Ed Note: This is part two of a two-part series and is an excerpt from Your Complete Guide To A Successful And Secure Retirement. Part one discussed five of the nine steps to maximize tax-efficient withdrawals for your older clients. Here, the authors discuss steps six through nine.
6. Tax-Wise Charitable Legacy
If you have charitable intentions, the efficient strategy is to leave your tax-deferred accounts to charity and your taxable accounts to family. Traditional IRA accounts left to family will incur income tax as funds are withdrawn. IRA accounts left to charity escape income tax.
Upon review of Stan and Mary’s estate documents, they were both leaving their IRA accounts to other siblings as they have no children. In their trust documents, they have provisions for trust assets to be left to charity. A review by their advisor pointed out that Uncle Sam could actually help them fund their charitable goals by saving income taxes.
Their living trust was revised to leave taxable accounts to family members that would receive a step-up in basis at Stan and Mary’s death, avoiding taxable gains upon sale of the assets. Their IRA beneficiaries were changed to name each other as primary beneficiary with the contingent beneficiaries being charities. They have agreed they will honor each other’s wishes when the first of them passes away. The surviving spouse will make the deceased spouse’s IRA their own and change the primary beneficiaries to be the charities desired by both of them.
7. Tax-Efficient Family Legacy
Rick and Debbie are in their mid-50s. Between the two of them, they have income that puts them in the highest tax bracket. Given the size of their accounts, and their plan to work until age 70, they expect that they will remain in the highest bracket even after retirement.
This year, Rick’s widowed mother, Jean, who is 85, went into assisted living. Although she does not have long-term care insurance, she has sufficient assets to meet her increased expenses. Jean’s income comes from her survivor Social Security benefit of $24,000, her RMD of about $80,000, plus dividends and capital gains from security sales from assets in her taxable account. Jean has been in a 25 percent marginal tax bracket for the last 10 years.
Besides her taxable account and her IRA, Jean also has a variable annuity. It has a current value of about $200,000 and a cost basis of $110,000. Rick has never liked this annuity because of its high expenses. However, he did not want to liquidate it because it would give Jean a large tax liability. In addition, it had a $400,000 death benefit. Finally, Jean and her deceased husband had purchased series EE savings bonds 18 years ago for $10,000. They are now worth over $20,000 and will continue to earn interest for the next 12 years.
As Jean’s sole heir, Rick knows that, while he will inherit the assets in her taxable account without a tax liability, he will have to pay taxes on all the assets in the IRA, and the gains in the annuity and savings bonds. Further, he understands that once he inherited the assets, the taxes would be at his higher tax rate. Rick mentioned this to his financial advisor who set up the following plan that they discussed with Jean, who understood it and agreed: