Tax Strategies for Different Stages of Aging

Vested Partners A Multi-Family Office Blog

Woman working on finances and taxes
We’re conditioned to think of 65 as the tipping point into old age. At least we used to. Actuarial tables combined with the attitude that ‘70 is the new 50’ mean that you can and should consider clients’ needs for protection from taxes at three distinct stages of old age.

Defining “late old age” must consider factors like health, mental status, family history and plain old luck, says a recent article from Financial Advisor, “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age.” However, imagine this scenario: a person in late old age is often widowed and, if they are well-to-do, has more assets than they are likely to spend in their remaining years after accounting for reserves needed for long-term care.

At this stage, it’s important for the person to have an estate plan in place, with named beneficiaries on any retirement and investment accounts, and have taken steps to minimize taxes heirs will be liable for upon their death. If this planning has not been done yet, there’s still time—but there’s no time for delay.

Recent changes in the treatment of inherited retirement accounts and events like deaths, births, or marriages in the family mean every plan needs a close look on a regular basis. What else needs to be done?

  • Directed, consistent, constant dollar levels of withdrawals from traditional individual retirement accounts (IRAs). This avoids being catapulted into a higher tax bracket. Charitable donations should be used, while enough IRA assets should be retained to take advantage of lower tax brackets coming in late old age.
  • Topping off required minimum distributions (RMDs) with voluntary withdrawals to fund Roth conversions, starting when the individual was married, and the spouse was alive when couples enjoy more advantageous tax levels than singles.
  • This is also the time to contribute to donor-advised funds (DAFs) or the family foundation by selling highly appreciated stocks. If one spouse’s death was anticipated, a share of appreciated stock held in joint accounts could be transferred to a separately owned account to gain the step-up at the spouse’s death.

After the work has been done and you enter late old age, there are three priorities to keep in mind:

  • Be sure the beneficiaries in your IRA reflect your current preference and minimize the beneficiaries’ taxes from traditional IRAs.
  • Confirm that the person named as your executor understands your investments and bequest preferences and is ready to take on the tasks to come in the future.
  • In the case of imminent inheritance tax liability imposed by federal or state law, speak with your estate planning attorney about how a planned charitable gift or other means of minimizing estate taxes might be accomplished.

Can beneficiaries’ tax burdens be minimized? Consider these options:

  • Switching IRA beneficiaries to grandchildren or younger family members in lower tax brackets, since non-spouse beneficiaries have only ten years to empty the accounts.
  • Helping wealthy children who don’t need inheritances designate their children or others in the family’s next generation as beneficiaries of other non-IRA assets in the estate.
  • Make a planned charitable gift to avoid federal and state inheritance taxes and capital gains taxes on appreciation the estate will owe before probate is completed.

We can help with legal filings after death. Your attorney needs to be part of the team, along with a competent executor aware of your intentions and a financial advisor familiar with your assets and transaction history.

Reference: Financial Advisor (Oct. 3, 2023) “Tax-Smart Wealth Transfer Tips For Clients In Late Old Age”

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