May means Mother’s Day, and in our family, it also meant my Mother’s and my birthday. This week, I received a birthday present from my Mom. The present is extra special because my Mom passed away seven years ago. It occurred to me that this is the perfect time to share with you a wonderful financial planning strategy that created my annual birthday present.
Mom and Dad never made much money. But saving and investing was always a priority for them. Another priority was education for us children. So it isn’t surprising that the result of all that education was children in much higher tax brackets than theirs. Through consistent saving and good investments, Mom built up a very nice IRA. When she was diagnosed with multiple myeloma, she decided it was important to her to leave something of her own to my sister and me. She chose her IRA. In order to make her gift even more valuable, she decided to convert her traditional IRA to a Roth before her death. She knew that her nice low tax bracket would allow her to pay much lower taxes and pass a financial gift to each of us which neither of us could do for ourselves. She lived just long enough to pay all of the taxes on her IRA gift. At her death, my sister and I each had the choice of receiving all the money income tax free, or keeping the wonderful tax free Roth and receiving minimum distributions over each of our lifetimes. We both opted to keep her Roth. I rolled mine into a ‘beneficiary designation Roth account’ invested in mutual funds. But the best part is that every year on her birthday, I receive a check in the mail. This year the check was for $3200. Every year since she died I have received a check. And every year both the check and the remaining account have grown larger. Her legacy gift to me each year feels like she is sending me her love.
There are several ways to make this type of gift work. The first key is the beneficiary designation on the IRA or retirement plan. A child or grandchild could be named as a primary beneficiary or they could be named as a contingent beneficiary. For example, if my Mom had left my Dad as the primary beneficiary but named my sister and me as contingent beneficiaries, my Dad could have ‘disclaimed’ the IRA at her death. That means that he could have decided to not receive her IRA but instead let it go directly to the contingent beneficiaries. This is a great planning technique because sometimes it is hard to know if the spouse will need the money or not. By using contingent beneficiaries and the ability to disclaim, the same type of gift can be given if the spouse doesn’t need the money. This same technique can be used to give money to grandchildren and keep the memory of the grandparent alive.
The second key is to try to pay the taxes in the lowest tax bracket. Frequently I find that the older generation is in a lower tax bracket than their children or even grandchildren. If that is the case, consider doing a Roth conversion.
And the last key is to continue to make the gift special. Pick an annual distribution date that is meaningful to both the giver and receiver. This could be an anniversary of something special, a birthday or much loved holiday.
See, financial planning really isn’t all about numbers. Financial planning, if done correctly, can be a true, lasting gift of love.
Resourcefully yours,
Micki
