The Great Wealth Transfer: Ensuring Your Heirs Are Prepared for Financial Success

Todd Pouliot
1 day ago
6 min read

From your chair, thinking about your heirs

You’ve spent a lifetime building your nest egg. Now that you're looking down the road at handing that wealth to the next generation, you find yourself asking the hard questions: “How much will my heirs actually keep?” “How will taxes and new rules change the value of what I worked for?” And, frankly, “How do I make sure my intentions survive the paperwork?”

Below, I’ll walk through what keeps people awake at night as a wealth-holder, the law that tightened the timeline for inherited retirement accounts, and practical ways we’re thinking about reducing the tax bite children or grandchildren might see.

Why is this such a big deal? To put it bluntly, the US government is broke; they need tax revenue, and they need it right now.

First — the hard rule: the 10-year payout window

If you leave a non-spouse heir a traditional IRA or most workplace retirement plans, the

account generally must be emptied by the end of the 10th calendar year after your death. That rule (commonly called the “10-year rule”) replaced the old “stretch IRA” in most cases and compresses what used to be a long-term, tax-deferring transfer into a far shorter period. This means beneficiaries can no longer (in most cases) take small withdrawals over their lifetimes; the money must be withdrawn within 10 years. (IRS)

There are exceptions — a surviving spouse, a minor child (only until they reach majority), a disabled or chronically ill beneficiary, or someone who is no more than 10 years younger than you may still be able to use life-expectancy-based payouts rather than the strict 10-year liquidation. But for most adult children and grandchildren, the 10-year clock is real. (IRS)

Why that 10-year clock matters to tax outcomes

A traditional (pre-tax) IRA is income to your beneficiary when they withdraw it — they’ll pay ordinary income tax on amounts taken. Under the old stretch rules, heirs could spread taxable income over decades, often keeping them in lower brackets. Now the compressed 10-year window can force large taxable distributions in a short period, potentially pushing heirs into materially higher marginal rates and increasing their total tax paid. Vanguard, Fidelity, and other advisors highlight that the difference between spreading distributions over decades and compressing them into ten years can be tens or hundreds of thousands of dollars in extra taxes, depending on account size and the beneficiary’s other income. (Vanguard)

Put plainly, the nominal amount you leave is not what matters as much as the after-tax amount your heirs receive. A million dollars in a traditional IRA can produce a very different outcome depending on whether the heir withdraws it in one big year, in several lumpy years, or uses planning to make most or all of it tax-free. (Bankrate)

A simple way to see the impact (conceptually)

Imagine an inherited traditional IRA of $1,000,000. If the beneficiary takes large withdrawals in two or three years, those distributions add to their ordinary income and can push much of that money into top marginal tax brackets, yielding a very high tax bill in a short period. Even spread evenly over ten years, that’s $100,000 of additional taxable income per year (on top of whatever else they earn), which can meaningfully increase their marginal tax rate and their Medicare IRMAA or state tax exposure. The bottom line: how the money is distributed matters as much as how much there is. (Vanguard)

Things you should be actively weighing (ways to reduce the tax hit)

Here are the practical moves to consider now that could preserve more of your legacy for your heirs:

Roth conversions while you are alive. Converting traditional IRA assets to a Roth IRA means paying income tax now at my rates, but the Roth grows tax-free, and withdrawals by heirs are generally tax-free (provided the Roth meets the 5-year rule). That can transform a future taxable windfall for heirs into tax-free money, often worth the upfront tax cost if your heirs are in higher brackets than you are. We recommend modeling this carefully: “Who pays the conversion tax?” “How will it affect my current cash flow and tax brackets?” (MassMutual Blog).
Gifting and partial lifetime transfers. Gifting assets during life reduces the amount that will sit inside retirement accounts at death (and thus the amount subject to the 10-year rule). Annual exclusion gifting, 529s for education, or larger lifetime gifts (with proper planning) can move assets out of the taxable retirement sphere. (MassMutual Blog)
Life insurance as a tax-efficient bridge. Buying an appropriately structured life insurance policy can provide heirs with a tax-free death benefit to replace the after-tax value of a pre-tax retirement account. That’s especially useful when you want an heir to receive a predictable, tax-free lump sum rather than a taxable withdrawal stream. Many planners suggest life insurance as a hedge against the 10-year rule’s compressed taxation. (MassMutual Blog)
Trusts and beneficiary designations — used carefully. Naming a trust as a beneficiary can control how inherited assets are paid out. Still, trusts add complexity and can change tax treatment (trusts themselves are subject to higher tax rates at much lower income levels). Many firms recommend naming individuals as primary beneficiaries and using other tools (like a trust funded outside the retirement account) to capture control objectives. If you use trusts, coordinate with the trustee and your tax advisor to avoid creating worse tax outcomes for heirs. (Fidelity)
Charitable strategies. If you have philanthropic goals, directing retirement assets to charities (via beneficiary designation or Qualified Charitable Distributions while alive if eligible) can remove those assets from taxable transfer and reduce your estate tax exposure. QCDs and charitable bequests from IRAs are tools I’m looking at because charities don’t pay income tax on receipts. My wife and I have been proud supporters of the Cystic Fibrosis Foundation for over two decades, https://www.cff.org/chapters/northern-ohio-chapter. (Kiplinger)
Timing RMDs and coordinated withdrawals. If you are younger than RMD age, we can help you time Roth conversions and other moves in lower-income years to reduce the overall tax impact on conversions and transfers. Likewise, heirs can sometimes time distributions within the 10-year window to level out tax impact across years. These are technical moves and require scenario modeling. Tax planning is always more fun than Tax Preparation. (Nerd's Eye View | Kitces.com)

Planning priorities

Model scenarios now. Having your advisor run multiple “what if” tax scenarios: different heirs’ incomes, Roth conversion levels, life insurance replacement needs, and how the 10-year rule changes the after-tax value my heirs receive. Kitces and other planners point out that modeling often reveals counterintuitive outcomes (for example, modest Roth conversions today might save far more for heirs than expected). (Nerd's Eye View | Kitces.com)
Coordinate with professionals, tax advisors, estate attorneys, and a reputable financial planner to ensure beneficiary designations, wills, and trusts work as intended. Make sure your advisor doesn’t have conflicts of interest, such as earning less commission on Roth Conversions. (Fidelity)
Communicate my goals. Besides taxes, I want to make sure my heirs understand the values and intentions behind the wealth. Practical education about tax consequences, plus a clear statement of my priorities, reduces the chance that liquidity needs force bad decisions. (For example, an heir hit with a tax bill who doesn’t understand options might take a large taxable distribution to pay it rather than using more tax-efficient funding.)

Final thought — your legacy is more than numbers

Yes, the 10-year rule changes how retirement assets are translated into an heir’s spending power. But the real goal isn’t to avoid taxes at all costs; it’s to get the right mix of financial security, flexibility, and the values I want to pass on. That means balancing current taxes you pay (Roth conversions, gifting) with future taxes your heirs would face, using life insurance where appropriate, and structuring documents so there are no surprises.

If you’re in the same chair, start by asking your advisor for a line-by-line model: what does a $500k or $1M traditional IRA leave your child after tax under different withdrawal patterns? Then compare that with Roth conversions today, the cost of life insurance, or a charitable plan. Those numbers, not the headline account balance, will tell you whether you’re leaving a gift or a taxable burden.

If you would like a .pdf of “The Great Wealth Transfer” planning checklist, don't hesitate to get in touch with me directly at Tpouliot@mygatewaymoney.com or visit us at www.mygatewaymoney.com to learn more about real financial planning and to schedule a time to meet.