Client Profile
A retired business owner and his spouse had spent decades building wealth and were passionate about two priorities: providing a meaningful inheritance for their children, and supporting charitable organizations that reflected their values. They had accumulated assets across multiple account types, including retirement accounts, investment accounts, cash reserves, real estate, and charitable assets. Their estate plan reflected their intentions, but they wanted to ensure their assets would transfer as efficiently as possible.
The Challenge
The couple had named both family members and charitable organizations as beneficiaries across numerous accounts using similar percentage allocations. At first glance, this appeared to accomplish their goals. A deeper review revealed an opportunity to improve how assets would ultimately pass to beneficiaries.
Different assets receive different tax treatment at death. Certain investment and personal assets may receive a step-up in cost basis. Traditional retirement accounts generally do not receive a step-up in basis and can create taxable income for individual beneficiaries.
The couple's goal was for each of their children to inherit approximately $1 million while also fulfilling significant charitable commitments. The way beneficiaries were structured could result in heirs receiving assets that carried future income tax obligations.
The Opportunity
Our review identified an opportunity to align each asset type with the beneficiary who could receive the greatest benefit from it, rather than allocating all beneficiary groups proportionally across all accounts.
The MPM Approach
Working within the framework of the clients' existing estate plan, we recommended restructuring beneficiary designations to better align with the tax characteristics of each asset. The strategy included directing non-qualified assets and other assets that may receive a step-up in basis primarily to family beneficiaries, designating charitable beneficiaries on qualified retirement accounts, and using the clients' donor-advised fund as part of the charitable distribution strategy.
This approach helped ensure that children were more likely to receive assets with favorable tax treatment, that charitable organizations could receive the full value of designated retirement assets since charities generally do not pay income tax on those distributions, and that the family's wealth transfer strategy more closely aligned with their goals for both loved ones and charitable causes.
The Outcome
The clients implemented the recommended beneficiary changes. As a result, they better aligned their beneficiary designations with their legacy goals, increased the potential after-tax value ultimately received by their heirs, enhanced the efficiency of their charitable giving strategy, preserved their intent of making meaningful gifts to both family and charity, and gained confidence that their estate would transfer according to their wishes.
Key Takeaway
Many estate plans focus on who receives assets. Just as important is which assets each beneficiary receives. By coordinating beneficiary designations with the tax characteristics of different account types, families may be able to improve after-tax outcomes for heirs while maximizing the impact of their charitable giving.
Compliance disclosure: This case study represents a real client situation, but all names, identifying details, account values, and other personal information have been modified or omitted to protect client privacy. Individual results will vary. MPM Wealth Advisors provides investment management and financial planning services. MPM does not provide legal, tax, or accounting advice. Clients should consult with their attorney, CPA, and other qualified professionals before implementing any planning strategy.