Efficient Ways To Help Your Clients Leave A Financial Legacy

Herald-Standard (Uniontown, PA) January 10, 2019 

Some people are fortunate enough to have enough financial resources to leave a legacy to family members or some special cause.

If they have accumulated more than they need to consume in their lifetimes, they may be able to multiply the size of their gift with proper planning.

Today, we are going to discuss tax efficient ways to help your clients leave extra qualified money to family members. Remember, qualified money is things like IRAs, 401(k)s, deferred comp and other such tax structures.

When you contributed to these accounts, you got to reduce your income by the amount of the deduction and this savings got to grow tax deferred. When you withdrawal money, you must pay ordinary income tax on these funds.

They are also subject to required minimum distributions at age 70½. Not taking these RMDs will result in a 50 percent penalty of what you should have taken plus taxes on the entire amount. This could amount up to 80 percent of the distribution going to the IRS.

Some people feel they don't need to spend these RMDs so they wonder what to do with them. If you want to leave a bigger tax free legacy, you may want to buy life insurance with them. The death benefit from life insurance is income tax free to the beneficiary.

There are many different uses for life insurance so it is important to purchase the correct product. All policies are not created equally. This can leave a nice tax free benefit.

If done properly, you may be able to stretch the balance of your qualified money to other family members upon your death. They will be required to start RMDs on this stretch even if they are not 70 ½, but because of their younger age, the required minimum distributions could be much lower.

This money could continue to grow at a faster rate tax deferred. This means that potentially the amount left to beneficiaries might grow to three or four times what the starting IRA value was.

While you can do either of these two strategies independent of each other, it can be extra powerful to combine them. If you have grandchildren, you may want to designate your children as beneficiaries of the life insurance and stretch the IRA to the grandchildren. This is because they would be younger and benefit more from the continued tax deferral.

If you do not have grandchildren, you could employ both strategies with your children. Since they would receive the big tax free life insurance benefit, it would be easier for them to not take more than the minimum required amount out of the stretch.

Many people have too much stock market exposure at this time. These strategies might provide a good rate of return and lessen some of this risk. There could be coverage available even for people with less than perfect health. Both of these strategies utilize the tax code to provide more benefit for your family. Remember, it not just how much you earn that is important, but it's how much you get to keep.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.” If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.

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