Tax experts highlighted a couple of alternative strategies that IRA owners might consider to minimize taxes while passing on the account to a nonspouse heir, if the bill passes.
Charitable remainder trusts allow investors to leave assets to a charitable organization and to a beneficiary.
Your beneficiary would collect a stream of income from the assets for a specified time span. At the end of that period, the charity collects whatever is left.
“The distributions are made during the term of the trust to the individual, and you can get the stretch benefit there,” said Suzanne Shier, chief tax strategist at Northern Trust.
“It’s for people who have charitable motivations, a tax minimization motivation and an appetite for the complexity of charitable trusts,” she said.
To make this work, you would have to name the trust as the beneficiary of the IRA, a move that can be a tax minefield if done incorrectly. Make sure you coordinate with a CPA and an estate planning attorney if you’re considering this route.
Life insurance: “With life insurance, you could get more money tax-free without any RMD or complexity, and just bypass the whole system,'” said Ed Slott, CPA and founder of Ed Slott and Co. in Rockville Centre, New York.
Generally, the death benefit of a life insurance policy is excluded from the recipient’s gross income. Your premium dollar also goes further.
“If you have $100,000 in an IRA, it’s just $100,000,” said Slott. “But if you’re spending $100,000 on life insurance, that might be worth $500,000 in death benefits.”