Special Cases Show Why Careful Financial Planning is Required

May 21, 2014

In the world of personal financial planning, there are often generalizations that are discussed on financial talk shows, whether on radio, television or website blogs and articles. Reading these for informational purposes could be a good idea, but consumers need to be careful about implementing such ideas and strategies. Sometimes matters may not turn out as expected.

As an example, we’ve been working with an elderly client in his late 80’s. Since he doesn’t have any children, this client (whose assets are significant) is choosing to leave his estate to an elderly sibling and thereafter to a middle-aged nephew. Any remaining assets after the nephew passes are to go to a charity. In this situation, the elderly sibling and nephew are disabled and receiving government benefits, so the client’s assets will remain in a trust to prevent losing those benefits.

The issue here is the client has a large Traditional IRA which will likely still hold significant value when he passes away. Normally, the sibling and nephew might be beneficiaries on this IRA account and therefore would take annual Required Minimum Distributions based on their lifetimes. Future problems might occur, though, because taking possession of the inherited IRA might disrupt their government disability benefits, something no one wants.

The alternative solution is to make the Trust as the beneficiary of the IRA. The advantage here is Trust still protects the remaining value of the account (as an inherited IRA owned by the trust) from affecting disability benefits. The downside is that the Required Distributions now have to be accelerated to just 5 years instead of the life expectancy of a living-person beneficiary and those distributions will be taxed at the much higher Trust marginal tax rate, not the potentially lower rate of the beneficiary and over a longer period of time. Solving these conflicting solutions will require careful analysis to attempt to minimize the taxes paid in this situation.

Tax and estate laws are continually changing and may even affect those who believe their estates are modest. Even one or two small strategy changes could mean thousands of dollars in taxes saved; more money that could pass to your heirs and intended bequests. Take the time and invest a little in reviewing your estate plan with an experienced estate planning attorney or financial professional. Call us if you would like a review of your financial plan or investment asset allocation.