0:00

With record levels of dry powder

0:02

available for investment, find out what's

0:04

in store for private markets in

0:07

2025 and beyond. Listen to crafting

0:09

capital, in partnership with UBS, at

0:11

partners.wsh.com, slash UBS, Spotify, and Apple

0:14

Podcasts. Welcome to Barents, the Way

0:16

Forward. I'm Greg Bartellis, and my

0:18

special guest is Patty Brennan, CEO

0:20

of Key Financial, which she founded

0:23

in 1990, and has since grown

0:25

into a firm with more than

0:27

2.5 billion in assets. Patty is

0:29

also a Barron's Hall of Fame

0:31

advisor and ranked high in multiple

0:33

Barron's lists. Today, Patty will discuss

0:36

new distribution rules for inherited IRAs

0:38

and how advisors and clients can

0:40

navigate what can certainly be a

0:42

vexing process. Welcome to the podcast,

0:44

Patty. Thank you so much, Greg. What an honor

0:46

it is to be on your show. Well, it's

0:49

an honor to have you, so thank

0:51

you so much. I want to first

0:53

ask you about your background because you've

0:55

had a great first chapter in your

0:58

career. Talk about that. Sure, it is

1:00

an unusual first chapter, especially for

1:02

our industry. I came into this

1:04

with zero business experience, zero finance

1:06

experience. I was an ICU nurse.

1:08

So what in the world is

1:10

an ICU nurse doing being the

1:12

CEO of a two and a

1:14

half billion dollar firm? I have

1:16

to tell you, Greg, it's not

1:18

like I intended to go. this

1:20

thing to what it is, it

1:22

has evolved. It has become this

1:24

over time. And I can't begin

1:26

to tell you how often I

1:28

use the skills that I learned

1:30

at the bedside in this

1:32

role. Not only with our

1:34

clients, but with my team.

1:37

And I think that's really,

1:39

really important. Taking a holistic

1:41

approach, recognizing that people are

1:43

not their organs, their lungs,

1:45

their kidneys. They are people.

1:47

People aren't their money. They

1:49

are their families. What do they

1:51

think about at night? What do

1:53

they worry about? What are their

1:55

aspirations? Their taxes, their cash flow.

1:57

Those are the organs that we...

1:59

deal with. Who are they? What's important

2:02

to them? That's what matters. And

2:04

you just recently had a book

2:07

published. Tell me about that. Yeah,

2:09

this was kind of, it was one

2:11

of those things, again, I have an

2:13

advisory board and someone on

2:15

the advisory board, one of

2:17

my clients said, you know, Patty,

2:19

when we are in your conference room,

2:22

the way you explain things, you just

2:24

make it so easy to understand. But

2:26

then we leave and we forget about

2:29

what you said. It would be great

2:31

if we could have something that we

2:33

could look back, look at, almost as

2:36

a reference that is kind of finance

2:38

101. No jargon, none of that stuff.

2:40

Just give it to us straight and

2:43

give us the process and the

2:45

ideas. And the wise. And the

2:47

title. The title of the book is,

2:49

am I going to be OK? And

2:51

the subtitle is, and is OK enough.

2:53

What does OK mean to you mean

2:55

to you? because it is different for

2:57

everyone. Yeah, and is this the intended

2:59

audience just kind of general population? We're

3:02

kind of, you know, that question, everybody

3:04

asked me that question. Who's your audience,

3:06

Patty? Who's your audience? I have to

3:09

tell you, I didn't want to pick

3:11

my audience. I want them to pick

3:13

themselves. So there is something there for

3:15

everyone. Whether someone's just starting out, I

3:18

use a lot of the work that

3:20

Joe Coughlin up at MIT, he's a

3:22

director of the MITH lab, I use

3:24

a lot of his work in terms

3:27

of the different questions to ask, depending

3:29

on the age group that we're talking

3:31

with, and people with extremely high net

3:34

worth clients who are looking at

3:36

legacy as being their primary objective

3:39

and concerns. What I really I

3:41

really like to title is what specifically

3:43

the am I going to be okay

3:45

part because It's not saying am I

3:47

going to be fabulously wealthy? It's it's

3:49

lowering the bar if you will

3:52

But it's really about hitting crossing

3:54

a threshold and that can be

3:56

a dramatically different thing depending on

3:59

the person So if someone, two

4:01

million might be more than enough, someone

4:03

would be like, I'm not sure I

4:05

can get buying two million. So there's

4:07

so many variables. And it does change

4:09

over their lifetime, right? So, you know,

4:11

standards of livings grow, et cetera, expectations

4:14

increase, you know, the kids need help,

4:16

et cetera, the things that we want

4:18

to do for charities, you know, come

4:20

up. So it's, it does evolve. So

4:22

am I going to be okay is

4:25

an ongoing conversation conversation. Now, linking

4:27

this to the subject at

4:29

hand, talking about new distribution

4:31

rules with inherited IRAs, this

4:33

is something that might on

4:35

the surface seem slightly dry,

4:37

but can be monumentally important.

4:39

And if it's not handled

4:41

well, well, you may not

4:43

be OK. Oh, absolutely, Greg. And

4:45

I got to tell you, we're going

4:48

to make it fun today. Let's make

4:50

it fun, and we're going to simplify

4:52

a very complicated set of rules. OK.

4:54

So, let's first start out.

4:57

We all know about Secure

4:59

Act 1.0. You know, it was

5:01

effective January of 2020, then

5:03

2.0 came out, 2022. But

5:06

there was this underlying question

5:08

that we advisors didn't know

5:10

the answer to, and that

5:12

is, okay, so you have

5:14

this beneficiary, they've inherited this

5:16

retirement account, they have to

5:18

have it drained by year

5:20

10 after the owner's death,

5:22

do they have to take

5:24

distributions in years 1 through

5:26

9? That question remained unanswered

5:28

until July of 2024.

5:30

So, here's the rules.

5:32

Let's break it down.

5:34

Keep it simple. You've

5:36

got eds and eds. Eds

5:39

are eligible designated beneficiaries. ads.

5:41

Those people would include the

5:44

spouse, minor children, chronically ill,

5:46

and disabled people, or any

5:48

beneficiary who was not more

5:51

than 10 years younger. So

5:53

it would be like a

5:56

sibling. So those are your

5:58

ads. They have... They can continue

6:00

to do the stretch provision, the

6:03

10-year rule, or if we've got

6:05

a cougar, for example, who inherited

6:07

this retirement plan and their

6:10

spouse was 15 years younger,

6:12

they can take over the

6:14

decedent's age. So if somebody's

6:16

75 and they were married

6:18

to somebody that was 60,

6:20

they all of a sudden

6:23

become 60 as it relates

6:25

to this rule. Those are

6:27

the eds. Very flexible. Then

6:29

you have the nets, non-eligible

6:31

beneficiaries. These are non-spouses who

6:33

are more than 10 years

6:36

younger. Typically the kids. Here's

6:38

a thing. You know, it

6:40

sounds like an infomercial, right?

6:43

Wait, there's more. So within

6:45

the nets, okay, you've got

6:47

these kids, there are rules

6:49

as it relates to when

6:51

the, if the owner died before

6:54

their RPD, RMDH, right, or after.

6:56

If they inherited before the RPD,

6:58

then they've got the 10-year drain

7:00

rule, meaning they don't have to

7:02

take distributions one through nine. They

7:05

can just take it all out.

7:07

As long as they take it

7:09

out before the end of the

7:11

10th year, they're good. For the

7:14

children, for example, the kids who

7:16

inherit after the RPD, then they

7:18

have to take it years one through nine,

7:20

plus they have to have it drained

7:22

by the end of the year 10.

7:24

So they're really the ones that we

7:26

have to be very conscious of. Now,

7:28

I've got good news as relates to

7:31

this, because you mentioned in

7:33

the beginning it's really important.

7:35

There's significant liability risk. If

7:38

we don't understand the rules, we

7:40

all have a mulligan, for example.

7:42

I, Patty Brennan, thought, oh great, I've

7:44

got a 60-year-old, or a 55-year-old

7:46

beneficiary. He wants to retire when

7:49

he's 60. He just received this

7:51

significant retirement plan. We're not going

7:53

to take anything in years one

7:55

through five, and that'll be their

7:57

retirement income the next five years.

8:00

Okay, good news is we have a

8:02

mulligan. That person, that beneficiary

8:04

is not subject to the

8:06

penalty because they didn't take the

8:09

distributions when they should have and

8:11

they also don't have to make

8:14

them up. January 1st, 2025, you've

8:16

got to start taking those

8:18

distributions and it has to

8:20

be out by that. year 10 of when

8:23

the owner passed away. Otherwise there will

8:25

be penalties, correct? Go, you got it.

8:27

So tell us about the penalties over

8:29

the scenarios for that? The penalties would

8:31

be 25% of the amount that should

8:34

have been taken out plus taxes.

8:36

It is, you know, as Steve

8:38

Leinberg once said, it's capital punishment

8:41

by confiscation. I mean, they're basically

8:43

taking, you know, in many cases,

8:45

half of the distribution. So it's

8:47

not a fun outcome and it's...

8:50

It's really simple, you just have

8:52

to understand, eds, neds, before, after,

8:54

those are the categories, just keep

8:57

them in mind. Okay, that's definitely

8:59

a helpful, a good way to

9:01

break it down, yeah? There's some

9:03

quirky stuff in this new piece

9:05

of legislation that I think any

9:08

advisor needs to know about.

9:10

Number one, minors. Okay, minors

9:12

are eds. They don't have

9:14

their eligible designated beneficiaries. And

9:16

by that I mean, according

9:18

to this new rule, a

9:20

minor includes anyone up to

9:22

the age of 21, not

9:24

18, as it is in

9:26

most states. The quirky aspect

9:28

of this is that they can

9:31

take their RMDs based on

9:33

their life expectancy

9:35

until age 21, then they have

9:38

to flip to the 10-year rule.

9:40

Okay? Don't miss that. Very

9:42

important. The other quirky aspect

9:44

of this role has to

9:46

do with disabled and chronically

9:48

ill individuals, beneficiaries. So if

9:50

the money is in a

9:52

qualified plan, like honestly, like

9:55

these poor people, these beneficiaries

9:57

haven't been through enough with

9:59

our medical. system jumping through

10:01

hoops, the hoops that they

10:03

have to jump through to

10:05

prove that they are disabled

10:07

or chronically ill are kind

10:09

of ridiculous if the money

10:11

is still in a qualified

10:13

plan. I understand we've got,

10:15

you know, know your client

10:17

roles and best interest legislation,

10:19

etc. But it warrants the

10:21

question, how are they doing?

10:23

Anything we should know about

10:25

as it relates to your

10:27

beneficiaries, because in that case,

10:29

if that owner rolled it

10:31

over into an IRA, no

10:33

obligations to report anything. If

10:35

someone is disabled or chronically

10:37

ill, they don't have to

10:39

prove anything to the underlying

10:42

custodian. Would that constitute someone

10:44

simply having a chronic illness or

10:46

being in a present state that

10:49

would be, you know, they're effectively

10:51

in a chronically ill condition? It's

10:53

a great question, great. I would

10:55

say it would be the latter.

10:57

Someone who is presently chronically ill,

10:59

getting chemo, things of that nature.

11:01

Sure. I mean, we could bend

11:04

the law and hope that somebody

11:06

doesn't get audited and penalized, etc.

11:08

But I think that that would be

11:10

safe. Right. Okay. Good question. There's

11:12

a third thing, and that

11:14

has to do with successor

11:16

beneficiaries. What's a successor beneficiary?

11:18

This was a big question,

11:20

and we didn't know the

11:22

answer. So here's a case

11:24

study, right? Grandma finally dies.

11:26

She's 90 years old. She

11:28

passes away. She's got this

11:30

retirement plan. She leaves it

11:32

to her son, Peter, who's

11:34

70. He doesn't have her

11:36

genes, and he dies pretty

11:38

soon after. He leaves it

11:41

to his daughter Pam Pam

11:43

is what was referred to

11:45

as a successor beneficiary What

11:47

is she have to follow? Here's

11:50

the deal if Peter Had

11:52

was doing the stretch provision

11:54

he if he was an

11:56

ed and doing the stretch

11:58

then Pam has to do

12:00

the 10-year role. If Peter

12:02

was subject to the 10-year

12:04

role, Pam has to finish

12:06

the term. Okay? So successor

12:08

beneficiary, we finally

12:11

have clarification. Okay? So that's

12:13

basically it. You've just got

12:15

to understand, you know, for

12:18

all of your advisors who

12:20

are listening today, understand whether

12:22

you, your beneficiaries are an

12:25

ed or an ed. and

12:27

then within the net before

12:29

or after RPD. Real simple,

12:31

don't overcomplicate it, and

12:34

there's some really cool

12:36

actionable things that you

12:38

can do in, you

12:40

know, some cases that

12:42

we've, we've, stop. There's

12:45

some actionable. Things

12:47

that we advisors can do where

12:49

you become the hero you become

12:51

Superman or maybe it's better to

12:53

say Spider-Man because this is a

12:55

web of legislation She got Spider-Man

12:57

and wonder woman be that superhero

13:00

for your client For example, I

13:02

had a client a prospect I

13:04

should say she was a young

13:06

widow 50 years old came in

13:08

because she was she was paying

13:10

so much in taxes and she

13:13

wanted us to do some tax

13:15

planning for her So I started

13:17

to ask some questions, etc., etc.

13:19

and I looked at one of

13:21

her statements and her statement was

13:24

an inherited IRA that she received

13:26

from her husband. So pretend her

13:28

name was Sandy. I said, Sandy,

13:31

tell me more about this inherited

13:33

IRA. Well, of course she had

13:35

her 1-800 advisor who when her

13:37

husband passed away took his retirement

13:40

plan and put it in this

13:42

inherited IRA, and she's been taking

13:44

distribution since he died. Well, here's

13:46

the thing. She's working, making great

13:49

money. She got his life insurance

13:51

proceeds. She doesn't need the cash

13:54

flow, and she's paying taxes way

13:56

ahead of time, completely unnecessarily. So

13:58

the legislation passed. this year provided

14:01

a fix. I said, Sandy, here's

14:03

the deal. There's this new hypothetical

14:05

RMD rule. Here's what you can

14:07

do. Take that, take that inherited

14:10

IRA, roll it into a spousal IRA,

14:12

which is what, you know, do the

14:15

spousal rollover, which you are eligible

14:17

for, and all you need to

14:19

do is retroactively take the minimum

14:21

distributions that you should have taken

14:24

had it been done correctly in

14:26

the first place. Well, guess what?

14:28

Well, guess what? She's 50 years

14:30

old. She didn't need to take

14:32

any home run Okay, she's got a

14:35

hero. Yeah Okay, so that's that's

14:37

an idea that you know everybody

14:39

listening today might want

14:41

to consider because it happens

14:43

a lot more than people

14:45

realize Because we didn't people

14:48

didn't know right So there's

14:50

another one another thought as

14:52

it relates to anybody that's disabled

14:54

or chronically ill, and that is

14:57

you know when in doubt Roll

14:59

it out because people can become

15:01

disabled even after the

15:03

fact. Car accidents happen,

15:05

etc. And if you

15:07

want to give your

15:10

beneficiaries optimal flexibility, that

15:12

may be a consideration. That's

15:14

a great point. Yeah, you know, I

15:16

would say the third thing is the

15:18

real home run though. This is my

15:21

absolute favorite. So for anyone who has

15:23

high net worth clients or who is

15:25

interested in getting into that market,

15:28

All you have to do

15:30

is ask one differentiating question

15:32

that's going to disturb that

15:35

prospect or disturb that client.

15:37

Here's what the question is.

15:39

Does it make sense to pay tax

15:41

on a tax? And of course, they're

15:44

going to be like, what do you

15:46

mean by that? And here's what we

15:48

mean. Let me give you a case.

15:51

Let's say that we have a client,

15:53

business owner. Let's say his name is

15:55

Dan. And Dan has a business, he's

15:57

65 years old, and he's working. his

16:00

tail off so stressed out he's he's

16:02

and and unfortunately all the stress it

16:04

kills him he dies very suddenly his

16:06

wife Beth has you know and by

16:08

the way this net worth is call

16:10

it 40 50 million so they've got

16:12

a taxable estate of that estate

16:14

five million dollars is in a

16:17

retirement account so Beth takes a

16:19

spousal rollover she's an ed she doesn't

16:21

have to take required minimum distributions

16:23

etc etc etc etc etc

16:26

etc etc And she lives,

16:28

and typical, you know, let's

16:31

say that she earns 7%

16:33

on this retirement account, so

16:35

5 million becomes 10, 10

16:38

becomes 20, then she dies.

16:40

So she leaves it to her

16:42

kids. Her kids don't receive

16:44

$20 million because of course

16:46

that $20 million is in

16:49

the taxable estate, so it's

16:51

subject to the 40% estate

16:53

tax, so $8 million goes

16:55

off the top. The kids...

16:58

It's a pre-tax IRA, are

17:00

subject, they are nets, so

17:02

they are subject to both

17:04

the tenure and their RMDs.

17:06

Let's assume that wax out

17:09

another 30 percent. So they're

17:11

$3.2 million. So basically that

17:13

$20 million pre-tax IRA that

17:16

it grow to nets out

17:18

to the kids at about

17:20

eight. Okay? Now, let's not do

17:23

that because... What was I talking

17:25

about in terms of paying tax on

17:27

a tax? If let's say we go

17:29

back to Dan Okay, you go back

17:32

to Dan say Dan, let's not pay

17:34

a tax on a tax Let's do

17:36

a Roth conversion of the

17:38

five million dollars and

17:40

Dan says Spider-man. What

17:42

are you talking about? I'm

17:44

in a 37% tax bracket.

17:47

I'm I'm a very high

17:49

I understand what let me

17:51

walk you through this math.

17:53

So He does the Roth

17:55

conversion and a $5 million,

17:57

$2 million goes to income

17:59

taxes. What have we done? We've

18:01

removed two million dollars

18:03

from the taxable estate

18:06

if he died right away We've

18:08

also removed the growth of that

18:10

from his taxable estate Okay,

18:12

so that's that can be significant.

18:14

So let's net out the net

18:17

out the taxes. So now Beth

18:19

has three million dollars She's

18:21

65 double double three becomes six

18:23

six becomes 12 $12 million in

18:26

a Roth IRA, the kids then

18:28

inherit that Roth IRA. This is

18:30

where it's really going to sound

18:33

like a late-night infomercial. But

18:35

wait, there's more. Yes, it's a

18:37

Roth. Yes, it's tax-free. Yes, the

18:39

kids are going to inherit

18:41

it. Number one, remember, it could

18:44

have been worth $20 million. You're

18:46

saying, why in the world

18:48

will we ever do that? Well,

18:51

remember that $8 million difference between

18:53

the 20 and the 12, that's

18:55

not subject to the

18:57

40% estate tax. But it gets

19:00

even better than that. Here's why.

19:02

Because it's in a Roth, there's

19:04

this quirky little loophole in this

19:07

new legislation that basically says that

19:09

if an inherited IRA is in

19:11

a Roth, it is deemed to

19:13

have, that the owner will be

19:16

deemed to have died before their

19:18

RPD. She's 85. So what that

19:20

means is the kids can leave

19:22

it in the Roth inherited IRA,

19:25

not take anything from years 1

19:27

through 9, and take the money

19:29

out in year 10, tax-free by

19:31

the way, it just loses the

19:34

shelter. Right. So they could

19:36

definitely get a lot of

19:38

compounding to do its magic

19:40

before. Yeah. Exactly. Exactly. So

19:43

these are the things where, again,

19:45

let's... Keep it simple, understand where

19:48

the exposure is, where the liability

19:50

is, and really, let's help our

19:52

clients make good decisions about their

19:55

retirement accounts. Does it make sense

19:57

to stay in a qualified plan?

19:59

Does it make sense to stay

20:02

in a pre-tax IRA? What is

20:04

their goals? What's important

20:06

to them about their money? Tell

20:08

me about the family. Are you

20:10

leaving it to siblings? Well then,

20:12

we don't have to worry about...

20:15

you know, they're ats, right? They

20:17

can continue to do RMDs based

20:19

on their life expectancy. So there's

20:21

lots of questions to ask, and

20:24

I find that when you ask

20:26

the right questions, people can sense

20:28

that you really care about them.

20:30

And really optimizing what they

20:32

work so hard to accumulate. Yeah, and

20:35

I like too how you just... even

20:37

you know walking him through the numbers

20:39

they might at first blush oh boy

20:41

it's a big short-term hit but you

20:43

just put out okay there's this scenario

20:45

in this scenario and then it can

20:47

go oh okay like you're and you know

20:49

I would imagine that a lot of people

20:51

listening to us today might be glazing over

20:53

just like our clients do I find that

20:56

sometimes when you document it you kind of

20:58

put it side by side and say here's

21:00

option one here's option two totally up to

21:02

you your choice what do you want to

21:04

do I just, we're going to give you

21:07

the information that you might want and

21:09

need to make a decision that's right

21:11

for you and your family. Exactly. That's

21:13

what we do. No, I love

21:15

the deep dive and it's clear

21:18

that you're incredibly knowledgeable and animated

21:20

by the topic, so I think

21:22

that's great. Well, you know, as with

21:24

anything, I find, the more you dig,

21:26

the more you get into this, the

21:28

more interesting it becomes and the more

21:30

value we can add. And there's so

21:32

much to know about what we do,

21:34

you know, and the value that we

21:37

can provide to our clients. Yeah, I

21:39

mean, things like this, again,

21:41

they may seem dry, but

21:43

they're really important different financial

21:45

outcomes based on the asset

21:47

location and the tax strategy

21:49

of the estate planning. It's

21:51

all definitely important to get right.

21:53

And I think for me, what I

21:55

get from my clients is, again, you

21:57

know, it's one thing to say that

21:59

we care but when we lay

22:02

something like this out and

22:04

take the time to help

22:06

them to understand and process

22:08

using words that they can

22:11

understand that builds

22:13

a bond they never forget.

22:15

Yeah and I think it also

22:17

really helps to demonstrate

22:20

value because sometimes clients

22:22

say I like my

22:24

advisor but Am I really getting

22:27

my money's worth? Right? It's

22:29

a little bit nebulous. And with

22:31

something like this, I would think

22:33

there'd be much more of a

22:35

sense of like, wow, this just

22:37

saved me a ton of money

22:39

and or made me a lot

22:41

of money. It's pretty quantifiable and

22:43

they might have never gone there

22:45

on their own. So I think

22:47

this is just another example, maybe

22:50

our manifestation of like really

22:52

providing value. Absolutely. We are

22:54

not going to justify our

22:57

presence in your lives every

22:59

quarter of every year. What

23:02

you'll find is that there

23:04

may be that one idea,

23:06

that one thing, that crisis,

23:08

it may be related to

23:10

the portfolio, it may be

23:12

related to something completely, you

23:14

know, random, a charity, the

23:16

kids are in trouble, etc.

23:18

or just some practical advice

23:21

based on our experience. We

23:23

can't put a price on

23:25

that. That's right. That's true.

23:27

That's true. Yeah, and having that

23:29

trust, and like you said, it could

23:31

be even just like a one big

23:34

decision, and you don't know when or

23:36

how that'll happen, but that can count

23:38

for a lot. Yeah, I think, Greg,

23:40

at the end of the day, what

23:42

clients are looking for is someone who's

23:44

going to exercise good judgment.

23:47

And good judgment comes from

23:49

experience and taking the

23:51

time to really understand

23:53

complicated issues like this

23:56

inherited IRA thing. It's

23:58

filled with caveats. It's

24:00

filled with but this and different

24:02

roles. And just to boil it

24:04

down and figure out what applies

24:06

to their situation and make it

24:08

easy to understand. Yeah, well, I

24:10

think you accomplished that today. So

24:12

thanks so much for joining. Thank

24:15

you so much. Thanks for, thank

24:17

you all for listening to

24:19

this. And I hope everybody

24:21

has a wonderful, wonderful day

24:23

and continue to prosper. Excellent.

24:26

Thank you so much. My

24:28

guest has been Patty Brennan.

24:30

For more podcast and the

24:32

latest wealth management news, visit

24:34

barons.com/advisor. For the way forward,

24:36

I'm Greg Bartalis. Americans

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