Wealth Management & Financial Planning

Wealth Management & Financial Planning

Planning for Tomorrow’s Taxes Today

[vc_row][vc_column width=”1/4″ offset=”vc_hidden-xs”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][vc_column width=”3/4″][vc_column_text]“This isn’t your father’s Oldsmobile,” stated an iconic 20th century ad campaign. Today, there is no Oldsmobile for you and your father to discuss. But your father’s finances may present several issues for discussion. A particularly difficult situation can arise when your father’s planned financial allocation based on his former life situation is no longer appropriate for today’s needs.

As part of our legacy planning process, most families consider what will occur financially when one parent passes. The reality is about 10% of us die suddenly. As life evolves, our needs change and so should our investment strategies. Common changes include a need for an increased income stream, assisted living or long-term care. Tax scenarios can change radically when a loved one is lost and opportunities to minimize tax liability can be overlooked.

Several times each year we receive a call from adult children regarding their parents’ previous financial decisions. Their parents bought products that potentially addressed their fears of market volatility or running out of income. But those former concerns no longer reflect the parents’ needs today – at least in the child's view. Many considerations come into play when making investment decisions, including liquidity and volatility.  But taxation must always be considered.

A typical scenario is a father with Social Security, a pension and $250,000 in an IRA or old 401k. Along the way, the father purchased a tax-deferred annuity from a broker. Dad didn't need the income and like most people, didn't like paying taxes on his bank deposits. Today, his $75,000 annuity contract is worth $125,000. Based on his current income, he is in the 15% marginal bracket.

Let's first assume that the father described above passes in his sleep with a son as the single beneficiary. His middle-class son and his wife are taxed at the 25% marginal rate. They will be forced to begin taking distributions out of the tax-deferred retirement account and will be taxed at their 25% marginal rate. Suddenly, the IRS receives a bonanza windfall. Why? Dad could have paid the IRS 15% but his son will pay 25%. The annuity’s $50,000 growth presents the same challenges and in most cases, the taxes are recognized immediately. (Proper planning can delay or at least slow that taxation).


Many people only look at their assets for today's use, without considering different events that life may present. The father looking out for himself and his son, should have intentionally recognized all the income he could up to the 15% marginal bracket. That doesn't mean he needed to spend the money. Rather, he could have paid taxation on the investment at his smaller 15% tax bracket.

These two things are certain: death and taxes. Take care of yourself and you might delay death. Being proactive and understanding the tax code will provide your future and your father with more opportunities. When adult children ask me how to help with their parents’ finances, we always begin with the tax return.

Tax advice provided by CPA’s affiliated with Financial Enhancement Group, LLC.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer.[/vc_column_text][/vc_column][/vc_row][vc_row][vc_column offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm”][vc_widget_sidebar sidebar_id=”sidebar-main”][/vc_column][/vc_row]

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