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Spotlight on Wealth Transfer and Retirement Planning
By Thomas W. Rowan

Planning for retirement is first and foremost about assuring that you have enough to retire on. But for many, it is also about planning to preserve assets for heirs and charity. If you and/or your spouse are a business owner, professional, or highly compensated executive, chances are you would like to have enough wealth to not only provide for yourself during retirement but also to create a lasting legacy. The key to achieving this goal often lies in structuring payments from tax-qualified retirement plans (QRPs) and individual retirement accounts (IRAs) in a tax-efficient manner, making lifetime gifts of non-retirement assets, and creating wealth and liquidity through the use of lifetime insurance.

Structuring Payments from QRPs and IRAs
Basically, distributions from QRPs come in two forms - lump sum and periodic payments. Couples who need QRP benefits to meet day-to-day living expenses are most likely to choose periodic payments. Joint-and-survivor annuities are popular with married couples because a joint-and-survivor annuity guarantees that benefits will be paid for as long as one of the spouses remains alive. More affluent couples are likely to find lump-sum distributions more attractive. These distributions may be rolled over income tax-free into IRAs, where the IRA owner has considerable flexibility in the form of the payout and often wider range of investment options than offered under a QRP.

Most advisors recommend that non-QRP/IRA assets be tapped for living expenses during retirement years before QRP and IRA assets are spent. The reasoning is straightforward - assets in QRPs and IRAs continue to accumulate tax-deferred even after you retire or die. The idea is stretch-out income tax deferral for as long as the law allows.

One obstacle to "stretch out" planning is minimum distribution rules that require distributions to begin on a specified date  and to be at least a minimum amount. In general, you can defer taking payments from your IRA until April 1 of the year following the calendar year in which you turn age 70 ½ Your QRP distributions can be deferred until April 1 after you retire, if later, unless you are a 5% or greater owner. At that time, you can elect to spread the payments over your lifetime or the joint lifetimes of you and your spouse or some other beneficiary. The longer the spread-out, the greater the deferral. Although amounts distributed to beneficiaries are included in income, amounts left in an IRA continue to grow tax-deferred, even during the pay-out phase. Required Minimum Distributions are not required for 2009 but are expected to be required to resume in 2010.

A second obstacle to stretch-out planning is federal estate taxes. Although QRP and IRA distributions to a surviving spouse generally qualify for the marital deduction and are not subject to estate taxes at the death of the first spouse to die, the value of distributions to children and grandchildren are subject to estate taxes at rates as high as 45 percent on taxable transfers of $3.5 million or more in 2009. The amount of total estate tax at the applicable rate is reduced by a credit of $1,455,800 in 2009 to determine the actual amount of tax payable. The credit translates into an applicable exclusion in 2009 of $3.5 million. Consequently, only taxable estates is excess of $3.5 million ($7 million in the case of a married couple, if assets are structured properly) are subject to estate taxes. The federal estate tax is scheduled to be repealed for one year in 2010 and reinstated in 2011 unless Congress takes additional action. Under the current law, at that time, the applicable exclusion amount will revert to $1 million and the top estate tax rate will be 55%. As discussed below, life insurance can be a cost-effective way to provide the cash for tax payment for those individuals caught in the estate tax net.

While your beneficiary will be able to offset a portion of the distributed income with a deduction for the estate tax paid on the QRP or IRA, between income taxes and estate taxes, that is a huge bite out of the legacy you hope to leave.

Lifetime Gifts of Non-Retirement Assets
If, after stretching-out QRP and IRA benefits, you still have more than enough income to live on in retirement, you may want to consider lifetime gifts to family and charity. Don't miss out on the several tax breaks that encourage lifetime gifts.
First, you and your spouse using your annual gift tax exclusions can join together to make outright gifts of up to $26,000 (2009, indexed for inflation) per family member entirely free of estate and gift taxes.

Second, lifetime gifts and any future appreciation associated with them escape estate taxation at your death - and, that translates into less estate taxes.
Third, outright gifts to charity may be deductible with certain limitations against income and gift taxes, and the value of the gift also escapes estate taxes.
Finally, any future income earned by the transferred assets is taxed to the donee, not you. There are non-tax reasons for lifetime gifts as well. By making the gift while you are still alive, you get to see the beneficiary, family member or charity, use and enjoy the gift. You can even offer advice about how to manage the gift. If you think a child or grandchild isn't quite ready for the responsibility, or if the donee is a minor, consider creating a trust to manage the asset for him or her.

Life Insurance
Life Insurance is the cornerstone of many retirement and wealth transfer plans. When you're accumulating for retirement, life insurance helps protect your family from premature death. During your retirement years, when wealth transfer is a focus, life insurance provides the cash to help pay estate taxes and other costs at the time of death and helps assure that everything goes according to plan. Many individuals take advantage of irrevocable life insurance trusts as a way to remove the policy proceeds from their taxable estates. An irrevocable life insurance trust avoids estate taxes because it is a separate legal entity in which the individual retains no interest or control. With proper planning, an irrevocable life insurance trust shelters the death proceeds from both income and estate taxes.

Life insurance can be especially important if you own a business and/or have significant amounts in QRPs and IRAs. Closely held businesses are often high illiquid - hard to convert to cash. Unless you have cash from another source to pay the estate taxes, you may have to sell or liquidate your business at a discount to pay the tax man. Similarly, with respect to QRP and IRA assets, even though the plans can pay out over the life expectancy of the beneficiary or as an annuity over many years, estate taxes on such assets are due within nine months of death. The need to pay taxes on "phantom income"- income that has not been received can create a hardship. That's where life insurance comes to the rescue.                            

You've probably spent a lot of time and effort accumulating your retirement assets and building an estate. Take the time to meet with a licensed financial professional to help make sure that you not only enjoy the income you want during retirement but also leave your loved ones and favorite charities with a lasting financial memory.

About the Author:

Provided courtesy of Prudential Financial Planning Services. For more information, contact Thomas Rowan, financial planner, CLU, CHFC, CLTC, who offers investment advisory services through Prudential Financial Planning Services, a division of Pruco Securities, LLC. Thomas Rowan's private office is located in Harrisburg, PA. He can be reached at (717) 975-8150 x7105 or at

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