You would be hard pressed to find more than a few intelligent and responsible individuals who wouldn’t agree that planning for the future is one of the most important things we can do as adults, especially where the security of our families are concerned. Yet, astoundingly, 42% of adults over the age of 40 have yet to plan their retirement, and more than 55% of Americans will die this year without a will. We know the results of poor retirement planning: More than 40% of Baby Boomers will likely fall short of their retirement income needs. Less known are the devastating results for families when an estate is probated without proper wills and trusts. A lack of planning in either area can be catastrophic. To delay starting your estate plan now invites disaster.
Despite the statistics, most people are keenly aware of the importance of retirement planning. The same can’t be said for their awareness of the necessity to plan their estates. The fact of the matter is that everyone dies with an estate that is subject to the probate laws of the state which, in effect, will create a will for you if you don’t have one, and, that could be devastating even for the smallest of estates. No matter how big your estate, the only way to communicate your wishes and ensure that your surviving family members are not unnecessarily burdened with legal fees, delays, and distress, you need to have a will.
When should I start planning my estate?
The answer is: At the earliest, when you acquire some assets or debt, and, at the latest when you start a family. Without question, you need an estate plan when the value of your assets approaches $1 million. And, when you consider your home, you retirement plans, your personal property and other investments, that can happen fairly soon in life. Then, your plan should be reviewed periodically or as your situation requires it.
What should I do at a minimum?
At very minimum you need a will. A will is a legal testament that specifies your wishes for the disposition of your property and declares who is in charge of doing so (an executor). If you have children or other dependents, your will establishes guardianship arrangements. In both cases, absent a will, the state will make those determinations.
But, frankly a will is usually not enough. It won’t designate how your assets will be controlled if you become incapacitated and it won’t prevent your assets from being probated which will cause delays and added expenses for your survivors. By adding two simple documents to your estate plan, you will be able to cover those bases. You need both a health directive and a living trust.
How will my estate plan affect my retirement plan?
While both plans are vital cornerstones of your family’s financial security, they serve separate purposes. Your estate plan preserves your assets for your family, while your retirement plan creates your assets used for retirement income. Planning for one purpose shouldn’t impact the other. There is however one place where your retirement plan does intersect with your estate plan and that is in your beneficiary designations. Qualified retirement accounts are generally held outside of trusts. That’s because they pass directly to your heirs by beneficiary designation without going through probate. The problem arises when your beneficiary designation is not coordinated with your trusts. For instance, if you establish a Family trust for the purpose of removing that portion of your estate that exceeds the marital exemption, a retirement plan asset that is designated to pass directly to your spouse may create a taxable event for your estate. In this case, the trust should be made the plan beneficiary.
Similarly, if your children are named as contingent beneficiaries instead of your trust, the asset will flow directly to them, instead of the trust which could include disbursement instructions. Instead, your children could receive the assets in a lump sum with no guidance on their use.
Also, the naming of beneficiaries can affect the rate at which distributions are made from the plan to those for whom they are intended after your death. It’s important to arrange the beneficiary designation so that, after your death, the rate of distributions are tied to your spouse’s age and needs so they are not paid out too quickly which can create an additional tax burden..
The bottom line is that if you fail to coordinate the objectives and goals of your estate plan with the beneficiary designations of your retirement accounts, they may not be realized in the way you had intended.