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RMDs lead to high taxes for heirs; there are better ways
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RMDs lead to high taxes for heirs; there are better ways

Dear Michael: We read your column last issue and we, too, are setting things up so our non-farming children receive our retirement savings when we die while the farming son is receiving the farm. Can you go into deeper detail as to some of the solutions we should be thinking about?

- On Second Thought

Dear On Second Thought: Last issue, we talked about the financially devastating results of a new IRS ruling that states heirs of “qualified plans” – SEPs, IRAs, etc. – will now have to take these funds out in 10 years’ time versus over their lifetime as it was before. Because of the aging of America, many beneficiaries will be in their top earning years when they start receiving inherited qualified money.

This is just a little noose tightening from our government which is beginning to happen – and for good reason. As a country, we are close to going broke. Our national debt now exceeds our GDP and that is not a good thing, as countries like Greece, Ireland and others who defaulted on their debt will tell you.

In addition, all the money that has been pumped into the economy via PPP loans, stimulus checks and other government programs has created a cash surplus in our country. The U.S. did not borrow this money – except internally – which means we just turned on the printing presses and made more money.

At some point, this is either going to lead to inflation (see rising housing prices) or higher interest rates (remember the ’80s?) The Fed is going to have to recover the excess cash in the economy to rebalance things and rising interest rates as well as higher taxes are in our future.

We talked last issue about rather than taking Required Minimum Distributions (RMDs) out of your qualified funds, see how much you would receive on a 20-year pay out. Take this amount and see how much life insurance that would buy you – perhaps individually or as a second-to-die.

Now you have converted taxable funds to a non-taxable death benefit for your non-farming heirs. In addition, put the life insurance ownership into their names because if you need care and you exhaust your savings and need to apply for Medicaid, you do not want the life insurance in your name. The kids would have to repay the past five years’ premiums towards your cost of care but that should be far less than the death benefit.

Now, if you die, the kids get the death benefit tax free – just like their farming brother. If you die before 20 years, then the kids will receive the death benefit plus the remaining annual pay out until 20 years is passed.

Another option is to take the same 20-year pay out and if you are healthy enough, you can qualify for a hybrid policy.

A hybrid is a life insurance policy that pays two to four percent of its death benefit monthly towards the cost of your long-term care. For example, a $200,000 policy would pay $8,000 per month towards your care costs – if you medically qualify for benefits.

If you do not need care in your lifetime, under the above example, your non-farm children would receive $400,000 – if you are both insurable.

The costs on these policies are much less – dollar for dollar – than traditional long-term care coverage. A lot of people who have been turned down for long-term care due to minor illnesses such as high blood pressure, cholesterol, etc., can still qualify for a hybrid policy.

Get yourself an estate planner and run the math and see which option is better for your future. Now, if you need your retirement money for income during retirement, then you will be spending that money in any case rather than going to the non-farming children. But if it is excess income you do not need, then there is a better method to handling qualified money than RMDs. 

Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota. Email him at

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Michael Baron provides estate planning guidance at Great Plains Diversified Services in Bismarck, North Dakota.

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