Financial Focus Consider These Strategies for Leaving a Legacy

You work hard to provide a comfortable retirement lifestyle for yourself. But, if you’re like most people, you want to do still more - you want to be able to leave a legacy to your children, your grandchildren and those charitable organizations you support. These are all ambitious goals - but fortunately, you’ve got some good tools available to help you achieve them.

To begin with, consider your current assets and how you can most efficiently pass them on to your heirs. For example, suppose you’ve built up a considerable balance in your traditional IRA, but you don’t think you’ll need to use it all to help pay for your retirement. Can you pass on your IRA’s tax deferral to your children?

Yes, you can - through the concept of the “stretch’’ or “multi-generational’’ IRA. To understand how the stretch IRA works, you need to know one of the rules governing traditional IRAs - specifically, you have to start taking “required minimum distributions’’ at age 70 1/2. Basically, the IRS has always required you to take minimum distributions based on your life expectancy. However, in 2002, the IRS changed the life expectancy factors used to determine your required minimum distribution calculations. Consequently, you can now take out smaller amounts of money from your IRA, which allows you to extend the number of years your IRA money grows tax-deferred.

Obviously, this change will positively affect how much of your IRA money you can leave to your children. But the new rules also permit your children, once they inherit your IRA, to base their minimum required distributions on their life expectancies. So, if they are in their early middle-aged years when they receive your IRA, they can take out relatively small amounts, thereby avoiding big tax hits.

The stretch IRA can be a valuable estate-planning tool. But you can also build your legacy while you’re still around to enjoy the results. One vehicle for helping you accomplish this goal is the Section 529 plan, which you can use to help pay for your child or grandchild’s college education. Section 529 plans, named after the appropriate section in the tax code, are offered as either prepaid tuition plans or state-sponsored college savings accounts.

Section 529 plan contribution limits are typically quite high - over $200,000 per beneficiary in many state plans. Also, under current law, all qualified withdrawals will be free from federal income tax, although the money will appear as income on the child’s tax return.

Thus far, we’ve only talked about vehicles that can help you leave a legacy to your family. But what about charitable organizations? What are some good ways to leave your legacy there?

One possibility is to donate an appreciated asset, such as stock or a piece of real estate, to a charitable remainder trust. You’ll get an immediate income tax deduction for a portion of the value of your gift. The trust can sell the asset, without incurring any immediate capital gains taxes, and invest proceeds in a diversified portfolio designed to pay you an income stream for life. Upon your death, the trust will pay out the remaining funds to the charity or charities you’ve chosen.

As you can see, there are several ways in which you can link your name to a legacy of generosity. But before you take action, consult with your tax and legal advisers. You’ll get more enjoyment out of leaving your legacy if you know you’ve done the best you can for everyone involved.

This article was submitted by the financial representatives of Edward Jones in Hagerstown: Greg Garner, 301-733-9465; Dave Walker, 301-766-7300; Joan Bowers, 240-420-8514; and John R. Pullaro, 301-824-7726.