“Wealth, like happiness, is never attained when sought after directly. It comes as a byproduct of providing a useful service.” — Henry Ford

When boomers begin to think of their retirement and leaving a legacy behind to the next generation, considering the right financial tools is of utmost importance. Certain options may seem appealing, but they may actually leave behind more debt and taxes, drastically eroding the actual value. Working with your clients to ensure they investigate the most beneficial options for their personal financial planning process will lead them down the path of formulating a lasting legacy.

Boomers often view their unused individual retirement account (IRA) as an ideal asset to leave to their children or grandchildren. While this is a generous attitude to have for future planning, it could potentially end up being a very costly way of transferring assets to the next generation, particularly for a boomer who is facing an estate tax.

Because the monetary amount has never been taxed, IRAs of large estate owners will be subject to income taxes. It is quite possible that your client’s generosity intended for their next generation could be consumed with extraordinary income and estate taxes, leaving their beneficiaries with much less than intended.

Strategies for sharing

Instead, why not explore a slightly different tactic that results in a significantly different tax bill? Work with your clients and show them the various financial tools they could employ with the money from their IRA. For instance, your client could use this money to fund a lifetime immediate annuity. Your client would pay income taxes on the money used to purchase the annuity and then could use the remaining balance to pay premiums on a life insurance policy.

This strategy would allow your client to inevitably pass more money on to the next generation. When your client passes away, there would be no balance in the IRA account subject to estate taxes. Properly structured, the beneficiaries of the life insurance policy will receive the money free of income taxes, capital gains and estate taxes.

See also: Trusts and LLCs: Mind the details

A tailored plan

Leaving behind a legacy of fees, taxes and, potentially, debt is not a goal of any of our clients. Providing them with guidance to ensure they are able to take care of the ones they are leaving behind is essential. By exploring multiple financial planning options, we can help our clients down the path toward their successful and personalized plan.

 

For more from Phil Harriman, see:

Don’t play the numbers game

End scene: Succession planning for our clients and ourselves

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