Retirement Accounts - Smart Planning Can Save Big Money

Meeting with a client recently reminded me of a topic that we have explored before. That is, smart tax planning for retirement accounts.
In particular, in this case, both husband and wife had both IRA accounts and 401K Plan accounts. This particular family had other assets including a family business and two residences. They intended to make charitable gifts at the second death using their trusts as the vehicle for disposition of property at that time. The second point that was raised involved retirement income or rather cash for current living expenses. Charitable Gifting. It always makes the most sense to use retirement plans to implement charitable gifts at death. This is the most tax efficient way to benefit a favorite charitable, religious or educational organization. The nonprofit entity can liquidate its share of the plan without paying any income tax. If the charitable gift had simply been made from the trust, an individual beneficiary would have been stuck with income taxes of 30% or more on withdrawing the same sum from the retirement plan.
How does one implement a charitable gift of a retirement account? Assuming that the charitable gift is to be made at death, the charity is named as a beneficiary. Normally, the charity would be listed for a fixed percentage. The plan sponsor might permit a percentage with a cap or a fixed amount.
Another alternative is to set up a separate retirement plan, by making a transfer from an existing IRA, for example, with the charity as the sole beneficiary. This is probably the cleanest and simplest way to plan for charitable gifting. The amount in the charitable IRA account can be regulated by withdrawals, or maintained by taking distributions from other plan accounts. Sometimes a client will provide in his or her trust that the charitable gift be augmented if the IRA account is less than a specified amount.
If the charity is named as only one of the beneficiaries of a plan, the family should be aware that there are time limits on making the distribution to charity after the death of the account owner. Otherwise, the stretch feature for the individual beneficiaries may be lost. This is another good reason for using a separate account for charitable gifting.
Important Reminder. This discussion brings up another point that married couples sometimes forget. For example, if a couple intends that their church or university is to get a gift of $50,000 at death, they should make sure that the spouse with the largest retirement plan take steps to be sure that the gift is made at the death of the account owner. Otherwise, the surviving spouse is likely to roll the account into her own IRA with beneficiaries that she can change at any time. (Assuming, the wife is the survivor, which is generally the assumption made in commentaries like this.) We have seen charitable intentions defeated often by inaction, intentional or unintentional, by the surviving spouse. Income Tax Planning During Lifetime. Another useful way to reduce income tax is to carefully plan distributions from retirement accounts so as to take no more than the Minimum Required Distribution (MRD). This should be done by using income and/or principal from other investments to meet current living costs. As any income tax advisor can attest, income tax planning for seniors can be a delicate matter.
Tax on social security benefits can be a huge variable for many people who do not have significant pension income and live off investments, social security and retirement plans.
Financial planners and other income tax advisors should study their client’s investment portfolio and income sources to devise strategies for minimizing retirement plan withdrawals and income taxes in general. Many times cash for current needs can be provided from principal (not taxable income). This can reduce or eliminate income tax on social security.
For example, couples with a substantial investment portfolio can use annuities and other vehicles to defer the recognition of capital gains and ordinary income. This can reduce taxable income and avoid income tax on social security payments. Remember the old adage, "don’t pay income taxes unless you have to!".
If you have charitable intentions and want expert advice on integrating those goals with your overall estate, or if you want to discuss more effective use of your assets, please call Jim Modrall or any of the attorneys listed below.
Donald A. Brandt, Joseph C. Fisher, Thomas R. Alward, Edgar Roy, III, Matthew D. Vermetten, Thomas A. Pezzetti, Jr., John M. Grogan, Susan Jill Rice, Gary D. Popovits, H. Douglas Shepherd, Laura E. Garneau and David H. Rowe at (231) 941-9660
©BRANDT, FISHER, ALWARD & ROY, P.C.
This newsletter is provided for informational purposes and should not be acted upon without professional advice.