It certainly isn’t fun to plan out your estate, but a good financial plan includes this important component. Now you may think that ‘estate planning’ only involves getting money to your kids when you die, but it really includes a lot of decisions that occur while you’re alive and that affect you and your spouse before someone else inherits the money.
The two main goals of estate planning are to protect you and your spouse in case bad situations happen in an untimely manner, like an early death or extra long term health costs, and to make your inheritance as easy and tax-efficient as possible for the people you care about.
Goal 1: Protect you and your spouse in case bad situations happen.
Before you focus on the money you leave behind for your kids, we encourage you to focus on the bills you might leave behind for your spouse.
After you make sure your retirement income plan can give you enough income to live on in the good times, you should look at two key risks that could create trouble in the bad times.
What happens to the surviving spouse when the first spouse dies, especially if its early?
A key part of retirement planning is figuring out what we call the ‘survivor gap.’ It is very likely that the surviving spouse will be getting less guaranteed money after the first one passes away. When you are both getting social security there will definitely be a drop, and depending on how you took your pension there could be a drop in income there, too.
We strongly encourage you to consider how the surviving spouse will be affected when you make your social security and pension decisions. Write down how much you’ll be getting from social security and pensions as a couple, and how it will drop if one spouse dies, and if the other spouse dies.
It’s quite possible that an 85 year old widow is living on the income decisions her husband made 25 years earlier! Please consider your future widow(er) when you make these decisions. Two great ways to help out are to delay the higher social security amount, as this will be the one that goes to the widow, and to take as high of a ‘survivorship’ percentage as possible on your pension.
Another situation to consider is what happens when one spouse needs extra long term health care. You should have a plan both for what happens, and how it gets paid for.
Are you medically qualified to take care of each other? Do you have a child that lives close by that can help? Do you want to put that burden on them at a time when they are helping their kids with high school, college and weddings? If you make use of a professional long term care facility, how will you pay for it?
These are all questions to consider. A good estate plan will help you address these, and make sure you have that plan in place to pay for long term health care costs – they are almost never covered by Medicare! And you have to pay for the costs until you have very little left before the government helps through Medicaid (also known as Title 19).
If planning for long term health costs is important to you then make sure to set aside extra money that’s reserved for these costs, or look into and get long term health care insurance.
Download our Retirement Guidebook6 Questions retirees aren’t asking but should be
Goal 2: Make your inheritance as easy and tax-efficient as possible
One part of having a successful financial life is leaving some money behind to the people or places you care about.
The first step is creating a will, but oftentimes most of your money doesn’t even go through the will, it probably gets sent out through something called beneficiaries!
If you think that your will takes care of your 401(k), Traditional IRA, Roth IRA, brokerage accounts, life insurance or mutual funds, think again. Most of these can be set up to pay out to your beneficiaries just by filling out a simple form. Make sure that these investment accounts have a beneficiary form on file that tells the financial company how to send this money out when you die.
A lot of people ask about trusts, and if that’s right for them. We believe a trust makes sense when you have any of these situations:
- You want to add some restrictions or requirements, such as wanting your inheritance to be used for education, or to restrict your kids from getting money in a way that could harm them, like with drug/alcohol abuse or perhaps a divorce.
- There is a special need situation and you want to get money to a family member, but make sure they are still eligible for government assistance
- You own property such as a house or cabin, especially if there is more than one beneficiary or if it is out of state
- You want to ‘avoid probate’ and keep your families financial matters away from probate court.
Other times people are concerned about the estate tax or inheritance tax. Well we have good news for you. There hasn’t been an inheritance tax in Wisconsin since 1992, and in 2021 an individual needs to leave behind over $11.7 million for there to be an estate tax. This is roughly 0.1% of all estate situations.
So inheritance and estate taxes are probably something you don’t need to worry about, but income tax very well could be.
A lot of people have the majority of their retirement accounts in Traditional 401(k) and IRA investments. You got a tax break when you put the money in, but when your kids inherit those accounts they will have to pay the taxes as they take the money out. And tax law changes in December 2019 force your beneficiaries to take that money out over 10 years (in most cases) or less.
If you are planning to leave behind money in Traditional 401(k) or IRA accounts please consider these ideas:
- Make a charity your beneficiary on Traditional 401(k) and IRAs. They’ll pay zero taxes on this money!
- Look at converting your Traditional money over to Roth money. Many people rightly believe their taxes are lower in retirement. Many of their kids are successful, pay high taxes and inherit money from their parents in their 50’s and 60’s when their income (and tax rate) could be at lifetime highs! Why not take advantage of your lower retirement tax rate and pay taxes then so that your kids don’t have to pay the taxes.
- They’ll love you for leaving them some money, but they might love you even more if its tax-free!
- Consider having some permanent life insurance to leave to your kids. Life insurance pays out tax free and it doesn’t have the 10 year restriction that IRAs and 401(k)s have now. It’s a great way to give your kids the flexibility to inherit money without government taxes or restrictions.
Estate planning usually isn’t on the top of your list for a fun activity, but it certainly is important for responsible people to plan out how they will take care of themselves, their spouse, their family and the charities they care about.
At Keil Financial Partners we know that figuring out estate planning on your own can leave you anxious and finding a good retirement planner you can trust is hard.
That’s why we created a 5-step retirement income plan (that includes estate planning!) to help you make the best choices with your money. And why we focus so much on financial education through our blog, guidebooks and Retirement Revealed podcast.
Please call or email us with any of your estate planning questions. We’ll get you started in the right direction.