4 Ways to Leave a Legacy

Many clients come to us needing help for retirement and legacy planning. In this article, we will describe four ways to leave a legacy, and the pros and cons to each idea.

Roth IRA Conversions

A Roth IRA conversion is a great way to dedicate a certain amount of assets for certain beneficiaries. Many clients have accumulated hundreds of thousands of dollars in their qualified plans whether it’s a 401(k), IRA, or TSA. The tax law allows you to convert any amount of IRA into a Roth IRA and pay the tax today. For example, if you’re in the 24% tax bracket and you want to convert $10,000 of your IRA into a Roth IRA, you would pay a tax of $2,400. Now that $10,000 will grow into the future completely tax-free, if you give it enough time, that really makes a big substantial difference.

Pros: If you have a long runway (20 to 40 years) before you plan on giving this inheritance to your kids or grandkids, then a Roth IRA conversion may be one of the best options to give tax-free money for very little charge. If you’re in a lower tax bracket, then might as well pay the tax on the money rather than them.

Cons: There are no guarantees that your investment will grow and if you have a shorter time horizon, then there may not be that much of a benefit.

Life Insurance

Life insurance has been around for many years and it is a great way to pass tax-free money onto the next generation. Life insurance is a contract between you and the company as long as you make your payments. They are required to pay your beneficiaries the life insurance amount. Many clients take advantage of this, especially in their late 50s to mid-60s to create a contract to make sure that each kid gets X amount of dollars. Currently, life insurance is not taxable on the beneficiaries and so it is a great way to pass tax-free money on.

Pros: It is a guarantee* to make sure that when you are no longer here your beneficiaries will receive X amount of dollars. Many life insurance policies today have additional riders on them to say that if for some reason you need this money or you need long-term care, that you can use a portion of the life insurance policy so it could be a safety net for you and also a legacy planning tool. 

Cons: Many of these policies get very expensive. When you are older, life insurance is cheaper than when you’re young. If you have had a health challenge, then you may not be able to qualify for life insurance.

Donor Advised Funds

Donor advised funds allow you to contribute to charities today and take the tax deduction today while allowing you to distribute it to the charities over time with the new tax laws of higher standard deductions and the restrictions on being able to write off large amounts of state and local taxes. This has generated a lot of activity with our charitably inclined clients. The main thing we do is bunch together several years of charitable contributions. For example, if a client contributes $20,000 per year over 5 years, they may not realize a large charitable deduction on their taxes. If in one year, we bunch those 5 years together and contribute $100,000 to a donor advised fund, this allows them to take a much larger tax deduction in the year it was contributed. Then, our client has the ability to stretch out those donations or donate to any approved charity of their choice into the future. They can also allow the donations to continue to grow and they’re donated to a future point.

Pros: Donor advised funds can be a great tax strategy, especially for clients who have large tax bills. They provide flexibility and are used by many wealthy clients.

Cons: Donor advised funds are irrevocable once you provide a donation. You are unable to receive it back under any circumstance. Additional administrational fees can increase the fees for donor advised funds.

QCD – Qualified Charitable Distribution

Anyone age 70.5 or older can take money from their IRA and contribute it directly to a charity. The benefit is that our client does not have to pay income tax on that donation. It is a great incentive, especially for our older clients who are charitably inclined. As long as it goes from the client’s account directly to the charity, then that portion is not taxable. The maximum annual amount is $100,000.

Pros: Charities and our clients benefit that taxes are avoided. Also, this donation counts as your RMD withdrawal.

Cons: You must be above age 70.5 to participate.

*Guarantees backed solely by the claims paying ability of the issuing insurance company.

Material discussed is meant for general/informational purposes only and it is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary therefore, the information should be relied upon then coordinated with individual professional advice.