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Planning for Tax-Qualified Plans

When planning for tax-qualified plans such as IRAs, 401(k)s and qualified retirement plans, you should carefully examine the potential taxes that impact these assets. Unlike most other assets that receive a “basis step-up” to current fair market value upon the owner’s death, IRAs, 401(k)s and other qualified retirement plans do not step-up to the date-of-death value.

Beneficiaries who receive these types of assets are subject to income tax, and if an estate is subject to estate tax, the value of these assets may be further reduced by federal and perhaps state estate tax. In addition, if you name grandchildren or younger generations as beneficiaries, these assets may additionally be reduced by the generation-skipping transfer tax – at the highest federal estate tax rate. All told, these assets may be subject to 70% tax or more.

However, there are strategies that can help reduce the impact of these taxes and ensure that these assets meet a client’s unique planning objectives. Here are just a few planning tips:

Name a charity as a designated beneficiary at your death or at the death of your survivor, if married. This strategy may be attractive for those who intend to make gifts to charity at death and the question is simply what assets should they select.

As a tax-exempt entity, a qualified charity does not pay income tax and therefore receives the full value of tax-qualified plans. For example if a client’s beneficiary is in a 35% tax bracket, a $100,000 IRA is worth only $65,000 in his or her hands, but is worth the full $100,000 if given to charity. Therefore, clients may consider giving these assets to charity and giving their beneficiaries assets that are not subject to income tax after death.

Name a Charitable Remainder Trust as Beneficiary
Naming a Charitable Remainder Trust as beneficiary of a tax-qualified plan may provide a steady income stream to a surviving spouse in a tax-deferred manner. Since the assets ultimately transfer to charity, this strategy also provides a charitable deduction for those clients subject to estate tax.

Generate lifetime income with a plan specifically designed for your unique situation and consider doubling the impact of your retirement account.

Take Lifetime Withdrawals, Gift Remaining Cash through Life Insurance Trust
By using withdrawals from a tax-qualified plan to purchase life insurance owned by a Wealth Replacement Trust, you may be able to pass the full value of your assets to your beneficiaries in a protected manner – undiminished by income tax.

These are only a few of the planning solutions for tax-qualified plans. The right solution for you depends upon your goals and objectives as well as your personal circumstances.

Ron Ware, J.D. and Greg Hammond, CFP®, CPA are wealth impact strategists and personal legacy advisors who help individuals, families, and business owners enhance their financial standing while discovering a greater capacity to provide for their loved ones and support cherished charities. Contact Ron or Greg. Greg’s website: www.hammondiles.com Ron’s website: www.wealthimpactpartners.com.