“The Great Wealth Transfer” is the phrase coined to represent the impending shift of assets from the Baby Boomer generation to their descendants. The scale of this shift figures to be truly “Great”. Per 2019 data, it is expected that $68 Trillion will be passed from one generation to the next over the next 25 years*.
We all have different aspirations for our “End of Life Plan”, but I am willing to bet that most of us would like to leave a legacy. Some of us plan to leave a tangible legacy in the form of assets while others plan on a less tangible impression on the world through their children or another means. While we support all sorts of legacy building, the former is what we can help you with.
While it can be difficult to pinpoint the exact scope of assets to be passed on, you know you want to leave something. You want to do it in a way that is most beneficial (and certainly not burdensome) to your heirs.
First and foremost, I will stress the importance of working with an estate attorney to craft a plan that most efficiently accomplishes your wishes – especially if you have accumulated significant assets over your lifetime. A good estate attorney is vital in navigating the intricacies of tax code and probate law. Furthermore, the law changes constantly and you’ll need a professional who can interpret those changes and refine your strategy over time.
While an attorney will be your best authority on how to distribute a legacy, there are many other considerations from the perspective of building your legacy. Below, I’ve detailed a simple, yet powerful concept that is often overlooked and, due to legislative changes, more important than ever.
Which Investment Accounts are Best to Leave for My Children?
- The primary consideration here is tax consequences. A Roth IRA is the best asset you can leave behind for individual beneficiaries. The funds you contribute to the account are post-tax and grow tax-free, so your beneficiaries will never have to pay a dime of ordinary income tax nor capital gains tax. They also have absolute control of the timeline in which they would like to withdraw the assets.
Many high-income earners are “phased-out” of making standard Roth IRA contributions and ignore the opportunity to fund such an account. Fortunately, there are ways you can build a Roth, regardless of income. If you think you make too much money to fund a Roth IRA, I urge you to investigate Roth conversions and “Back-door” contributions with your financial advisor.
- Moving down the line, taxable investment accounts are the next best of the common account configurations to leave for heirs. The beneficiaries will not owe any ordinary income tax on withdrawals, nor be compelled to withdraw the assets over a designated period. They would, however, be liable for capital gains tax on gains that occurred after your passing since they receive a “step-up” in cost basis to the date of the decedent’s passing.
- While traditional IRAs are an excellent vehicle for funding your own retirement with tax-deferred dollars, current regulation makes these accounts quite a bit more burdensome for heirs. Following the SECURE Act legislation of 2019, any non-spouse beneficiary of an IRA must now withdraw (and recognize as ordinary income) the full balance of the account within 10 years of the decedent’s passing. For a large IRA, this results in the beneficiary paying higher tax rates on their own income while also receiving a reduced benefit from the legacy that you left for them.
If your heirs are fortunate enough to receive investment assets from you in any form, it goes without saying that they should be grateful for the financial benefit. Having said that, my point here is to illustrate that there is much that can be done to direct your assets efficiently. Quite frankly, any good estate attorney will tell you that I’ve only scratched the surface. Whether you’re still building wealth in your career, or planning for the next generation in retirement, there are strategies to pursue. We would relish the opportunity to have a conversation about your wishes and how we might best help you fulfill them.