Depending on your intentions for retirement accounts, they may need to be managed and used in distinctly different ways to reach the dual goals of enjoying retirement and leaving a legacy. It’s all explained in a helpful article from Kiplinger, “Planning for Retirement Assets in Your Estate Plan”.

Start by identifying goals and dig into the details. Do you want to leave most assets to your children or grandchildren? Has philanthropy always been important for you, and do you plan to leave large contributions to organizations or causes?

This is not a one-and-done matter. If your intentions, beneficiaries, or tax rules change, you’ll need to review everything to make sure your plan still works.

How accounts are titled and how assets will be passed can create efficient tax results or create tax liabilities. This needs to be aligned with your estate plan. Check on beneficiary designations, asset titles and other documents to make sure they all work together.

Review investments and income. If you’ve retired, pensions, annuities, Social Security and other steady sources of income may be supplemented from your taxable investments. Required minimum distributions (RMDs) from tax deferred accounts are also part of the mix. Make sure you have enough income to cover regular and unanticipated medical, long term care or other expenses.

Once your core income has been determined, it may be wise to segregate any excess capital you intend to use for wealth transfer or charitable giving. Without being set apart from other accounts, these assets may not be managed as effectively for taxes and long-term goals.

Establish a plan for taxable assets. Children or individuals can be better off inheriting highly appreciable taxable investment accounts, rather than traditional IRAs. These types of accounts currently qualify for a step-up in cost basis. This step-up allows the beneficiary to sell the appreciated assets they receive as inheritance, without incurring capital gains.

Here’s an example: an heir receives 1,000 shares of a stock with a $20 per share cost basis valued at $120 per share at the time of the owner’s death. They will pay no capital gains taxes on the gain of $100 per share. However, if the same stock was sold while the retiree owner was living, the $100,000 gain in total would have been taxed. The post-death appreciation, if any, on such inherited assets, would be subject to capital gains taxes.

Retirees often try to preserve traditional IRAs and qualified accounts, while spending taxable accounts to take advantage of lower capital gains taxes as they take distributions. However, this sets heirs up for a big tax bill. Another strategy is to convert a portion of those assets to a Roth IRA and pay taxes now, allowing the assets to grow tax free for you and your heirs.

Segregate assets earmarked for charitable donations. If a charity is named as a beneficiary for a traditional IRA, the charity receives the assets tax free and the estate may be eligible for an estate deduction for federal and state estate taxes.

Your estate planning attorney can help you understand how to structure your assets to meet goals for retirement and to create a legacy. Saving your heirs from estate tax bills that could have been avoided with prior planning will add to their memories of you as someone who took care of the family.

Reference: Kiplinger (May 21, 2021) “Planning for Retirement Assets in Your Estate Plan”