Consider these three facts:
- Americans held $7.9 Trillion in IRAs by the end of 2016. (2017 Investment Company Institute Fact Book)
- 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.)
- 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.