This article from the Wall Street Journal (July 9, 2023) addresses grandparents who are considering benefitting their grandchildren through the retirement account component of their estate plan. *subscription link required (may not be required): email Lorie if you want a link to the article and don’t have a subscription to the WSJ*
I thought this would be relevant to many of our clients and their advisors because we do see a significant number of clients maintain a large component of their net worth in retirement accounts.
A lot has changed as a result of the SECURE Act (the first version in late 2019 and the second version in late 2022). Before the SECURE Act, beneficiaries of retirement accounts such as IRA and 401(k) could typically “stretch” the distribution across their own life expectancy – thus stretching the taxes out over many, many decades. Unfortunately after the SECURE Act, the majority of non-spouse beneficiaries must withdraw (and pay income taxes) on inherited retirement account funds by taking required minimum distributions (“RMD”) within ten years of the inheritance (or only five years if the retirement account owner died before age 73).
As the article points out, if the retirement account beneficiary is a high-earning or other individual in a high tax bracket, these distributions compressed into a ten year period are very income-tax inefficient. (another great article as well) *subscription link required (may not be required): email Lorie if you want a link to the article and don’t have a subscription to the WSJ*
Some ideas that we have explored and implemented with our Legacy Program clients and their other trusted advisors to significantly reduce tax issues associated with significant retirement accounts:
Satisfy charitable intent through retirement accounts rather than through post-tax assets. For example, making charities or a donor-advised fund the beneficiaries of a retirement account and taking the charities out of the living trust.
- We recently worked with a client family on our Legacy Program who was giving approximately $1 million to various charities through their trust. We changed their plan to instead satisfy the family’s strong philanthropic goals through their retirement accounts. The charities will receive the exact same amount of money, but the individual beneficiaries will now save over $300,000 in income taxes!
- Maintain both fairness and tax optimization by giving more retirement account assets to (1) certain beneficiaries (e.g. disabled individuals) who aren’t subject to the ten-year withdrawal rule or (2) specific beneficiaries who are in lower-tax brackets such as young adult grandchildren and giving non-retirement assets to higher-earning individuals such as children in their prime earning years. This takes some time and thought but is worth it for some families.
Roth conversions. In conjunction with our clients’ CPAs or financial advisors, some generous clients are moving assets from a traditional IRA to a Roth IRA (and paying the income taxes TODAY to minimize estate and/or income taxes for their beneficiaries in the future). Additionally, while beneficiaries of traditional IRAs generally have to take annual payouts over the ten years, beneficiaries of Roth IRAs can let the entire account grow for the entire decade before withdrawing the funds – and of course, the funds would be tax free with the Roth IRA since the taxes were pre-paid.
Feel free to reach out anytime if you’d like to explore strategies relating to your retirement accounts.
How to Leave Grandkids Your Retirement Savings
What Inheritors of IRAs Need to Know About Required Withdrawals
And remember, another Legacy Program benefit (and a cost of non-renewing) is that typically discussions and implementation of even somewhat minor changes to the estate plan for non-legacy program clients cost $5,000+.