Don’t Overlook This Tax Saving Opportunity


Twice in the past several weeks I have encountered a tax planning opportunity that was missed by families caring for a parent with diminished mental ability or confronting other life changes. In one instance, the children of a gentleman afflicted with Alzheimer’s and requiring skilled nursing care turned to Legacy Trust for help in consolidating his financial affairs. During the initial interview with the children, we learned that the main assets included a modest trust account and a larger balance in individual retirement accounts (IRAs). We also asked about expected cash requirements, real estate holdings, Social Security and other sources of income. We found that Required Minimum Distributions were being taken from the IRA’s but, digging deeper, also discovered that medical expenses had been steadily increasing.  In fact, for the past two years, deductible medical expenses had actually exceeded reportable income, resulting in zero tax liability.

The family did not have much financial experience and knowing the IRA withdrawals would be taxable, withdrew the minimum amount required, but not the optimal amount.

We consulted with the family’s tax accountant and, based on the details we uncovered, asked him to calculate the amount of additional withdrawals that could be taken from the IRAs without incurring income tax. By increasing the IRA withdrawal to match the amount that may be offset by medical deductions, the family will, gradually withdraw the IRA funds tax free.  These funds can then be added to dad’s trust and used for his long-term care.  If their father passes away before the investments are totally consumed, the kids will have withdrawn most, if not all, of the IRA funds with little or no income tax cost. They will inherit any remaining funds tax-free.

In another case, a recent widow was left with a large IRA, bank savings, and Social Security income to live on. She has three successful children, all with income tax brackets higher than her own. Although there may be some tax on larger than required IRA distributions, the generational savings could be significant. This would be even more likely should her medical expenses begin to rise.

Baby Boomers, the largest segment of the U.S. population, are now at or nearing their retirement age.  They are the first generation to accumulate retirement funds mostly by saving and investing in 401k and other qualified plans. As they begin retirement, these funds will be rolled out to IRAs that will, in most cases, be a primary source of retirement income.  There will be more IRAs and they will be larger, on average, than in the past.  Also, the incidence of debilitating diseases such as Alzheimer’s is expected to increase proportionately with an aging population.

The pattern described above is destined to be repeated in ever increasing numbers in the years ahead.  If you encounter a similar situation, please consult your tax or financial advisor.  It could save some taxes.