TAX PLANNING
that limits any significant shifts in their strategy or goals , namely :
1 . You have directed consistent , constant dollar levels of withdrawals from the client ’ s traditional individual retirement accounts ( IRAs ). By doing this , you ’ ve avoided catapulting your client into a higher tax bracket with “ lumpy ” withdrawals , used charitable deductions to save on taxes , and retained enough of their IRA assets that they can take advantage of lower tax brackets in their late old age .
2 . You have topped off their required minimum distributions ( RMDs ) with voluntary withdrawals to fund Roth conversions ( if the client was married , these should have begun when the spouse was alive , and the couple was taxed more advantageously than the widowed individual ).
You ’ ve also likely encouraged clients to contribute to a donor-advised fund or family foundation by selling highly appreciated stocks .
And if one spouse ’ s death was anticipated , you likely recommended that the couple transfer shares of appreciated stock held in joint accounts to a separately owned account so the stock gains a stepup in basis when the spouse dies .
Your Mission Is …
In the best of all financial worlds , your client in late old age has their investment assets mostly held in Roth IRA and brokerage accounts , and only a tiny allocation is appreciated stock . Now , you have three priorities : 1 . To ensure that the client ’ s IRAs reflect the beneficiaries ’ current preferences — specifically , that beneficiaries ’ taxes will be minimized if they stand to inherit a traditional IRA .
2 . To confirm that a trusted family member understands the older relative ’ s investments and bequest preferences and can become one of their executors , keeping the plan on target amid any turmoil both before and after the client dies .
3 . To keep the client aware of any imminent increase in their inheritance tax liability imposed by federal or state law , and to suggest that the client contemplate a charitable gift in response .
Some clients may want to take steps to limit their beneficiaries ’ exposure to taxes . They can do so by taking the following steps :
• Switching IRA beneficiaries to grandchildren or younger family members who are in lower tax brackets . Since beneficiaries must now empty the accounts in 10 years according to changes in the law , these monies should be going to people in lower brackets .
• Helping wealthy children who don ’ t need inheritances designate their children ( or others in the family ’ s next generation ) as the beneficiaries of other , non-IRA assets in the estate .
• Making a planned charitable gift that will help them avoid federal and state inheritance taxes and capital gains taxes on appreciation that the estate will owe before probate is completed .
A trusts and estates lawyer will handle legal filings after the client ’ s death . Still , I can ’ t emphasize enough how important it is for the lawyer to be part of a team that includes a competent executor who is sensitive to the client ’ s intentions and a financial advisor familiar with the client ’ s assets and transaction history .
Perhaps You ’ re The Recovery Crew
You may inherit or acquire a client in late old age who didn ’ t get the advice you would have given them before to help them minimize their taxes . Now you ’ re working to salvage what you can . Perhaps the client did one of these things :
1 . Took RMDs only and didn ’ t take advantage of Roth IRAs . Or missed opportunities for Roth conversions while filing jointly at more moderate tax brackets than they ’ re now in .
2 . Exhausted their brokerage accounts , realizing long-term capital gains , or overlooked opportunities to liquidate unrealized gains of stocks held in a brokerage account .
You still have some options with these clients . You can still evaluate voluntary IRA withdrawals to fund Roth conversions . The Roth accounts can be rainy-day funds or be used to reduce taxes for the client ’ s beneficiaries .
Suppose a client has a spike in their out-of-pocket costs for things like healthcare and caregiving . In that case , you can identify the most tax-efficient moves , comparing the sale of assets in brokerage accounts ( which come with the realization of long-term gains ) with
You may inherit or acquire a client in late old age who didn ’ t get the advice you would have given them before to help them minimize their taxes .
the tax bills the client would see if they took voluntary IRA withdrawals .
Remember These Things
As an advisor to a wealthy individual in late old age , you should keep these two thoughts in mind :
1 . The client portfolio ’ s asset allocation does not matter at this stage of their lives . The time horizon is short , and their beneficiaries can adjust their investment mix later when they inherit the assets .
2 . Even a client with a limited life expectancy deserves your attention . Probate periods can be long and extend your advice ’ s life span and consequences .
In my next column , I ’ ll write about the strategies for minimizing taxes that you can recommend as an advisor to clients in “ early old age ,” shortly after they ’ re retired , when they are still in good health yet need to plan .
PAUL R . SAMUELSON is the chief investment officer and co-founder of LifeYield .
46 | FINANCIAL ADVISOR MAGAZINE | NOVEMBER 2023 WWW . FA-MAG . COM