Discover, Design, Deliver: Estate Planning for Wealth Transfer

Over the next two decades, it’s estimated that $84 trillion is expected to move from Baby Boomers to their children, grandchildren, and causes they want to support. This phenomenon is known as the Great Wealth Transfer. 

This unprecedented wealth transfer is significant because of its huge size and its impact on the lives of future generations, the economy, and the tax collectors. The Great Wealth Transfer isn’t just about money moving from generation to generation. It’s also about passing on values, responsibilities, and family traditions.

Here’s what you need to know about this transfer:

• Baby Boomers born from 1946 to 1964 are at a stage in life where they are beginning to think more about estate planning and passing on their wealth.
• Generation X and Millennials are the ones who will inherit much of this wealth. They’ll need to be knowledgeable about managing, investing, and nurturing this wealth for future generations that also benefit from the Baby Boomer’s trillions of assets.
• As these wealth transfers begin to occur, we expect to see shifts in how people invest because the younger generations may have different goals and priorities than their parents.
• The Great Wealth Transfer will also impact the broader economy, influencing market trends and changing how future generations invest these assets.

While Roth IRAs won’t reduce the total value of your estate for tax purposes, they can provide a more tax-efficient means to transfer your wealth to heirs. 

When you convert funds from a traditional IRA to a Roth IRA, the amount converted is taxed as ordinary income in the year of the conversion. This means that the taxable portion of your traditional IRA (contributions you deducted on your taxes and any earnings on your contributions) is added to your income for that year and taxed at your current income tax rate.

After the conversion, the Roth IRA’s assets growth is tax-free and not tax-deferred. This is a significant advantage because all future earnings, whether from interest, dividends, or capital gains, will accrue tax-free, assuming you are at least 59 ½ and have held the account for at least five years. 

When you pass away, your Roth IRA becomes part of your estate. Federal estate taxes apply as follows in 2024*:

• If you’re single, your estate can be up to $13.61 million before it owes any estate taxes.
• For married couples, you’re looking at a combined limit of $27.22 million.

*These federal estate tax exemptions will sunset at the end of 2025.

For your heirs, inheriting a Roth IRA also has substantial benefits. While they are required to take distributions, these distributions are usually tax-free. This aspect of Roth IRAs can be particularly advantageous for estate planning, as it allows your beneficiaries to inherit assets without incurring a significant tax burden. 

However, it’s important to note that the rules regarding inherited IRAs can be complex, and consulting with a financial advisor or tax professional is highly recommended.

As financial advisors in Washington, DC, we often suggest this tactic as part of a well-rounded estate planning strategy, working alongside other wealth management techniques.

Even more important, withdrawals from Roth IRAs are tax-free, provided certain conditions are met. Generally, you must be at least 59½ years old and have held the account for at least five years.

For your heirs, inheriting a Roth IRA also has substantial benefits. While they are required to take distributions, these distributions are usually tax-free. This aspect of Roth IRAs can be particularly advantageous for estate planning, as it allows your beneficiaries to inherit assets without incurring a significant tax burden. 

However, it’s important to note that the rules regarding inherited IRAs can be complex, and consulting with a financial advisor or tax professional is highly recommended.

Oftentimes, people planning for retirement don’t include one very important factor in their retirement planning process: various types of taxes and how that might impact what you want to transfer to your heirs. 

The bottom line is that no one wants to pay more taxes than they have to. A well-designed tax plan will help you optimize the amount of money to fund retirement and a future legacy. 

Part of tax planning includes an assessment of your income during post-retirement years and whether or not it will throw you into a higher tax bracket after you retire. Higher brackets can happen because, at a certain age, you must begin taking required minimum distributions (RMDs) from your retirement accounts, which could increase your income.

Also, don’t forget the impact of Social Security benefits on your tax situation. 

Other tax tactics like using Roth IRAs, tax loss harvesting, and asset location strategies can help you keep more of your hard-earned wealth and lessen the impact of capital gains.

Giving to charity and other gifting strategies can also be part of your tax plan. These tactics can lower current tax payments and transfer more of your wealth to heirs and the non-profit organizations you may want to support.

At Brown | Miller, we believe a holistic wealth management process is the key to achieving true financial independence. Regardless of your life stage, a data-driven, fact-based process results in an objective, realistic roadmap that evolves with the life events that impact your assets and plans.

Discover Phase: This includes understanding your current circumstances, concerns, sources of income, financial goals, assets, liabilities, and risk tolerance. This step is crucial for goal-based planning, where every decision will align with your future. 

Design Phase: Here, McLean financial planners craft highly personalized wealth strategies that impact planning, investment management, taxes, and the legacy you leave to future generations.

Deliver Phase: This is where your plans are put into action. Regular reviews and adjustments are made to adapt to change, ensuring your financial roadmap stays aligned with your situation and evolving goals.

Transferring your wealth to your heirs takes careful planning and timing. Here are four wealth transfer strategies to consider as part of your overall estate planning process: 

1. Irrevocable Life Insurance Trusts (ILITs): These trusts can hold life insurance policies, allowing the proceeds to be passed to beneficiaries free of estate and income tax. This strategy provides a tax-efficient way to transfer wealth and provides control over the distribution of assets after the passing of the surviving spouse.
2. Charitable Gifting and Donor Advisor Funds:  for those that are charitable-minded, direct charitable gifts or gifts to a donor advisor fund can be a way to satisfy charitable objectives, receive income tax deductions, and reduce potential federal estate taxes.
3. Annual Gifting: Utilizing the annual gift tax exclusion allows you to transfer wealth to beneficiaries tax-free up to a certain amount per person each year. This method can gradually decrease the size of your estate, potentially reducing estate taxes upon the demise of the surviving spouse.
4. Generation-Skipping Transfer Trusts: These are designed to pass assets directly to grandchildren or later generations, bypassing the immediate children’s generation. 

This can reduce the estate taxes that would be applied if the wealth were transferred directly to your next-generation inheritors.

Estate planning is more than just creating wills and trusts. It should include how taxes will be addressed and outline how your family dynamics will play a part in your overall estate plan. Good estate planning helps ensure your assets go where you want them to while minimizing taxes for your estate and future generations. 

This often requires working with specialized financial planners, wealth managers, CPAs, and attorneys. 

It’s important to keep your estate plan up-to-date based on major life changes, like marriages, births, deaths, catastrophic illnesses, and other events that impact financial and physical well-being. Staying on top of these life events can help protect your legacy and transfer more assets to heirs.