Do you have a large IRA you don’t need for retirement? That would be a nice problem to have, according to Jayson Lenox, attorney-at-law and partner with Beck, Lenox & Stolzer Estate Planning and Elder Law, LLC. Click on the article link to read about John and Sally’s “problem”.
We are the first to admit, this is a nice problem to have. However, it is still a problem. John and Sally are rightfully concerned about the taxes generated by Required Minimum Distributions and any taxes heirs may face.
Their two adult children would currently be required to empty the IRA within ten years of their parent’s death. Depending on their ages, these taxable withdrawals could hit during their peak earnings years. The $1 million IRA could potentially lose 40% of its tax value. If John and Sally’s estate exceeds the federal or state tax exemption levels, their heirs could pay a combined estate and income tax burden of 60%-70%.
A recent article from Forbes, “Don’t Need That IRA For Retirement? Here’s What You Can Do With It Instead,” provides several options to consider.
IRA Disclaimer to Pass Assets to Grandchildren. Adult children could disclaim part or all of the IRA, passing all or a portion to grandchildren instead of the children. The grandchildren would still have to be content with the ten-year rule for withdrawals. They are in a far lower tax bracket than their parents. The original IRA owners would need to set up a special IRA trust to restrict how funds could be used. They might specify the funds to be used for education, a down payment on a first home, or medical care. An experienced estate planning attorney can help set up a trust to reduce the tax impact on the family and enhance the grandchildren’s lives.
Create a Testamentary Charitable Remainder Trust. The IRA could be left to the trust to create a lifelong income stream for the children. The benefits are twofold: steady income while protecting the principal and spreading tax liability over many years. Upon the death of the heirs, the balance in the trust is donated either to a charity of the parent’s choice or a Donor Advised Fund. If the couple wishes to replace the amount of money given to charity, they can buy a life insurance policy for their children to benefit the grandchildren.
Buy a Guaranteed Life Insurance Policy. Purchasing a life insurance policy with the RMDs would add an asset outside the probate estate. The income tax-free proceeds could be used to pay taxes on the remaining IRA or become an inheritance. The IRA could also be bequeathed to a charity, and life insurance proceeds would replace the IRA inheritance.
Qualified Charitable Distributions During Life. For philanthropically minded families, a QCD allows IRA owners to contribute funds directly to qualified nonprofits once they turn 70 ½. The QCD does not count as income, so John and Sally can keep taking the standard tax deduction.
Early Distributions Before Reaching Age 73. John and Sally could take their distributions before they reach the required minimum distribution age, spreading withdrawals over extended periods of time. The tax burden would be evened out over time.
Taking Action. Do you have a large IRA that you don’t need for retirement? These options should be reviewed with an experienced estate planning attorney to be sure they don’t undo other estate planning strategies created to pass wealth across generations and support their future.
Beck, Lenox & Stolzer attorneys have years of experience in helping clients determine estate planning strategies to suit their individual family situation. You are welcome to schedule a phone consultation with one of them. The consultation is free, and a subsequent, more in-depth consultation in our office is also free.
Reference: Forbes (Nov. 25, 2024) “Don’t Need That IRA For Retirement? Here’s What You Can Do With It Instead”
