We’re conditioned to think of 65 as the tipping point into old age. Or at least we used to. Actuarial tables combined with the attitude that “70 is the new 50” mean that you can and should consider clients’ needs for protection from taxes at three distinct stages of old age.
I call those stages late old age, early old age, and later middle age. In this column, I will address the first, late old age, with specific tips for helping individuals or their family members among your clients. I’ll write in later installments about the steps to take in the other two stages to protect your clients’ assets and buttress their sense of security.
Defining ‘Late Old Age’
Is “late old age” 80? 85? 90? It’s difficult to say since much depends on health, mental status, family history, and luck.
But picture this: An individual in late old age is often widowed and, if well-to-do, has more assets than they can spend in the years remaining (after accounting for reserves needed for long-term care). Their free-spending days are memories.
It is best to keep financial advice simple at this stage. But you want to confirm that the individual has made plans for beneficiaries through a will, designated beneficiaries in retirement and other accounts, and taken steps to minimize the taxes heirs will be liable for upon their death.
In other words, tax and estate planning should have been done well before late old age. Nevertheless, I urge advisors not to let these client cases wither.
Recent changes in the tax treatment of inherited retirement accounts and perhaps even events such as deaths or marriages in the family mean that every plan needs a close look at least annually. Developing and sustaining good relationships with the individual’s beneficiaries could also lead to new assets to manage and referrals.
The Advance Work
If you’ve been this client’s advisor for a while, then you’ve done the foundational work that limits any significant shifts in strategy or goals, namely:
1. Directed consistent, constant dollar levels of withdrawals from the client’s traditional individual retirement accounts (IRAs). By doing this, you’ve avoided catapulting your client into a higher tax bracket with “lumpy” withdrawals, used charitable deductions to save on taxes, and retained enough IRA assets to take advantage of lower tax brackets in late old age.
2. Topped off required minimum distributions (RMDs) with voluntary withdrawals to fund Roth conversions (starting if an individual was married when the spouse was alive, and the couple taxed more advantageously than a widow will be).
You’ve likely encouraged clients to contribute to a donor-advised fund (DAF) or family foundation by selling highly appreciated stocks.
And if one spouse’s death was anticipated, you advised that shares of appreciated stock held in joint accounts were transferred to a separately owned account to gain the step-up at the individual’s death.
Your Mission Is …
So, in the best of all financial worlds, the client in late old age has their investment assets dominantly held in Roth IRA and brokerage accounts, with only a tiny allocation of appreciated stock.
Now, you have three priorities:
1. Ensure that the beneficiaries of the client’s IRAs reflect their current preferences and minimize the beneficiaries’ taxes in the case of their traditional IRA.
2. Confirm that a trusted family member understands the older relative’s investments and bequest preferences and can become one of their executors, preventing erratic actions before or after the client’s death.
3. In the case of imminent inheritance tax liability imposed by federal or state law, inform the client of the confiscatory tax rate and suggest contemplating a planned charitable gift.
Some clients may want to take steps to limit the taxes their beneficiaries could be exposed to by:
• Switching IRA beneficiaries to grandchildren or younger family members in lower tax brackets since the rules now are that beneficiaries have ten years to empty the accounts. (A recent Wall Street Journal headline: “How to Leave Grandkids Your Retirement Savings—and Not a Huge Tax Bill”)
• Helping wealthy children who don’t need inheritances designate their children, or others in the family’s next generation, as the beneficiaries of other, non-IRA assets in the estate.
• Making a planned charitable gift to avoid federal and state inheritance taxes and capital gains taxes on appreciation that the estate will owe before probate is completed.
A trusts and estates lawyer will handle legal filings after the client’s death. Still, I can’t emphasize enough how important it is for the lawyer to be part of a team that includes a competent executor sensitive to the client’s intentions and a financial advisor familiar with the client’s assets and transaction history.
Perhaps You’re The Recovery Crew
You may inherit or acquire a client in late old age who didn’t get the advice you would have given to minimize taxes. Now, you’re working to salvage what you can. Perhaps the client:
1. Took RMDs only and didn’t take advantage of Roth IRAs. Or missed opportunities for Roth conversions while filing jointly at more moderate tax brackets than they’re now in.
2. Exhausted brokerage accounts, realizing long-term capital gains—or overlooked opportunities to liquidate unrealized gains of stocks held in a brokerage account.
Some options remain open. You could still evaluate voluntary IRA withdrawals to fund Roth conversions. The Roth accounts can be rainy day funds or reduce taxes for beneficiaries.
Suppose a client has a spike in out-of-pocket costs, often for healthcare and caregiving. In that case, you can identify the most tax-efficient moves by comparing the effects of realizing long-term gains by selling assets in brokerage accounts with the tax bills from voluntary IRA withdrawals.
Remember This…
As an advisor to a wealthy individual in late old age, you should keep these two thoughts in mind:
1. The client portfolio’s asset allocation does not matter in late old age. The time horizon is short, and their beneficiaries can adjust their investment mix upon inheriting assets.
2. Even a client with a limited life expectancy deserves your attention. Probate periods can be long and extend your advice’s life span and consequences.
In my next column, I’ll write about the strategies for minimizing taxes that you can recommend as an advisor to clients in “early old age,” shortly after they’re retired and in good health, yet with enough life experience to embrace the need to plan.
Paul R. Samuelson is the chief investment officer and co-founder of LifeYield.