Making Effective Use of IRAs as Part of an Estate Plan
by Daniel Sudit and Kevin G. McCandlish
It is a common misconception that once you designate a beneficiary for your individual retirement account (assets, either through your investment adviser or a retirement plan provider, those assets are taken care of in regard to estate planning. It is true that this step does affirm who will receive your retirement assets at passing; however, in order to complete a holistic estate plan, other key issues should be addressed.
There are effective uses of an IRA as part of the estate planning process that most retirees have prepared for. These steps include taking taxable withdrawals from your IRA when your tax bracket is lowest, often right after retirement, completing your beneficiary designation forms in a consistent manner with your estate planning documents, and avoiding naming your estate as your IRA beneficiary. In addition to these commonly discussed themes, you want to ensure your assets are being maximized in accordance with your wishes. This column will cover three complex estate planning strategies for retirement dollars that are often not addressed prior to passing. We have found that they may have sizeable tax effects to an individual’s estate.
Bequest Your IRA to Charity
Many of us are charitably inclined, but could be financially unable to commit a large sum of funds to the causes we are passionate about during our lifetime. Utilizing your retirement assets to make a charitable bequest at your passing is a tax-efficient method to reducing your taxable estate while providing a generous gift to a cause you support. By bequeathing your IRA to a tax-exempt entity (e.g., the YMCA or a public non-profit university), the funds will transfer to the charity tax-free. The charitable beneficiary will receive the entire benefit of your bequest and your estate will receive the full charitable deduction for estate tax purposes, reducing the size of your taxable estate. Depending on the size of your estate and your state of domicile, this deduction could mean the difference between your estate being over or under the federal or applicable state estate tax exclusion limit.
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Kevin G. McCandlish , CTFA, is a wealth adviser at BMO Private Bank.