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Unhatched Eggs Don’t Pay Taxes

The tax man cometh.  Or something like that.  Isn't that the phrase?  Pay now, pay later, eventually you're gonna pay.

Anyways, I'm definitely paying.

Okay, so here's the deal with taxes.  Taxes always have to be paid.  Sometimes you pay them now, or you pay them later.  Sometimes you don't even pay them, someone else does.

But at some point, they get paid.

A long time ago, my grandfather started an IRA.  I mean, I have an IRA too.  And every year, I don't pay taxes on my IRA.  It's a ROTH IRA.

That is, I don't pay taxes RIGHT NOW.  Eventually... I'll pay taxes on the income made within the IRA.

Well, so this IRA was part of the trust.  Here's the thing... Let me first say that everything with my grandparents and great grandparents stuff got messed up.  I know this because the current trustee has told me this.

He's told me that they had to fix a lot of stuff.

Additionally, my mom's stuff was messed up.  And we had to fix stuff with that.

Additionally additionally additionally....

A lot of money has been lost between my great great grandparents, my great grand parents and my grand parents and my mom.

If things had gone right?  There would be somewhere around 20 to 50 million in that trust.

But it didn't go right and now there's between 1 and 2 million.

Why didn't it go right?  People stuck their paws where they shouldn't have stuck them.  A lot of money was lost to legal fees, to taxes, to things not being done right.

It wasn't invested properly.

The thing is, if you have money and you have it not only invested properly, but you also have it in tax efficient investing, and you also have it setup in a way to avoid legal and bank fees...

That same amount of money can be worth 10 times what improperly setup money is worth.

If you go back 20 years and you setup two investment accounts... One has everything right... It's invested in a proper way and managed by a seasoned portfolio manager.  The taxes are done right... The paperwork is done right and you avoid legal fees and you have lower bank fees and investment fees.

The other one?  Invested wrong, lots of changing hands and active trades, lots of pulling the trigger on selling stock when it's down and buying when it's over priced and losing money.  Legal fees, large investment fees.  Pulling out capital instead of just distributing income, or letting the income reinvest...

Etc. etc.

Those two accounts can be worth VERY different amounts as time goes on.  Fees hurt, lawyers cost money, invested in bad investments hurt returns in the long run... Pulling out money makes the compounding effect go WAAAAY down.

Anyways... One of the things that happened with our stuff is this IRA was cashed out last year.  It wasn't supposed to be cashed out like that in one fell swoop.

What happens when an IRA is cashed out?  The IRS sees it as income.

So... Income is taxed.  Now the way our trust is setup is that the principle stays how it is... Or was supposed to stay.  And then the income was supposed to be distributed to the beneficiaries each year.

This didn't happen.

Why is that important?

Well, because as the income comes in, the IRS thinks we're getting that income in the form of checks.

We're not.

SO?

That means the IRS thinks I made 37 thousand dollars last year from my trust.

I did not.

That means I have to pay tax on 37 thousand dollars in income that I didn't actually receive.  It's sitting in the trust.

Ouch.

Tell me about it.

So, what are you broke or something?

Nope.  Here's the thing, I already knew this was coming, years ago.

My mom always said, don't count your chickens before they hatch.  Most people count unhatched chickens in their favor.  I count unhatched chickens against me.

What I mean to say is this...

My view on life is as follows... Things are always going to cost more than you think, you will always make less than you think you will, and everything will always take longer than you think it will.

I like to use doubling as my go to.

So, I try to live within half my means.  Take your salary and half it.  That's how much you should be living on.

Take your costs and inflate them.  When you buy stuff, make an excel sheet and double the cost.

Save more, spend less.  Live below your means.

Don't count money until after it's been in your pocket for some time.

That's what I did.  I received a distribution in the fall... I didn't spend a dime.  That distribution wasn't part of the income, it was part of something else.

But I knew that this tax situation would be coming.

Additionally, even though I have money in accounts, I don't spend what's there.  I only spend what my monthly income is.

I could have 10 million in the bank... But if my monthly income coming off that 10 million in interest is only lets say... 3 grand a month or something (That would be very poorly invested money, but for the sake of argument) I would only spend 1500 a month.

I know, I'm crazy.  But that's my policy.

It's also the reason why when I go to hit the file my taxes button and I have to pay 3 or 4 thousand dollars in taxes... I'm going to be okay to write the check.

Because instead of taking the money I received and booking a flight to Paris... and buying a new car... and going on a mall shopping spree... and buying the latest and greatest iPhone and all sorts of other things...

I just put it all in the bank and let it sit, and didn't change a thing about my lifestyle.

Trust me, I know people who inherited money and immediately went on a spending spree and travel and vacation spree... Guess what happened when they had to pay taxes on that money?  They had actually spent so much of the money that they had to take out a loan to pay the taxes the next year.

So what's the deal with paying these taxes going forward?

Next year will be different.  The IRA is already cashed out.  That's done.  And they are going to start a quarterly distribution schedule, or possibly monthly schedule of the income coming off the investments.

What that means is I'll get that income into an account that I can then access.

WOO HOO TIME TO GO SHOPPING!

No thanks.  That money will then go into an account and be held to pay future taxes.

I probably will end up investing the money and then maybe use some of the income that comes off those investments.  But, no, it's not time to go shopping.

Most people make that mistake.  They spend most or all of their paychecks... For most people though, they get a tax return when they file... And then they go shopping with that too.

Who am I to tell anyone what to do.

My thing is... just remember don't count your chickens before they hatch... and sometimes not all chickens hatch at the same time.

So, remember to buy enough chicken food to feed all your hatched chickens, but make sure to keep some extra for those eggs that hatch after the fact.

That's why I saved money instead of partying like a rockstar.

I knew that my chickens hadn't hatched yet, but I knew that sooner or later... They would hatch.  And they would be counted against me.

The good news is.... Going forward, there should be less expenses because 2017 and forward everything has been setup and fixed so that it's all properly invested, the accounts are correct, and the taxes are all up to date and filed right.

If anyone is going to setup a trust for future children or grandchildren... I recommend the following...

Don't appoint anyone in your family, or anyone you know as trustee... Now, this also includes what happened to us... That means make sure the paperwork specifically appoints the following, and cannot be changed...

Make 3 corporate trustees and each one has equal say.  Each one has to agree in an all or nothing.  No changes can be made to the trust no matter what.  3 different doctors have to evaluate the person making the trust and they all have to agree if the person is of sound mind or not.

See, with my family trust... My grandfather did make my mom and her sister the trustees initially... but there was a loophole in that changes could be made to the trust.  That means all you need is a doctor willing to say someone is of sound mind when they really aren't and you can then change the trust.

If you specially setup a trust and say that there has to be 3 trustees non-family tied, no one related, and 3 medical doctors have to sign off on it...  And 3 different accountants have to sign off... And 3 different money managers have to approve the investment changes.

You're pretty much set.

Anyways... All that being said... The number one take away from this post is...  Even if you don't have a trust... Even if you just have your regular work paycheck each week, or maybe once a month like my check is...

Save some money.  You never know what costs are going to come up in the future that might be unexpected.  And if you didn't save... You'll find yourself in quite the pickle when it comes time to pay that cost.

I know, no one wants to save (I mean, I wanted to buy tons of things for my house when I was at Lowe's tonight... But I walked away from unnecessary purchases and went with only what I came in for).  We all just want to cruise to the Bahamas 24/7 and buy everything and anything we can get our hands on.  But just trust me... Chickens will eventually hatch and they'll be hungry and waiting.

Spend half of what you make, double every cost... And plan for everything to take twice as long as you think it will.

Oh and don't put all your eggs in one basket.