1: Add Them As Beneficiaries To Your IRA
Both traditional IRAs and Roth IRAs allow you to name multiple beneficiaries. Your children or grandchildren can even be named as secondary beneficiaries – so your spouse would be able to use the assets before they’re passed to the kids.
After your death, the IRA would be divided into separate accounts (known as inherited or beneficiary IRAs) for each beneficiary. As of today, in May of 2021, non-spouse beneficiaries have ten years to remove all the assets from the IRA. They can do it all at once (and pay a higher tax bill that year) or spread it out evenly over ten years. Of course, there are some exceptions to this rule, including for disabled beneficiaries or minor children.
Adding children or grandchildren as beneficiaries to your IRA is one of the simpler methods when we talk about how to fund a legacy. In many cases, your beneficiaries will be in a lower marginal tax bracket than you, potentially making this a tax-efficient means of wealth transfer.
Unfortunately, should you decide to name a trust as your IRA beneficiary, the opposite would be true. IRAs inside of trusts can be complicated, so contact your financial advisor for some guidance here. If you have a child that isn’t necessarily the best with money, then this may not be the best idea for a large IRA.
2: Name Them As Beneficiary To An Annuity
Naming a child as beneficiary of an annuity would provide an income stream from the annuity payments after you pass away. Because of the difference in age, this can result in a bigger stream of income throughout their lifetime.
In the case of a child who is a spendthrift or may have some personal issues such as drug use, this may be a better option than naming them as a beneficiary of an IRA. Instead of having access to all the money at once, the assets could be metered out slowly over time.
Of course, any minor beneficiaries would be problematic. If that’s the case, a good solution would be to designate a custodian as the beneficiary of the payments for the benefit of the minor. This is covered under the Uniform Transfer to Minors Act (UTMA).
3: Purchase Survivorship Life Insurance
Survivorship life insurance covers two policy owners and pays a death benefit at the second death. These policies are often called “second-to-die” insurance. Because the policy doesn’t pay out until the second death, it can be a cost-effective way to provide a bigger death benefit than buying two individual policies. This is what makes it an effective estate planning tool.
A couple with two children taking out a $1 million survivorship insurance policy would be effectively leaving each child $500,000. Generally, the survivorship policy premiums are lower than those on one person.
Now for the good part. Thanks to the SECURE Act, Required Minimum Distributions (RMDs) now start at age 72 instead of age 70-1/2 (for the time being). At this age, many retirees already have their income stream set and don’t need additional money for living expenses.
Commonly, retirees with IRAs will reinvest their RMDs back into their portfolios. Rather than doing this, you could use a portion of your RMD to pay the survivorship insurance premium. This is a creative way to fund your legacy that does not depend on leaving a large estate.
Using your RMDs to pay for a survivorship life policy can give you more flexibility to spend and enjoy your savings, knowing that your children’s or grandchildren’s legacy is secure.
How To Fund A Legacy
These are just three strategies to leave a legacy that aren’t dependent upon carving aside some part of your retirement portfolio. A good estate plan should be flexible and comprehensive for the retirees first. You’ve worked hard to be where you are.
Of course, you should speak to your attorney and CPA about your estate planning needs, but a check-in with your financial professional can get the ball rolling.
If you’re wondering how to build a legacy for your children or grandchildren, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.
As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.