By Terry-Ann Orman
Financial Advisor Talking To Senior Couple At Home

Building wealth involves hard work, dedication and discipline. Spending your wealth and distributing it is often more complex and requires careful planning. So, what is the ideal time to think strategically about wealth distribution? It’s when you’re actually creating and accumulating your wealth. You have time to leverage strategies for optimal impact in the long term. Rather than exploring strategies in your spend-and-distribution phase, consider these four factors to formulate a strategic plan now.

Think about what you want for yourself and others

Retirement is a relative term. It means different things to different people. Maybe you want to slow down but remain involved in your business or professional practice. Perhaps you want to do something completely different – maybe without pay or health and other benefits. You may finally want to live the lifestyle you have only dreamed about!

Once you have figured out your lifestyle plan, consider whether you’d like to leave a legacy, and if so, what that will look like. Does it mean an inheritance to your children only, or do you envision something longer-term so multiple generations benefit? If the latter, consider leaving your estate in trust to protect those assets from outsiders or having your estate plan provide for distributions outright over time. A financial advisor can help you navigate the pros and cons of each strategy, including tax ramifications and asset base sustainability.

Your goal may be to fulfill your philanthropic goals in retirement or after death. To enjoy gifting while living, you may need to structure your giving so you receive an annuity stream back for a period of time – or until your death. Consider a large gift during a year you will have a higher-than-usual tax liability, perhaps from the sale of a business interest or a large investment property.

Balance cash flow needs with tax efficiencies in retirement

Whatever your goals, consider how much you need to cover your ongoing expenses on an annual basis and the source of your income. Sourcing income can become complex due to tax ramifications of drawing down from various assets. For example, distributions from your tax advantaged retirement funds will be taxed at your marginal income tax rate in retirement, which will not necessarily be much lower than during your working years. Drawing down from investment accounts may be taxed at lower capital gains rates. The portion of Social Security benefits subject to taxation depends on your income level, and not all sources of income are treated the same.

If you have time, create nontaxable sources of income as a third alternative for retirement, like building up Roth-IRA accounts or strategically using life insurance products. Careful planning will help you maximize after-tax income flows and minimize wealth erosion due to taxes, inflation and transaction costs.

Identify the appropriate assets to leave behind

Some assets are powerful accumulation vehicles, but less efficient to live off and possibly leave behind. Others may cost a lot to liquidate now and are better to leave as an inheritance. Remember – retirement accounts are taxed as ordinary income when taking distributions. So, drawing from nonretirement funds and tax-free vehicles are more efficient. If you decide to take no more than is mandatory from your retirement funds and spend down your other assets, you may pay fewer taxes. But your beneficiaries will feel the tax toll. Choose who will ultimately pay the taxes.

It is always wise to donate low-cost-basis assets to charities, both now and after death. You receive a tax deduction in the year of the gift, and the charity receives the appreciated stock and skips paying capital gains tax on a future sale.

What’s the best course of action?

The answer depends on your individual financial situation, your relationship with your family, your appetite for deploying sophisticated planning strategies and your philanthropic goals. A comprehensive financial plan can help clarify your goals and formulate strategies to enhance your retirement and family’s future. An independent review of your current plans may uncover further opportunities to secure your family’s financial future.

About the Author

Terry-Ann Orman, CFP®

Terry-Ann Orman, CFP®

Senior Vice President, Financial Planning Strategist

Terry-Ann helps the bank’s clients achieve their wealth management goals by combining tax efficiencies, asset protection, risk management and estate planning strategies. She has a master’s degree from University of Cape Town, South Africa, majoring in accounting and economics. She has been a Certified Financial Planner (CFP®) since 1996.