Required Minimum Distributions & Charitable Giving Case Study

Overview:

Planning for retirement takes strategic planning to help protect longtime investments and assets from tax penalties. Seeking guidance on how to save money for retirement, a family of three comes to Chandler & Knowles after the father, a former executive, receives a significant amount of money upon retirement. With a total of 2.2mm in an individual retirement account (IRA), the money acquired places the family in a higher-tax bracket and at risk facing a significant estate tax. With the help of the experts at Chandler & Knowles CPAs, the family was able to reduce tax penalties through a devised a wealth and charitable donation distribution strategy.

Client Background:

A 71-year-old former CEO and father with a net wealth of 8.8mm comes to Chandler & Knowles CPAs seeking retirement help after being awarded a golden parachute following his departure from his company. In the corporate world, a golden parachute is a significant compensation package that is given to CEOs in case they lose their position due to termination, acquisition, or a merger. While many welcome this compensation, this golden parachute placed the former CEO in a much higher tax bracket, creating a set of complex retirement problems. Individuals with an IRA are required to withdraw money from their account by the age of 70 ½ in a process known as the Required Minimum Distribution (RMDs). With the newly acquired funds from the golden parachute, the RMD for the 2.2mm IRA required the former CEO to withdraw a minimum of $107,000 within the first year, placing a taxable income burden on the family.

Challenges:

Among one of the biggest challenges facing the former CEO is a new tax bracket that places retirement funds at risk for significant penalties. The IRS requires an RMD to be withdrawn from the IRA account every year once individuals reach the age of 70 ½. If an individual fails to withdraw the funds indicated in the RMD from the IRA account, an excise tax of 50% must be paid to the IRS. For the former CEO, one of the main priorities was to reduce taxable income by lowering the RMD of $107,000 to avoid paying any excise tax. Other priorities included distributing the 8.8mm wealth and advanced planning to help reduce amount of estate taxes owed to the IRS.

Chandler & Knowles Methodology:

The professionals at Chandler & Knowles CPAs were able to devise a strategy to protect retirement funds and family estate from significant penalties. After a thorough consultation, our team was able identity a charitable gifting strategy that allocated 1mm towards a charitable remainder trust (CRT). One of the benefits of setting up a CRT is that it provides an immediate partial tax deduction based on the value of the gift to charity. Most importantly, the CRT strategy for the retired CEO would reduce our client’s RMDs significantly.

Through a CRT, the team at Chandler & Knowles CPAs was able to simultaneously create a wealth replacement strategy that uses life insurance to replace the money gifted to charity. Another component of the strategy involved increasing the amount transferred to heirs within the CRT to help reduce the estate taxes.

The Results:

Through a customized strategy that combines charitable giving with permanent life insurance, Chandler & Knowles CPAs was able to maximize the amount of wealth given to our client’s heirs, while minimizing the tax burden on the estate. Through our customized solutions, we were able to reduce RMDs and tax liability to help increase projected wealth at the age of 92 by 27.8% from 13.3mm to 17mm.