Many IRA owners are unknowingly setting up their heirs for a hefty tax bill. With the SECURE Act eliminating the stretch IRA and tax rates likely to rise in the future, proactive planning is more important than ever. If you want to leave a lasting financial legacy, consider these three strategies to protect your wealth from excessive taxation.
Understanding the “Legacy” Camp
A few years ago, we attended a presentation by Ed Slott, CPA, “America’s IRA Expert.” He explained that IRA owners generally fall into two camps:
Non-Legacy Camp – These account holders plan to use their IRA assets for their lifetime income needs.
Legacy Camp – These individuals have other income sources and want to minimize required withdrawals to leave as much as possible for their heirs.
For those in the legacy camp, traditional IRAs are not the most tax-efficient way to pass down wealth. IRA assets are subject to both income tax and potential federal or state estate taxes. Additionally, with the national debt exceeding $37 trillion, it’s unlikely tax rates will be lower in the future than they are today. That’s why it may be beneficial to withdraw IRA funds strategically now, rather than allowing them to grow tax-deferred only to be taxed more heavily later.
We will explore three key strategies to help legacy-focused IRA owners: 1) Roth conversions to eliminate future tax uncertainty; 2) Life insurance planning using ILITs (Irrevocable Life Insurance Trusts); 3) Charitable planning strategies using Qualified Charitable Distributions (QCDs).
Roth conversions: Locking in lower taxes
Many people hesitate to convert their IRA to a Roth, fearing it will push them into a higher tax bracket. However, strategic Roth conversions allow you to manage your taxable income while locking in today’s lower tax rates. For example, let’s say a married couple in 2025, both over age 59½, files jointly and falls within the 22% tax bracket. They have room before reaching the higher 24, 32, 35 or even top 37% bracket (at $751,600). By strategically converting a portion of their IRA each year, they can spread the tax burden while securing tax-free withdrawals in the future.
Why Consider Roth Conversions?
Future Roth distributions are tax-free and do not impact Social Security taxation or Medicare premiums.
No Required Minimum Distributions (RMDs) from Roth IRAs.
Reduces the taxable portion of your estate.
For more information, visit the Retirement Planning section on Asset Strategy’s Financial Guides. You can also reference Schedule 1, Part II, Line 26 of your tax return, which carries over to Line 10 on the front page of your 1040 (IRS Form 1040).
Life insurance planning using ILITs
Life insurance is one of the most tax-efficient assets to leave to heirs. Unlike IRAs, which are subject to income and estate tax, life insurance benefits pass to beneficiaries tax-free.
An Irrevocable Life Insurance Trust (ILIT) removes life insurance from your taxable estate while protecting it from creditors, lawsuits, and divorce claims. IRA owners can use taxable distributions or RMDs to fund the ILIT, converting tax-inefficient IRA dollars into a tax-free inheritance.
Key Benefits of Life Insurance Planning:
- Tax-free death benefits to heirs.
- Protection from estate taxes and liabilities.
- Modern policies offer riders for long-term care and critical illness.
- Since people are living longer, life insurance costs have become more competitive. This strategy can significantly enhance the amount left to heirs while minimizing taxes.
Charitable planning strategies with QCDs
Qualified Charitable Distributions (QCDs) allow IRA owners to donate up to $108,000 per year in 2025 (indexed for inflation) directly to qualified charities. This approach lowers taxable income while benefiting charitable organizations. Private family foundations, donor-advised funds (DAF), or charitable remainder trusts (CRT) do not qualify.
Why Use a QCD?
- Satisfies your RMD requirement.
- Lowers your Adjusted Gross Income (AGI), reducing the impact on Medicare premiums and Social Security taxation.
- No need to itemize deductions to receive tax benefits.
Each spouse can donate up to the $108,000 limit, meaning a married couple could contribute up to $216,000 tax-free. However, QCDs must be made from an IRA—employer retirement plans are not eligible.
Putting it all together
By combining Roth conversions, ILITs, and QCDs, you can maximize your financial legacy while minimizing taxes. Consider which strategies align with your long-term goals and whether your IRA is earmarked for personal retirement income or wealth transfer. Given today’s historically low tax rates, acting now can provide significant benefits in the future.
You can schedule a free 20-minute Discovery Call with Bruce Hardy, Director of Private Asset Management at Asset Strategy, to explore your best options: Schedule Here.