Wealth preservation: Protect your IRA or retirement plan from
taxes.
If you've worked hard and amassed a large IRA or retirement plan,
don't think it's all smooth sailing from here on out. There is
still work to be done. Protect the wealth you have built up in
your IRA so that what you don't use can go to those people and
causes that are nearest and dearest to your heart.
There are three candidates to receive your IRA funds
after you are gone: your heirs and family, charities and Uncle
Sam. We assume the latter is not among your list of beneficiaries,
but the fact is a huge percentage of retirement plan assets in
America go to the taxman each year. Although this article is focused
on large IRA tax issues only, readers wishing to learn more about
tax and other pitfalls the wealthy face can e-mail us at FourFactors@PillarOnline.com
and request our latest white paper titled "Four
Factors The Affluent Must Know To Avoid Financial Disaster And
Secure Their Dreams."
Take-aways
• Taxes could take 68 percent of your
large IRAs and retirement plans.
• Uncle Sam is the biggest beneficiary of many large
IRAs.
• Advanced estate and tax planning strategies are
available. |
With baby boomers moving into retirement, the question
of protecting retirement assets is increasingly important. Not
surprisingly, more and more of our clients and prospective clients
are looking for ways to handle large IRA-related tax issues.
Not long ago, we demonstrated some of the potential
tax pitfalls involving a large IRA to a recently widowed gentleman
who had a net worth of about $10 million and wanted to leave a
portion of the IRA to family as well as charity. Part of the wealth
they had accumulated was the husband's $4 million pension plan,
which was converted to an IRA.
First we explained the bleak future that lay ahead
for the money in the IRA if he did not plan properly. Without
taking the right steps, 37 percent of the retirement money would
go to federal and state income taxes upon his death, and another
47 percent would be lost to federal estate taxes. (These are 2005
figures, new estate tax brackets are in effect this year.)
Of that $4 million IRA, $2.6 million could wind
up being lost to taxes. Though there are tax deductions for estate
taxes, the client's children would net about $1.3 million, and
nothing would go to charity, making Uncle Sam his biggest IRA
beneficiary.
Even with a living trust, his estate would only
be sheltered for about $4 million of his $10 million from estate
taxes, which meant his $4 million IRA and $2 million of his wealth
would be eaten up by estate taxes. Keep in mind that this estate
would be worth two to three times this amount, $20 million to
$30 million, in 15 to 20 years if it grew at 6 percent a year.
So, realizing we had a huge tax problem on our hands
we went to work on making his heirs the largest beneficiaries
and helping to fulfill his dream to donate a substantial amount
to his favorite charities.
We showed him how he could take $160,000 from his
IRA each year, pay taxes and net about $100,000 annually. The
proceeds would fund an irrevocable life insurance trust. Upon
his death, the trust would pay the beneficiaries $15 million unencumbered
by estate or income taxes.
Then we focused on how to fulfill his dream of gifting
to charity. We recommended he make the beneficiary of his IRA
his favorite charities. The charities would then get $4 million
if he averaged a 4 percent return (or whatever his IRA value is
at his death). This was a good example of someone who is able
to benefit from an advanced estate planning strategy that went
beyond the living trust and ensured that wealth that would have
otherwise gone to taxes went instead to those he most wanted to
help – his family and charity.
Christopher G. Snyder and Haitham "Hutch"
E. Ashoo are principals of Pillar Financial Services in Walnut
Creek. Contact them at 925-356-6780.
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