I recently saved a client’s heirs $699,429 in income taxes. Give or take.
I recently saved a client’s heirs $699,429 in income taxes. Give or take.
It actually wasn’t that hard.
His situation may not be yours exactly, but there's still a lesson for you.
👇
IRA custodians issue tax Form 5498 to account holders listing prior year account values, contribution amounts, etc.
On a new client’s 5498, a few items stood out:
A traditional IRA balance of $2M.
The primary beneficiary of the account was his deceased mother.
There were no contingent beneficiaries listed.
😟
Whoops. As-is, this significant IRA balance may have run through his estate upon death. This is typically an undesirable outcome from a tax & legal perspective. At best, the ultimate heirs and required distribution schedule coincidently align with the deceased’s wishes. At worst - unnecessary administrative headache, unfavorable tax results, and the deceased’s wishes for beneficiaries are NOT met.
The obvious answer here is for my client to update his beneficiary primary and contingent beneficiaries to be living relatives.
🛑
But, wait, there’s more.
Two other facts about this new client. He has:
👉 Significant assets. Outside of his IRA, he has taxable investment accounts of around $10M.
👉 Significant philanthropic intentions. His will includes a division of assets between his family and several 501c3 charities.
Aha! 💡
A BETTER solution for him is to name 501c3 charities as the beneficiaries of his IRA. He can then update his will to leave a greater percentage of taxable investment accounts to his family vs the charities.
Why do it this way?
When his family inherits the IRA, they’ll pay tax as they take required distributions. 💸 A 501c3 charity will not. A quick calc on federal income tax of $2M of IRA distributions is nearly $700K! Further, the assets in his taxable accounts will be eligible for a step-up in tax basis which makes them a more favorable type of asset to leave to non-charitable beneficiaries.
By making a few minor adjustments, my client’s estate plan has become MUCH more tax-efficient for his heirs.
And this just a stopgap measure for an obvious one-off problem. My client’s ultimate estate plan may include even more sophisticated options such as a donor-advised fund, a charitable trust of some kind, etc.
Your takeaways:
Make sure your IRAs all have named primary & contingent beneficiaries. Who are living and/or charities.
If you have charitable intent and sufficient assets, consider leaving your traditional IRA to your favorite charities and leave your heirs more tax-efficient assets such as taxable investment accounts and Roth IRAs.