP®). 

About the Author:

Jade Zhang is a graduate student at California Lutheran University expecting to graduate in July 2020. She is studying for a Master of Science in Financial Planning. 

References:

IRS. (2020). 2019 Instructions for Schedule D (Rev. January 2020): Exclusion of Gain on Qualified Small Business (QSB) Stock. Retrieved from https://www.irs.gov/instructions/i1040sd.

Lee, Paul. (2019 ). QSBS: The Quest for Quantum Exclusions. 8th Annual Institute on Tax, Estate Planning and The world Economy. Retrieved from https://drive.google.com/file/d/1-EDhRK6w5RRUdSoLAq7qHQZFBZQfVdRc/view

• Key planning ideas you can bring to your clients, that take advantage of today’s depressed stock prices and low-interest rates.
• Roth Conversions, GRATS, Intra Family Loans, Sales to Grantor Trusts and Charitable Lead Trusts (CLTs).
• Examples you can use with your clients on why these planning opportunities may be especially powerful today.

Speakers:  Anne Gifford-Ewing, JD, and Jeff Ruderman, CFP®

Anne Gifford Ewing is a Senior Trust and Estate Specialist with Capital Group Private Client Services, focusing on trust, estate, tax, and personal planning matters. Prior to joining our firm in 2019, Anne spent more than a decade in private legal practice at Gifford, Dearing & Abernathy, LLP in Los Angeles, during which time she was recognized as Certified Specialist in Estate Planning, Trust & Probate Law by the California Board of Legal Specialization of the State Bar of California. She received her JD from University of California Hastings College of the Law, and both her MA and BA from Stanford University. Before law school, Anne completed Capital Group’s multi-year management training program. Anne is the 2018-2019 President of the Los Angeles Estate Planning Council, and a past board member of the Fiduciary Roundtable of San Gabriel Valley. Anne has been a frequent speaker at various bar associations and professional organization meetings. She is based in our downtown Los Angeles office.

Jeff Ruderman is a Wealth Strategist for Capital Group Private Client Services. He joined Capital Group in 2011 as a senior client relationship specialist, prior to joining Capital Group he spent over five years as an assistant vice president, senior private client associate with Bernstein Global Wealth Management. As a member of the Wealth Advisory Group, Jeff provides advice on various wealth planning topics, specializing in the areas of wealth transfer, charitable planning, and working with private business owners. Jeff earned a BA with Honors in International Finance and Marketing from the University of Miami and also studied International Business at the Hogeschool Voor Economische Studies in Amsterdam. He holds a professional designation in personal financial planning from the University of Georgia and is a CFP®. He is based in our Los Angeles office.

When: May 7, 2020, 01:00 PM Pacific Time (US and Canada)

Related slides: Capital Group Planning in a Pandemic.

Attorney Karakachian is a senior adjunct faculty member at California Lutheran University School of Management.  He has been teaching in the MBA in Financial Planning Program since 2013.  He has taught Principles of Estate Planning, Income Tax, and Strategy, Managerial Accounting and Foundations of Accounting and Finance courses.

Hratch began his accounting career in the tax division of Arthur Andersen in Los Angeles.  He quickly rose through to ranks to the level of Tax Manager.  He moved on to Deloitte Tax also in Los Angeles where we were promoted to Senior Manager.  Following a ten year career in the Big Four accounting firm environment, Hratch joined a large local firm.  Since 2008, he has been a private practitioner providing a broad range of tax planning, compliance, and advisory services to owner-operated enterprises and their owners as well as families.  Since 2012, he has been providing legal services with an emphasis on taxation, estate planning, real estate, and business advisory services.

The Transcript from the webinar:

Chia-Li Chien: 

Alright, Josiah. It’s on top of the hour. Let’s go ahead and get started. And then if people roll, they roll in. 

Josiah Gonzales: 

I would like to welcome everybody to the Next Gen Mentoring Forum. The Next Gen Mentoring Forum series is designed to empower, educate, and illuminate individuals who are interested in the financial planning industry.

At each forum, an expert will discuss a topic in the field of financial planning with the purpose of inspiring critical thought and discussion. In today’s session, Dr. Chia-Li Chien will interview attorney Hratch Karakachian about the SECURE Act.

My name is Josiah Gonzales. I’m a graduate program specialist at the School of Management. I am your host today and I am also a proud CLU alumni of the MPPA program.

Dr. Chia-Li Chien is an assistant professor and director of the financial planning program at California Lutheran University. She maintains an active financial planning practice specializing in succession program management at the Value Growth Institute. She’s authored three books. The most recent peer-reviewed research book is by Palgrave Macmillan titled enhancing retirement success rates in the United States leveraging reverse mortgages, delaying social security, and exploring continuous work.

Next Gen Mentoring Forum is sponsored by the California Lutheran University School of Management Financial Planning Program. We offer MBAs and financial planning that helps financial advisors pursue a leadership position or grow their financial planning practice. By deploying advanced financial planning, effective client communications, last counseling streamline practice management, as well as leveraging fintech, I will turn over today’s session to Dr. Chein.

Chia-Li Chien: 

All right, thank you Josiah, and welcome everyone. For today’s session. I’m very, very honored to interview Hratch, one of our senior adjunct faculty here at California Lutheran University. Hratch started his career in a big four accounting firms. He eventually got so successful that he’s now in a private practice providing legal services in the tax, estate planning, real estate, and business advising services. And for those of you who have attended his class, you know that he’s a wealth of knowledge in the tax area is incredible. So welcome, everyone today for the session and we are going to be trying to be as interactive as possible. And first, I’m going to ask the questions for Hratch that he often has today in history. So before you answer that question, tell us why you typically have today in history in your LinkedIn profile or some sort of social media post.

Hratch Karakachian: 

Thank you for inviting me Chia-Li and welcome everyone. It’s a great honor and privilege to speak with you and discuss this important topic. To answer the specific question I love history, and I almost majored than history as an undergraduate, but there was a fight between accounting in history and accounting one. I’ve kept my interest in history by posting interesting tidbits, things that happen on a day and I incorporate that in my presentations and on my LinkedIn profile. Today it just so happens that it’s Smokey Robinson’s 80th birthday. He was born in Detroit, Michigan and started his career at a very young age in 1955 when he was only 15 years old and in the late 50s he met and got to know Barry Gordy and together they fall for Motown Records. As the saying goes, the rest is history. He has no plans of retiring. In fact, when I read this tidbit. I went on Google and saw he’s having several concerts in Las Vegas at the end of March.

Chia-Li Chien: 

Wow, that’s incredible.

Hratch Karakachian: 

So what does this have to do with the SECURE Act and retirement planning? Absolutely nothing but I thought it would be a good segway into the SECURE Act.

Chia-Li Chien: 

So the SECURE Act has a lot of, thank you for that thought that it was very interesting to have a little bit of history and interesting to learn there you’re almost major in history but still have that in your day to day passion and interest. Thank you for doing that. 

So SECURE Act – can you kind of tell us a little bit about the history of how the security comes about and when is it coming into effect? So then we have a little bit of background about what that is.

Hratch Karakachian: 

The SECURE Act has been discussed in Congress for a little while now. It passed Congress in July of last year. But the Senate did not act on it until later in the year. 

The thrust in the focus of the SECURE Act was to eliminate, the primary purpose was to eliminate the opportunity to stretch IRAs and I’ll get into a little bit more. In addition to making some other modifications, Congress believe that IRAs were getting too big and individuals were being able to defer a tremendous amount of income through IRAs and by leaving it to the next generation.

As a result, the government was not getting its fair share of taxes and one of the major provisions of the SECURE Act was to eliminate the opportunity of beneficiaries to be able to delay the distributions from IRA.

Chia-Li Chien: 

So if I could just interrupt for a moment. So I tried to see the logic behind this. Where were they the stretch IRA in the past I’m assuming that the reason behind it is that the US government wants to get the cash as soon as possible, is that has something to do with that? 

Hratch Karakachian: 

Exactly. Yeah. Getting tax revenue sooner rather than later.

Chia-Li Chien: 

Right, right.

Hratch Karakachian: 

And he just one point the note. An important point is, for the most part, this provision, this specific provision, will not have a major impact on IRAs in the $500 to $1 million range, not that I’m saying that those are small IRAs. A lot of people would love having those types of funds in their IRA accounts.

But it will have a major impact on the larger IRAs and larger retirement plans that have millions of dollars. And one of the triggers that was the genesis of this was an article that came out several years ago now. Discussing Mitt Romney’s IRA. Mitt Romney’s IRA had a fair market value at the time, I think this was in 2015 or 16. It had over 100 million dollars and the discussion and the thought was well that’s a tremendous amount of money and it’s not fair for individuals to have that type of deferred income in their IRA accounts and hence we have to come up with some methodology to have tax taxes imposed on that accumulation of income.

Chia-Li Chien: 

Right, so, so in this case, Mitt Romney started out several businesses and obviously have company stock inside that IRA account, the handset has grown to that tremendous amount of money. And so you’re right. So, the general public, which basically, what you’re saying is less than a million dollars IRA account probably is not going to be impacted the most, but they are particularly targeting those large amounts of IRA. Can you talk a little bit about in terms of other than just taking the money out and help us understand the required minimum distribution concept. 

Hratch Karakachian:

Okay. The required minimum distribution is almost all retirement plans defined contribution plans, the owner of the account of that retirement plan is required to take out a distribution from the account after risk getting to a certain age.

And if the owner of the account does not take out this distribution. There are some severe penalties, up to 50% of the amount that should have been taken out. The age for this required minimum distribution under prior law is 70 and a half. Now, this is where the distribution becomes required. There’s no provision in the law that prohibits anyone from not taking out a distribution from their IRA.

Individuals who are younger than 70 and a half are able to take out distributions. There’s some discouraging aspects to it if an individual is less than 59 and a half. There’s a 10% penalty and that has been put in place to discourage taxpayers from taking distributions and use them for retirement plans into hopes of encouraging them to keep the funds and use it for retirement, rather than for nonretirement purposes at a younger age.

Chia-Li Chien: 

And just to clarify that this applies to qualified accounts as well, not just the IRA account.

Hratch Karakachian:

Correct, right. 

Chia-Li Chien: 

So for one k for three please be plans and the previous age was 70and a half. Currently, the new law is 72 years old. Can you walk us through in terms of the actual timing of someone who must distribute, meaning that the age is set as 70 but when they actually has to take it out before that penalty of 50%, up to 50% kicks in. 

Hratch Karakachian:

So the new law switched the required minimum distribution age from 70 and a half to 72. So, the law requires an individual to take funds out after reaching 72 and the drop-dead date for that first-year distribution is April 1st of the year, following the year in which the owner of the account turns 72 years of age.

Chia-Li Chien: 

Right, and the account balance has taken on when? Because it’s not just a time. It’s not just April 1st following year but account balances determine based upon what time

Hratch Karakachian: 

So for the first year. Let’s take an example if an individual turns 72 in 2020. They can take this required minimum distribution during 2020 honor before December 31 but they must take it before April 1st of 2021. Now that first-year distribution the balance in the account is measured. The fair market value of the account or accounts if they have more than one account is December 31 of 2019 and it is divided by their life expectancy as published by the IRS tables.

Chia-Li Chien: 

So oftentimes clients might be asking questions such as if they have multiple accounts as you alluded to that you if they have multiple accounts, is it better to just consolidate everything into one account and do the calculation of our MD or is it just take out from one account satisfy those amount. What’s your preference or what do you see in terms of what clients typically do?

Hratch Karakachian: 

There is a slight difference in the law where IRAs can be accumulated together and one distribution can be taken out from one account or multiple accounts. However, if an individual has a 401K and an IRA or IRAs, separate distributions have to come out for the IRAs and another distribution has to come up for the 401K. So they cannot be consolidated; 401k and the IRAs cannot be combined.

Chia-Li Chien: 

And so, so this is probably a reason that a lot of the custodians that hold these accounts have automatic set up in the account to actually forced taking the money out of the account because of the fact that you can’t. Sometimes you cannot consolidate all of these accounts to get it.

Hratch Karakachian: 

It makes it easier for the custodians, and the financial institutions to have the automatic distribution. To answer your specific question regarding consolidating an IRA, it would make it easier from a financial management perspective to have one IRA account. Rather than having three or four, eight, etc. So my suggestion or recommendation would be to consolidate the accounts and that’s fairly easy and straightforward to do.

Chia-Li Chien: 

And I think that if you are working with a financial advisor or certified financial planners, they probably will be able to help you calculate how much you need to take it out in comparison to how much you need and then so those kinds of calculation typically will be in place ahead of time before you run into a problem like this. Now, one of the other aspects.

Of the SECURE Act was the contribution age limit into the IRA. I know in the past, both IRA and Roth IRA have some sort of limitations. Can you talk about the limitations and then talk and share with us what type of age limits today is in place based on the SECURE Act.

Hratch Karakachian: 

So, individuals were not allowed to contribute to traditional IRAs past the age of 70 and a half. That limitation has been lifted, but it only applies to traditional IRAs. There was no restriction for Roth IRAs. Individuals could contribute the Roth IRAs at any age and also SEP IRAs and 410 k plans did not have that restriction either, so long as the individual was employed and had earned income from their work. The limitation preventing individuals from contributing was specifically restricted to traditional IRA. So now that restriction has been lifted. Of course, one important point is that an individual, an owner, to be able to contribute must have earned income or must have a spouse who has earned income to be able to contribute individual just portfolio income they will not be allowed to contribute.

Chia-Li Chien: 

So when you say earn income., does that also apply to Roth IRA? If you continue to contribute to Roth IRA. I think a Roth IRA has earned income type of limitation that still holds true for Roth IRAs. 

Hratch Karakachian: 

Yes. And there’s also adjusted gross income limitations for individuals to contribute directly to a Roth IRA. There is a backdoor Roth IRA opportunity as well for those who have higher levels of adjusted gross income.

Chia-Li Chien: 

This gets into a very interesting question. So we have the SECURE Act push out the RMD (Required Minimum Distribution) is now extended to age 72. Meanwhile, you can continue to contribute to the IRA kind of conflicting, right? You can take something out, but at the same time, you can continue to contribute to the IRA. So from a practical standpoint, what would you recommend in terms of from a client’s perspective? Why would they continue to contribute? And why would they at the same time be forced to take the distribution? What’s your recommendation here?

Hratch Karakachian: 

Yeah, the conflict here is that if an individual must withdraw funds if they’re over 72 and a half. They must withdraw funds out of the IRA and they are contributing into it. The additional contribution is factored into their ending balance at the end of the year. So they’re required distribution will end up being a little bit higher. The recommendation and suggestion, obviously, is to analyze the individuals cash flow needs and how much funds they need. And make a determination based on the available resources and they’re available cash flow and if it makes sense to make additional contributions.

Chia-Li Chien: 

Right. Now the other questions that I have is, that obviously assuming that the target of this particular SECURE Act is targeting much more wealthy families, but for the mass affluent would it still make sense if their tax bracket is low, just go ahead and convert them to Roth IRA? Well, that still makes practical sense if the tax bracket is low enough that and if, if so, do they also have a certain limit in terms of conversion?

Hratch Karakachian: 

Obviously converting an IRA that has pre-tax contributions in it will have a tax impact in the Roth conversions. And I agree with you that if individuals in retirement, they have a lower tax. They’re in a lower tax bracket that takes advantage of those lower tax brackets.

The stretch that I’d like to come back to in just a moment, there’s one point that I want to clarify and expand on. The SECURE Act requires inherited IRAs, an inherited retirement plans to be distributed out over a10 year period. This was not the case with Roth IRAs and now it is so both accounts pre-tax accounts and Roth accounts, the beneficiaries have to empty out those accounts within this 10-year timeframe. So the tax impact needs to be carefully analyzed and some projections have to be made, including certain assumptions to make sure reporting of additional funds and income in years, one, two, and three would be beneficial and helpful for the IRA account owners.

Chia-Li Chien: 

So, in terms of the so-called stretched IRA in the past, now that individuals need the inheritance, if you will, has to take it out within that 10 years period of time. So the longest time is 10 years but it doesn’t limit people to take it sooner, obviously. And from a practical standpoint, the beneficiary, if you will, do they need to actually roll that into that inheritance IRA enabled to take effect or how does it actually kick in that 10 years. So then, advisors can advise their clients appropriately in terms of inheritance.

Hratch Karakachian: 

The SECURE Act that got rid of the stretch did keep certain beneficiaries. The old rules do apply to certain types of beneficiaries and those beneficiaries under the act are called EDB, Eligible Designated Beneficiaries and these EDB’s are able to stretch the IRAs. Who are these beneficiaries? It’s the surviving spouse of the account owner, it is a chronically ill beneficiary or a disabled beneficiary, a child, a minor child, not a grandchild, but it has to be a minor trial of the account owner, and beneficiaries that are within a 10-year timeframe of the account owner. This group, these eligible designated beneficiaries, are able to stretch.

Chia-Li Chien: 

So if I were to walk through an example. Let’s say if a husband and wife, survived by the spouse’s wife. Let’s say she’s only 50 years old, then we can stretch based on her life expectancy at age 50 versus if the beneficiary if that goes to a daughter, then that won’t be able to stretch unless she’s a minor. Is that correct?

Hratch Karakachian: 

So the daughter will not be able to stretch, no. If she’s the beneficiary of the IRA account, she has to take out the entire balance over 10 years. 

Chia-Li Chien: 

Yeah.

Hratch Karakachian: 

And it’s at any point in time during that 10 year period.

Chia-Li Chien: 

if I go back to Mitt Romney’s example. He should probably marry someone very young if the strategy is not to take the money out as a surviving spouse. Just a stretch because it qualifies the stretching instead of just having to take it out within the 10 years period of time, right?

Hratch Karakachian: 

Right. If the beneficiary is a minor child, they will be able to stretch based on the owner’s life expectancy, but, only up until they reach the age of majority which in almost all states is 18 and then a few states it’s 21. And after they turn the age of majority the 10-year rule applies.

Chia-Li Chien: 

So Terry has a question in the chatbox. She was saying that by definition if the beneficiaries is a minor, they can stretch based on the IRA owners life expectancy until the minor reaches the legal age of 21.  

Hratch Karakachian: 

Yes. Okay. And then after that, the 10-year rule applies. Okay, good. All right.

Chia-Li Chien: 

So, in some cases, that this is probably one of the biggest changes in terms of the stretch IRA so at the end of the day, whoever is a surviving spouse, that spouse will die at some point, therefore, that money is still going to be transferred to an heir that eventually have to be taken out by 10 years. So that kind of expedites the entire revenue collection process, if you will.

Hratch Karakachian: Exactly, exactly.

Chia-Li Chien: 

Um, one of the things that you have mentioned in the SECURE Act was the annuity options in 401K. Can you kind of walk us through what actually does that mean?

Hratch Karakachian: 

The SECURE Act increased and expanded the disclosure requirements to beneficiaries are owners of 401 k’s who have included or purchased with the use of some of their contributions and annuity plan or a type of a vehicle that will provide them with income for life. The SECURE Act requires these retirement plans that have these options to provide illustrations to the beneficiaries of how the annuity plan will work and what type of income they can expect to receive. That’s one modification. So it’s more from disclosure and information providing perspective to the account owner rather than increasing options.

Chia-Li Chien: 

Right, so maybe just let us some back up a little bit so then people have an understanding of why this is a disclosure option. 

There are pensions, they are defined benefits and defined contribution plans. In a defined benefits situation that distribution options are required by law. The sponsor has to provide all these different types of distribution options. Defined Contribution info on today’s world, there is not really necessarily a policy required for us. So this is the very first initiative. The government is trying to provide some guidelines. So, in this case, is disclosure is not necessarily required for the type of distribution option if you will. So, this id just from a plan sponsor was a third party administrator’s perspective, they need to make sure that this information is disseminated to the employees as well as a plan sponsors is that is another right assessment.

Hratch Karakachian: 

Yeah, if the 401k plan has an annuity type option in it where the owners have invested in them, they are entitled to additional information and additional illustrations. Also, the other provision is important. These owners the annuity type are allowed to trust the transfer investment from one 401k plan to another if there’s mobility and movement of a one and from a bite of a job from one employer to the other.

Chia-Li Chien: 

Okay, so. So I guess the key thing here is that many of the employers sponsor plans do have annuity options. For example, my husband works for county or state that they do have Prudential as part of their 401k plan, which in turn is an annuity inside. So in that case, he is expected to receive some sort of disclosure coming in terms of annuity options.

Hratch Karakachian: 

Yes.

Chia-Li Chien: 

So this is probably a good idea for the CFP or financial planner to know. Now, when you’re working with clients although, you can actually advise clients what to do with in terms of the options, having this understanding will actually greatly help your service. Now some of the 401K or even pension plan may or may not have that in service was law. And so those are the things that I think needs to be watched out for in case of making major mistakes in taxes and things like that.

Hratch Karakachian: 

I highly recommend financial advisors who do have clients that have invested in annuity options within 401K plans to ask their clients for these illustrations and review them with the clients and let the client know the pros and cons and be able to advise it. I think there’s going to be a better opportunity, a bit more information, not necessarily better, but more information available to advise clients.

Chia-Li Chien: 

Right, and I think that these illustrations also point out that, did you save enough how much you need to save, speed up the savings, as well as, different types of distribution options available to them. So these are actually better opportunities for the planners going forward.

Hratch Karakachian: 

I think so much information.

Chia-Li Chien: 

Right, so how about some small business incentives and in terms of Secure Act.

Hratch Karakachian: 

There are several small business incentives. For small businesses that are 100 employees or less who do not have a formal retirement plan. The tax credit has been increased if they implement a new retirement plan. There is a $5,000 tax credit for the employer for a three year period. 

Also, the rules regarding small employers coming together and coordinating their retirement plans as a group has become relaxed so the goal and the hope for that is to increase opportunities for organizations that provide retirement plans to their employees and also for smaller businesses who on their own would be expensive, cost-prohibitive, and administratively burdensome these plans can and I don’t know if this is set up as a marketplace, but some smaller employers could come together and form one retirement plan covering multiple employers.

Chia-Li Chien: 

And I think that these are great concepts in terms of helping businesses provide opportunities for people to save. And so I can immediately think about industry association. So that say if you are in the construction industry, you have a construction association, that association can probably help come up with a pool type of retirement plan and members can actually join. 

And so those are possible opportunities for advisors to actually work with the association or a group of similar types of businesses to provide those opportunities for family who have the opportunity to save for their retirement.

Hratch Karakachian: 

That’s the goal. The goal is to make retirement more accessible and easier on as big of the working population as possible. Yeah.

Chia-Li Chien: 

Yeah, and I think those are great steps towards saving more for retirement, although that I do believe personally, in my opinion, is that there shouldn’t be any limit if you want to save more, just go ahead and save more. I think that there are a lot more people who need to save but are not taking the opportunity to do that. That let switchgear, a little bit about in a SECURE Act. There’s also a non-retirement type of change. Can you take us through the changes in the 529, as well as a Kiddie tax.

Hratch Karakachian: 

For the under 529 area. The two provisions that were put in place was the opportunity for beneficiaries of a 529 plan to use funds for apprenticeship programs.

Where before it was restricted to formal educational institutions colleges, universities, but now apprenticeship programs are recognized and that includes fees for tuition, books, supplies,  equipment, for example, which would be helpful and necessary in an apprenticeship program.

Chia-Li Chien: 

Is that a reason to increase skilled workers in the states? Because last year I worked with a couple of large clients. That their number one concern was that they cannot hire enough skilled workers. They have a team of people, the HR team, of people going down to the community for each one of the high schools that they are nearby and they’re just having a hard time with who skilled worker. So I’m thinking maybe this is part of the reason to increase the amount of skill workers in the US, by having this incentive in place.

Hratch Karakachian: 

That’s definitely the main reason for it. The other reason is the 529 plans are usually set up early on, at least that’s the goal and the hope of the 529 plans being set up early when the child is much younger.

Chia-Li Chien: 

Right.

Hratch Karakachian: 

With the hopes of the funds, small investments over 15, 17, 18 years would grow and be used to pay for tuition. But early on when a child is born in this account is set up the parents or the grandparents who formed the account, do not know what direction the child is going to take, whether they’re going to go to a formal college or university and get a formal education or they might go towards the arts and the nonformal types of programs, in terms of graphic design, etc. 

I think that this option will allow individuals some flexibility of using those funds. And as a result, help give the children more options, if you will than just formal education.

Chia-Li Chien: 

Right, and I think that usually do a spot on. You never really know that child or grandchild and which direction, that person is going to go. My dad would always tell us that if your children turn out to be great, it’s a gift. You just never know which way they’re going to go. How about the Kiddie Tax?

Hratch Karakachian: 

Well, one other point to on the 529 the new rules allow a one time $10,000 distribution out of a 529 plan not to pay for tuition and other fees books, etc for a college education but to pay for a student loan, but only tend to have one time per account. 

Chia-Li Chien: 

That’s good to know.

Hratch Karakachian: 

I think it’s kind of counterintuitive because when I read this, I was thinking the 529 is set up so that it’s used to pay the tuition and fees and room and board and books, etc. Why would a student have a need to borrow funds but maybe it’s for a sibling, I guess, there could be a circumstance or situation where some funds could be used to pay down to wait to pay down a student. 

Chia-Li Chien: 

Yeah, well you know that does make sense. Some people who maybe went to school with scholarships, not knowing that they are still borrowing money. And so perhaps this is one of the ways to kind of counterintuitively help the family.

Hratch Karakachian: 

Also for graduate school too. 

Chia-Li Chien: 

Right. Yeah.

Hratch Karakachian: 

Maybe the scenario. I’m thinking about it, they finish undergraduate and go to graduate school for a couple years, and there are not enough funds in the 529 plan or they want to withdraw it at that point they borrow and then they decide to withdraw some funds at a later date, that’s an option.

Chia-Li Chien: 

So how about kiddie tax? Any changes in the kiddie tax? 

Hratch Karakachian: 

What happened was the rule was always that income of a child, over and above a certain amount and this is the unearned income of a child. The earned income of a dependent child is taxed at the rate of the child. That this is the unearned income.

Chia-Li Chien: 

Okay.

Hratch Karakachian: 

The rationale behind this, which was put in place in the 1986 act, I believe, was to prevent parents from transferring assets to their children in the hopes of the children paying tax at a lower rate than the parents because children, in theory, would have less income.

Chia-Li Chien: 

People are just so smart, we find ways to not pay taxes.

Hratch Karakachian: 

Opportunity for efficient tax, taxation. The tax cuts and jobs act that passed in late December 2017 said, okay, we’re going to simplify this and require the unearned income of children to be taxed at the trust tax rates. And trust tax rates can be very high, because of the tax tables, you get to the highest tax rates, very, very quickly at very low-income threshold.

And there was a website because certain children had unearned income as a result, especially for survivors of children whose parents had died in the military, and they were receiving retired death benefits.

From their parents and some of that income might be taxable on that income was being taxed at the tax rates and the children were being burdened by the trust tax rates, which were substantially higher and they the SECURE Act reverted the law to what it was before the tax cuts and jobs act.

Now the unearned income of children will be taxed at the parent’s highest tax rate of the parent, which was the line effect before the change. And there’s an option but to go back and amend returns for 2018 to take advantage of this. So, this law applies on a retroactive basis to the beginning of 2018

Chia-Li Chien: 

All right, good. Thank you, Hratch for such insightful conversations regarding the changes in a SECURE Act and how we can better serve our clients going forward. So I’m going to turn the floor back to Josiah. 

Josiah Gonzales: 

Thank you, Dr. Chien. Thanks, Dr. Chien and Hratch Karakachien. We’re so glad to have had you for the Next Gen Mentoring Forum. It was a very informative session. Thank you for thank you to the California Lutheran University School of Management Financial Planning Program for sponsoring today’s Next Gen Mentoring Forum.

California Lutheran University School of Management offers MBAs and financial planning. It helps financial advisors pursue a leadership position or grow their financial planning practice by deploying events financial planning, effective client communication/ counseling, streamline practice management, as well as leverage fintech.

Please sign up for info sessions for more information. Our next Next Gen Mentoring session is on Monday, March 23, 2020, at 2:30pm Pacific Standard Time. Please join Dr. Chien to interview Jennifer Bacarella about her journey of developing, running a large broker-dealer, thank you all and see what the next Next Gen Mentoring Forum.

Chia-Li Chien: 

I just wanted to thank everyone. I wanted to give everyone a little bit of a side note, the person I’m going to be interviewing actually had successfully developed more than 1000 financial advisors in the industry. So I really encourage you to join me in the next session. All right, thank you, everyone, and have a great week.

Hratch Karakachian: 

Thank you. Bye.