2014 Federal Estate Tax Changes and Your Financial Legacy

By Joseph Clark
Ed Slott Master Elite IRA Advisor

Few would argue that money changes people and not always for the better. Over the last 25 years, I have witnessed families inherit money and do the right things from an investing and spending mentality. Sadly, I have also witnessed disruption, divorce and a host of behaviors far from the hopes and plans of the person who passed on the assets.

This past June, the U.S. Supreme Court finally ruled on the creditor protection of inherited IRA’s and made it clear once and for all that they are not protected on a federal level from creditors of the beneficiary. This ruling has changed the estate planning landscape in more ways than many understand and has opened the door to better thought processes for your retirement money.

Most of us aren’t worried about creditor protection and with the new exemption equivalent – the amount you can transfer estate tax free during life or at death – exceeding $5 million per spouse, the number of people subject to federal estate taxation is minimal. This brings to center stage the fact that estate planning was, and still is, far more important than a finalized tax plan. 

Your estate plan is your legacy plan. It is about privacy and the best use of capital, and it should be structured in a way to best serve those you intend to include in your plan. Perhaps most importantly, your estate plan should address potential disruptions in an ever-changing world. The tax code will change, your heirs will experience life’s normal challenges and opportunities, and something you never considered may befall them. Early demise, disability and even divorce may seem remote, but all three happen every day.

Your retirement assets such as IRA’s and Department of Labor plans, like your 401(k) or 403(b), need to be left to an individual — a living breathing person. The Department of Labor plans generally must go to your spouse unless they sign off after marriage, (prenuptial agreements do not apply here) permitting you to designate a different beneficiary. Your IRA beneficiary can be any person you choose.

What happens if you leave your retirement plan to your estate instead of a person, or your beneficiary precedes you in death? In either case, many times your savings must be liquidated and distributed over the next five years and you lose the ability to “stretch” the income out to your family over their life expectancies.

That is a huge opportunity lost now and forever. Such a situation obviously destroys the tax savings strategy you worked so hard to build. It also creates a potential marital asset for many recipients and the newfound wealth could be lost in the event of a future family disruption.

There are very specialized trusts you can use to help mitigate most risks. The Supreme Court case has spurred the legal and financial planning communities into major discussions and fostered worthwhile solutions. If you have built assets in retirement plans, I would strongly encourage you to find out more about IRA Beneficiary Restricted Access Trusts (IBRAT’s).


Joseph Clark is a Certified Financial PlannerTM and the Managing Partner of Financial Enhancement Group, LLC an SEC registered Investment Advisor. He is the host of “Consider This” radio show and serves as an Adjunct Assistant Professor at Purdue University where he teaches the capstone course for a degree in Financial Counseling and Planning. Financial Enhancement Group has offices in Indianapolis, Lafayette, Anderson, and Rensselaer Indiana.  Securities offered through World Equity Group, Inc., member FINRA/SIPC, a broker dealer and SEC registered Investment Advisor. Advisory Services can be provided by Financial Enhancement Group (FEG) or World Equity Group. FEG and World Equity Group are separately owned and operated and are not affiliated. Big Joe can be reached at [email protected] or (765) 640-1524.

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