Who will inherit your wealth? Your heirs or the IRS.

Consider these three facts:

  1. Americans held $7.9 Trillion in IRAs by the end of 2016. (2017 Investment Company Institute Fact Book)
  2. With more than 10,000 baby boomers retiring every day, we are on the cusp of an historic intergenerational wealth transfer that could total as much as $3.2 trillion. (RBC Wealth Management Survey.)
  3. As much as 30-80% of an estate could be made up of IRAs or other retirement plan assets according to most estimates.

And, let’s add a fourth fact that is worth considering: Only 3 in 10 of families have a wealth transfer strategy in place.

What is becoming more apparent to us at Highland, every day, is that most people don’t have a clear plan for the transfer of their IRAs, or a basic understanding of the tax-advantaged death options available for qualified assets.

Conversations about inheritances and death options aren’t easy, but they are at least possible (and important) to have now, and impossible if we procrastinate too long.

Let’s consider the available options:

  • Spousal Rollover: The surviving spouse can choose to rollover an inherited IRA into a new or existing IRA in their name. A benefit to the surviving spouse is the delay in distribution on these assets until the surviving spouse reaches age 70 ½. This applies in deferring RMDs (required minimum distributions) the deceased spouse may have been taking.
  • Spouse Inherited IRA: Under this option, the spouse may begin taking distributions right away under the deceased spouse’s plan as an inherited IRA. This may be advantageous for surviving spouses younger than 59 ½ who need access to the cash flow immediately, while allowing them to avoid early withdrawal penalties. The surviving spouse can choose to delay taking distributions until the date the deceased IRA owner would have reached 70 ½.
  • Transfers to Children in a Lump Sum: The children will receive the value of the IRA and they will be required to pay their ordinary income tax rate on that income.
  • Inherited IRA (children): If the IRA owner dies before age 70 ½ , the children can choose to take out the balance within five years (and pay ordinary income tax on the distribution) or stretch out the distributions over the children’s life expectancy. If the IRA owner was 70 ½ or older at death, the distributions will continue based on the required minimum distribution of the deceased. The children can elect to have the payouts stretch over their life expectancy, but they must make this election. This action can defer taxes owed and continue the tax-deferred benefit of the IRA.
  • IRA to charity: The qualified assets can be left directly to a charity. This will avoid any income tax and estate tax from being owed. This includes making a gift to a donor advised fund which can allow heirs to make gifts to multiple charities over time according to any philanthropic wishes or goals of the family.

This is just a primer on the options available upon death that can provide tax savings and wealth accumulation.

We’d love to have a longer conversation about your preparedness for these events. We’ve found conversations today can make an inheritance a greater gift to those bequeathed, furthering your legacy and generosity in the lives of those you love and the causes you hold dear.

We’d consider it a privilege to talk with you.

Randy Fairfax

Randy has more than 30 years experience in the finance and business advisory fields. As a consultant, he has primarily worked with non-profit organizations, closely held businesses and high capacity families. He has extensive experience in charitable organizations and planning. He has helped families and non-profits leverage tactical analysis with organizational strategies to be more efficient and effective increasing their financial resources. Randy obtained his undergraduate degree in accounting and MBA in Finance from the University of Akron. He has also earned the Certified Financial Planner designation. He is a member of the National Committee on Planned Giving and the Financial Planning Association.

Disclaimer

The information and material published in this report are confidential and non-transferable. Therefore, recipients may not disclose any information or material derived from this report to third parties, or use information or material from this report, without prior written authorization.

This report is provided for informational purposes only. It is not intended to constitute an offer of securities of any of the issuers that may be described in the report. No part of this report is intended as a recommendation of any firm or any security, unless expressly stated otherwise. Nothing contained in this report should be construed as the provision of tax or legal advice.

Past performance is not indicative of future performance. Any information or opinions provided in this report are as of the date of the report and Highland is under no obligation to update the information or communicate that any updates have been made. Information contained herein may have been provided by third parties.

Highland makes no representations or warranties, express or implied, as to the information's accuracy or completeness. Furthermore, such information may be incomplete or condensed. Highland, its directors, employees, assigns, agents, and successors bear no liability for any errors or omissions in this publication or for any losses arising from the use of or reliance upon this information.

This limitation on liability applies to direct, indirect, consequential, special, punitive, or other damages, as well as damages for loss of profits or business interruption. Investors shall bear all responsibility for investment decisions taken on the basis of the contents of this report.