Now is a great time for advisors to be discussing taxes and retirement planning with their clients if they haven't already done so, according to Leslie Geller, a Los Angeles-based wealth strategist at Capital Group with 15 years of industry experience.
One major reason to review the tax implications of passing down retirement accounts now, for instance, is because of the Secure Act that took effect in 2020, she noted.
Prior to joining Capital Group, Geller was a partner at Elkins Kalt Weintraub Reuben Gartside, where she advised high- and ultra-high-net-worth clients on all matters related to taxation, wealth transfer and family governance.
By email, we asked Geller a series of questions on what she suggests advisors do now for their clients when it comes to taxes and their retirement plans and portfolios.
THINKADVISOR: Why should advisors review the tax effects associated with passing down retirement plans after death with clients now?
LESLIE GELLER: One of the major reasons to review the tax implications of passing down retirement accounts now is because of the SECURE Act. Passing on retirement assets as an inheritance has always been tax inefficient, but it's become even more of a concern because of this new legislation that took effect in 2020. Additionally, the IRS recently released proposed regulations to accompany the SECURE Act, and even though these regulations are not in final form, they indicate a general direction of travel.
Under the SECURE Act, most non-spouse beneficiaries who receive IRA accounts as an inheritance — upon the death of the owner of that account — will now be subject to the 10-year rule, meaning they must draw down the full value of the retirement account over 10 years (as well as pay the tax on these disbursements if it's a traditional IRA). Previously, with proper planning, most investors who inherited retirement accounts could take distributions from the account over their remaining life expectancy.
For many families, this new 10-year rule may result in negative planning and/or tax consequences, so at the very least, a discussion around passing down retirement accounts, both traditional and Roth, is table stakes.
Advisors can flag to clients and their families the tax issues and uncertainties that they may face when passing down retirement assets at death. Advisors can also discuss the various "pre-death planning" options their clients have with respect to their retirement assets, with an eye towards minimizing uncertainty, and potentially future tax liability.
These options include everything from reevaluating beneficiaries and the division of qualified and non-qualified assets among beneficiaries, to large-scale Roth conversions and distributions far and above their RMDs.
What other tax-related issues should advisors be talking about now with their clients who are retirees and pre-retirees regarding their retirement plans/portfolios, and why?
For high-net-worth (HNW) clients, now is the time for advisors to keep wealth transfer discussions front of mind. This is particularly true for transitioning their wealth — such as retirement accounts — down to children in a tax efficient manner. Many clients do not realize that retirement accounts are considered part of their taxable estate upon death.
Currently the lifetime exemption from the estate and gift tax amount is in excess of $12 million per person, but it is scheduled to drop to around $6 million per person in 2026. At this level, many more HNW families will need to think about proactive wealth transfer planning, which can range from the very simple (e.g., paying tuition expense directly, funding 529s as wealth transfer vehicles) to the complex (e.g., GRAT programs, sales to defective grantor trusts, or spousal lifetime access trusts).
With inflation moving higher, advisors should also discuss with their clients any anticipated changes to the level of distributions that they'll need from their retirement accounts. Will clients need more than the required minimum distributions (RMDs)? What will be the tax implication of potentially drawing down more?
