"Got-Too-Much"
Angela and Paddy were in their late 60’s and happily enjoying their retirement.
And so, they should!
Both had worked long and hard, and they’d accumulated some real wealth. They had plenty of income in retirement from his Social Security, rental income from some apartment units, interest off their CD’s and dividends off their investments. Required Minimum Distributions from retirement accounts would kick in soon. They were enjoying life.
As ‘boomers’ they were about to downsize from what had long been the family home. Their three children had all moved on and their five-bedroom house was just too big for them now. They had found an apartment in a nice area. Perfect. This home should sell quickly, so they should soon see another $610,000 going from bricks-and-mortar into savings.
But what, if any, were the implications? A golfing pal recently encouraged Paddy to meet with WealthBuilders.
First, we spent some time getting to know Angela and Paddy. It was important to understand the facts around what they had accumulated – their capital position, and their sources of income. We then helped them to identify the cost of the lifestyle they wanted to continue to enjoy. We also delved into what else they might like to do in their lifetime in order to get the most from their remaining years.
Then we ‘crunched their number’.
This is what we found. Based on their conservative assumptions, allowing for inflation and for the potential costs of long-term nursing care, Angela and Paddy should NEVER run out of money. In fact, our goal was to continue to build their wealth, even allowing for extra expenditures.
But they had a big problem – a different problem than many. Good intentions gone haywire…
What’s that, you may well ask? A few years ago, Angela and Paddy had decided to invest a substantial portion of their wealth – money they were pretty sure they’d never, ever need - in non-qualified annuities, which are tax-deferred vehicles. Their thinking was - the money could still be aggressively invested in the market, they’d avoid the taxes on the growth each year, and then the children would inherit those annuities when Mom and Dad have passed away.
But here’s that big problem just down the road.
And it’s one they hadn’t intended to put on the kids.
We alerted Angela and Paddy to the fact that, unlike some investments, annuity beneficiaries do not receive a stepped-up cost basis upon death. So, the tax consequences to beneficiaries can be severe. To make matters worse, beneficiaries used to be able to “stretch” out the required minimum distributions from those inherited annuities over their life expectancy. But recent changes in tax law eliminated the “stretch” provision; annuities must now be fully distributed over a 5-year span, if not taken lump sum. That adds a whole lot of higher-taxed ordinary income each year over a very short period of time for each of the children.
But it didn’t have to stay that way. Angela and Paddy strongly felt they were in a much stronger position to absorb the taxes themselves now, rather than passing it along to the children later. We worked with their CPA to help them understand the ramifications of surrendering those annuities now and reinvesting in new investment accounts set up with a Transfer on Death (TOD) designation. With the children named as beneficiaries, the accounts eventually pass to the children with a stepped-up basis, avoiding that big tax bill.
Would you like to change your tomorrows?
*This is a hypothetical situation based on real-life examples. Names and circumstances have been changed. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments or strategies may be appropriate for you, consult your financial advisor prior to investing. Your results will vary.