Key questions to help ensure a more efficient transfer of tax-deferred assets

When engaging with beneficiaries, asking the right questions is crucial to understanding their financial landscape and helping them make informed decisions that will optimize the transfer of wealth. These questions not only help tailor financial strategies to the beneficiaries’ unique situations but also demonstrate your value as a financial professional. 

Following are some essential questions to guide these important conversations.

How old are you?

Understanding the beneficiary’s age, of course, is critical for tailoring retirement and investment strategies for their needs and goals. It’s also important to anticipate the age range at which the beneficiary is likely to inherit assets. 

For example, if a beneficiary is likely to still be in their working years, it might make sense for the account owner to convert tax-deferred assets to a Roth account. Another option is life insurance, which passes income tax-free to beneficiaries. Conversion strategies can sometimes allow a retired account owner to pay taxes at a lower tax rate than a working beneficiary.

Are you married?

A beneficiary who’s married may be in a better position from an income-tax standpoint than one who’s single. A married couple filing a joint return generally benefit from two standard deductions and wider “married filing jointly” brackets. For example, a married couple filing a joint return hits the 24% bracket at $206,700 of taxable income, whereas a single filer reaches the 24% bracket at just $103,350 of taxable income.

When a beneficiary is single, proactive planning may be more effective. A retired married couple, for instance, might be able to move money out of a tax-deferred retirement account at a much lower effective tax rate than an unmarried beneficiary. For example, a married couple filing a joint return hits the 22% bracket at $201,050 of taxable income, whereas a single filer reaches the 22% bracket at just $100,525 of taxable income.

What’s your current income and tax bracket? Do you anticipate any changes to your income in the coming years?

Understanding the beneficiaries’ current income and tax bracket will be a big help when developing an asset-transfer plan. To the extent possible, you’ll also want to anticipate the likely tax status of the beneficiary around the time they’re likely to inherit the tax-deferred assets. 

For example, a young physician in residency might not be making a lot now but can expect to make much more in the future. Likewise, a spouse re-entering or leaving the workforce can have a big impact on income. Having a good handle on a beneficiary’s current and future financial situation is critical to evaluating current planning opportunities.

What are your current and projected retirement savings?

Beneficiaries with large, tax-deferred retirement account balances of their own may be faced with significant required minimum distributions (RMDs) at their required beginning date. As a result, they may want to be more aggressive in drawing down inherited accounts before those RMDs begin.

When do you plan to retire?

If a beneficiary is still working but planning on retiring in, say, 5 years, they may want to minimize distributions from the inherited account until they stop working. Similarly, the years between retirement and RMDs can be a good time to draw down inherited accounts.

Will you have any other sources of retirement income?

Be sure to ask about things such as income from a business or passive investment income. Anything that generates ordinary income is relevant to the decision-making process.