Minimizing taxes on retirement accounts

Situation:

A retired physician in the top tax bracket was concerned about looming income and estate taxes due on her substantial retirement account.

Her retirement account assets had grown to be quite large over many years of practicing medicine, in addition to other wealth she has accumulated. She was concerned about the taxation of her retirement accounts when they are eventually passed down to her three children and eight grandchildren. She read an article by Grant, Hinkle & Jacobs that was published in a national financial newsletter about techniques to improve the tax-efficiency of her retirement accounts, and asked us to assist with her planning.

Because her IRA would be subject to both income and estate tax at her passing, she was understandably worried that she would be leaving more to the IRS than she would be leaving to her children and grandchildren.

 

Action Steps:

First, Grant, Hinkle & Jacobs worked with her attorney to establish an irrevocable trust for her heirs. She is now funding the trust over time with distributions from her retirement account that she does not require to support her current needs. Funding the trust is accomplished without triggering a gift tax by using a combination of her annual gift exclusions and, in certain years, a portion of her lifetime exclusion.

Next, in anticipation of the taxes due, the trustee of the trust used those gifts to fund a life insurance policy designed by Grant, Hinkle & Jacobs. The policy leverages the premiums into a multi-million dollar death benefit that will be paid completely void of income, capital gains, and estate taxes, no matter when it occurs. The beneficiaries can use these funds to pay income and estate taxes due on the inherited retirement accounts so they can continue to keep them intact for as long as possible.

The trust was drafted so that any assets remaining in the trust after her passing will be protected from creditors, divorcing spouses, and future estate taxes for her children and grandchildren.

 

Results:

The client is now focused on spending more quality time with her grandchildren and living a long, healthy life, rather than worrying about her estate, taxes, and asset protection.