A few weeks ago Mrs. Micah published a post discussing the financial list that you should create for those who leave behind, titled How to Save and Store Critical Financial Information For Your Family. Ever since I read that I’ve been thinking about her post as well as my own On my death, please take a breath. It occurred to me that the financial list Mrs. Mike created would be an excellent place to leave some further instructions to your beneficiaries regarding their inheritance, with an emphasis on the tax aspects of IRAs. This would be a good way to avoid the tragic mistake that I referenced in my earlier post.
Here is an example of what I had in mind;
Dear Rich,
Some of the money that I left you is in an IRA account. Please understand something about this account. When I left it to you there were no taxes due, but because this IRA was funded with pre-tax money, you owe taxes at your marginal rate as you withdraw it. Fortunately, withdrawals can be made based on your current life expectancy, so you can withdraw this money a little bit at a time over the years and hopefully pay very little in taxes along the way. The way the money is currently invested, even though right for me, may not fit with your investing style or needs. If you wish to reduce the stock portion and keep it all and CDs that choice is yours. You can sell the stock and reinvest the money into CDs or even place it a money-market fund and this transaction will not be taxable. It’s only when you withdraw the money from the IRA that you’ll be required to pay taxes. The required minimum distributions that you must take are just that, minimum numbers, if you need to take a bit more it’s your choice to do that as well. Just keep one thing in mind, if you take out too much money in one year you may jump into a higher tax bracket and pay more tax than is necessary. Lastly, the one thing I ask you not to overlook is to include a new beneficiary should something happen to you. Again this is your decision, a child, a friend, a family member, a charity, the choice is yours.
Use it in good health,
Obviously, you can fine tune this to your own style. The message here is that years of your planning can be undone by one mistake your beneficiary makes. Here’s a way to help avoid that.
Joe
Interesting idea. I haven’t thought about doing something like this but I can certainly see the benefit of doing it this way.
Read http://www.joetaxpayer.com/on-my-death-please-take-a-breath/ for what can happen otherwise.
I have never considered it but its a great way to help simplify the transfer of assets. A letter is great but I would also have a conversation with your beneficiaries to explain what should be done.