Massive Qualified/Traditional Balances
We have a client that has an incredibly large ESOP Account, with no NUA Opportunities to take advantage of. The value approaches $20mm and could easily be higher over time. Through our planning we have revealed to the client that the size of her RMDs in approximately 10 years will be far more than her income need. The client has a ‘fear of missing out’ on any strategies that could be employed now to avoid some of this taxation in the future.
Given that this ESOP is the single largest asset for the family, we consistently return to the same advice: These taxes are inevitable. We have discussed making systematic Roth Conversions to use up any remainder of the lower-end brackets that still exist, before the RMDs are required and force us to the largest tax bracket. The client’s CPA has suggested funding a Donor Advised Fund to the appropriate level to capture the entire charitable deduction for their AGI.
Truthfully, we don’t see any difference between standard charitable giving or giving through a Qualified Charitable Deduction at RMD age versus the Donor Advised Fund but we trust the CPA to make sure this is a wise move. The client has goals to fund other benefits to the family, like funding her grandchildren’s education. Even in discussion in those topics, we admit that we would likely be hesitant to tap any Roth IRA balances simply because the RMDs at those times will still exceed any reasonably anticipated costs. The Roths we convert essentially become the best parts of this client’s Estate.
Our main question is if we are missing any obvious technique to assist this client in reducing Qualified Balance, Future RMDs, or Tax Liability? After extensive searches online for any answers, we arrive at the same conclusion: these taxes are inevitable. That is why we are turning to the IRA Experts to confirm our thinking or shed light on new techniques. Thank you for any insights you can offer.
Permalink Submitted by Alan - IRA critic on Thu, 2025-07-10 18:43
Not sure why NUA could not be applied to the ESOP shares, but if that is not a possibility, then they should be rolled over to an IRA and most of the shares sold for diversification purposes, as that should outweigh tax considerations.
There are no easy answers regarding high RMDs beyond Roth conversions and/or donations through QCDs. Although the tax bill locks in current tax rates for at least 4 more years, after that there is no real permanency since the rates could be increased by future legislation, most likely targeting higher bracket taxpayers. Therefore, enhanced conversions in the next 4 years and perhaps till RMDs begin is advisable.
Large DAF contributions are a tool prior to QCDs and perhaps in addition to QCDs later on, but the tax benefit does not begin until the standard deduction amount is exceeded by itemized deductions.
Therefore, high taxes are probably inevitable, but sound planning could at least reduce the degree of that inevitability.
If client inherited from a spouse, was the estate tax portability form filed by the deadline?
Permalink Submitted by Warren DeNardo on Fri, 2025-07-11 10:19
Thank you, Alan. We appreciate your support.
We inquired extensively about invoking NUA. The shares are private. We were told that the company has heard this request before and has not been able to accommodate advisors looking to invoke NUA for their clients.
Thankfully both spouses are alive, and the ESOP is with its original owner. We will be working with an estate attorney for this client to ensure that everything that the estate is as tax efficient as possible.