Each year most of us file and pay our “Fair Share” of Federal Income Taxes to the tune of thousands or tens of thousands of dollars. The biggest tax that will be due however does not have your signature on the return, it’s that of your loved ones when they inherit your “Tax Qualified Plans”. These include IRA’s, 401K plans, 403b, Thrift Savings Plan (TSP), TIAA CREFF, VALIC to name a few. The money grows Tax Deferred but is fully taxable at death when it passes to a non-spousal beneficiary unless the proper planning occurs. If the money is taken in a “Lump Sum” the custodian informs the IRS that a fully taxable distribution has occurred. The taxes are due when the heirs file their returns for the year in which the money was received. This triggers a “Tax Bomb” that explodes resulting in huge tax hit to the assets. The heirs then write a check and here’s the saddest part “DON’T GET A RECEIPT” that breaks down where the money goes. Think about that, even if you purchase a stick of gum you are given a receipt. When you send the IRS tens of thousands of dollars there is absolutely no “Accountability”. Then you have to hear the leaders from both parties in Washington lecture you on paying your “Fair Share”, this is sickening. I don’t know about you but I feel certain that I have paid my fair share but thought I would do a little research to see exactly what happens to some our hard-earned money that goes into the Washington abyss. Then I am going to show you how to minimize this debacle when you pass your tax deferred assets to your loved ones.
According to the Government Accountability Office (GAO), you might be shocked of the waste and abuse of your tax dollars: (1) Unrecognized Transactions: these are transactions the accountability office cannot account for 24.5 Billion (2) Unused Flight Tickets by Government Employees: Purchased 100 million dollars of Airline tickets that were either duplicate purchases or unused by the government employees (3) Credit Card Abuse by Department of Defense Employees: their government issued credit cards were used for: concert tickets, gambling, cruises and exotic dancers. Over an 18 month period the number was approximately $102,000.00. That’s just a sample of where your money is going, this is ridiculous.
You and I can’t fix Washington but you can take the steps to legally protect your IRA and other tax qualified assets from funding this nonsense. As most of you are aware, once you turn 70 1/2 in most cases the Government requires that you begin taking mandatory distributions from you IRA (RMD’s).
The amount is determined by the account balance the previous December 31st and the IRS life expectancy tables. When I am working with a new client that has money in these types of accounts I always ask them for the analysis provided to them by their existing advisor as to what the distributions look like now and at their death. The answer is always the same, not only have they no idea of how much they are going to have to take out mandatorily, there has been absolutely no plan to prevent a tax disaster when they die. The next question I ask is “How do you feel about that?” Most will tell me “Fred I had no idea that the tax bill was going to be that high.” My next question is “If I could show you how to protect the assets while living and minimize the tax impact at your death, will you move the money to my care?” I get about 98% that say “yes”. The other 2% just don’t believe me. These are IRS codes and rules however opinions in this instance can have severe consequences.
There are multiple reasons for loss on the accounts, here are a few. First, in my opinion the money in your Retirement Accounts is sacred. The money should “NEVER BE AT RISK OF LOSS”, it’s a retirement account for goodness sake. This is money it took decades to accumulate and can vanish due to market risk overnight! Secondly, I can’t do an IRA analysis on money that could disappear. How is someone going to tell you approximately how much you have to take out while you are living if the account balance each year looks like it’s on a rollercoaster. Also, the tax planning doesn’t matter if I you don’t know what the balance is going to look like when you pass. To demonstrate the benefit of advanced” IRA” preservation planning, here is a recent example. A couple I recently
visited had an IRA balance at risk in mutual funds in the amount of $500,000.00. They told me that they no longer wanted to gamble with their life savings in the stock market and asked if I could help them. I showed them that at a 6% projected growth rate that they would have to take out between ages 70 1/2 and 85, $489,000.00 from the account in mandatory distributions. This would leave an account balance to their heirs of $660,000.00. After the heirs pay taxes of approximately $244,000.00, they would inherit $416,000.
By implementing “Wealth Preservation Planning”, the account could grow without risk of loss while they are living and a 2nd death the beneficiary would be an “IRA Qualified Trust”. The money would remain tax deferred, protected from many of the unknown perils that can happen to their beneficiaries. These can come in many forms such as: divorce, disability, death, tax problems, minor grandchildren, spousal influence to name a few. The trust would divide the money into separate accounts for the heirs and paid out over the life expectancy of each beneficiary. In the case of this couple, their children and grandchildren would receive over $2,000,000.00 verses $489,000.00 before the advanced planning. To say the least they were thrilled, not only was the account protected from market risk while they were living but devastating tax loss when they pass. The law firms that I work with can design modern trust, but the most important part of the planning is preserving the assets that go into the document. The most advanced trust in the world won’t matter if there is nothing to protect!
I am not licensed to advise anyone on being in the market, selling their positions or managing their market assets. Like I said before, I left the securities business many years ago. My job is to help my clients manage “Risk” on the money while they are living and refer them to the proper professionals to develop asset protection beyond the grave. The options are out there, but you must be educated in order to make an informed decision. Without the knowledge, you risk a significant portion of your life savings being used as “Entertainment Slush Fund” distributed by the elites in Washington!
If you own any of these types of assets and want to be proactive in the planning call Philly at (888) 753-6664 and schedule a complimentary consultation.