No One Wants to Tip Uncle Sam

Most people want to pay the least amount of tax possible over their lifetime. There are a lot of different strategies to do so. Some tax-saving strategies are better than others based on individual situations, but there is one strategy that you don’t hear about often that could be worth exploring.

How This Less-Used Tax Strategy Saving a Client 50K in Taxes

Seven years ago, we had a 20-minute phone call with a 60-year-old client. She asked if we could review her mom’s tax return and her investment allocation after tax season. The mom was working with a different advisor but our client just wanted to get a second opinion on it. We found that our client’s mom was taking required minimum distributions of about 30K per year, and she had a lot of write-offs due to high medical expenses, and she was giving charitably, which really lowered her taxable income. Because she was in an assisted living facility, these expenses actually lowered her taxes to zero.

We did a tax projection for the mom, and we realized that she could take another 40K out of her IRA and still pay zero tax each year. The mom didn’t need the money, and one of her goals was to pass some of her assets on to her daughter, our client. When we looked at the client’s tax projections over the next few years, we realized that if she was to inherit this money, she would pay quite a bit more tax on the money that she inherited.

We shared our findings with our client and her mom; we showed them this zero-tax strategy, and then we showed them the alternative pay-more tax strategy. As you can probably guess, it didn’t take long to come to a conclusion on what they wanted to do. Here’s what we did to really solve this for them…

  • The mom started to increase what she was taking out of the IRA and it just went to another account of the mom.
  • She just took a distribution on that individual IRA, and paid zero tax on it.
  • It then went to another account and stayed invested.
  • Neither the mom nor daughter needed the money right away, but it was still there in case a medical expense came up.
  • When the mom passed away a few years later, she had taken out an additional 200K from her IRA that she paid zero tax on.
  • If that money stayed in the IRA and her daughter inherited it, she would’ve had to pay another 50K in taxes because she would be forced to take out money each year for the next 10 years, at least from that inherited IRA.

Should You Be Looking Into a Multi-Generational Tax Strategy?

The tax strategy we see in this scenario is that it may be beneficial to think about multi-generational planning. You don’t need to be an uber-wealthy person to benefit from this. If you’re already helping your parents with finances or you think that they might be open to it, maybe start a conversation or watch this video together and see where it leads you.

Once you start involving the family in some of these planning techniques, it can really open up more options. We’ve often heard from clients how labor-intensive and time-intensive it is for them to organize the financial affairs after a parent passes away, and that’s the last thing you want to be worrying about during that time. Take a look at our family planner, it’s a great resource to get you started.

Benefit of Multi-Generational Tax-Planning

Tax planning is really important, not just for the short term. There could be a real benefit to this family tax and estate planning idea. One small change or the implementation of a simple strategy could make quite a difference in how much can be saved. If you’re thinking about your own finances or maybe your parents’ finances, feel free to reach out to us.