Blog

Legacy Planning Law Group

We're There for Your Family When You Can't Be

Baby Boomers Will Leave Trillions of Dollars to Their Heirs

During the next 25 years, Americans will transfer an estimated $68 trillion to their heirs and charities. Seventy percent of that amount, almost $48 trillion, will pass from baby boomers and most of that ($32 trillion) will go to members of Generation X. Although Americans who are currently between the ages of 50 and 70 will distribute some of their assets during their lifetimes, the remainder will get transferred through their estates after they die.

Because baby boomers will leave trillions of dollars to their heirs, they and their beneficiaries should learn about the financial consequences of this magnitude of wealth transfer. Prudent planning can prevent massive losses from unnecessary taxes and other negative financial outcomes. Every dollar that you legally avoid paying to the government, is a dollar you can one day give to charity or your loved ones.

Tax Traps

You might want to help your adult children or your grandchildren now, rather than having to wait until you die. Unfortunately, giving large amounts of money to them while you are alive, can trigger gift taxes. Depending on the amount of the gift, you might find that a large chunk of your money went to the government, instead of to your loved ones.

How you leave your assets can also impact the tax consequences. For example, if you have a traditional individual retirement account (IRA) and you leave its proceeds to a beneficiary who is not your spouse, there can be a significant tax bill. In addition, some financial accounts have burdensome transfer fees, so you should check into this issue before deciding what to do with your assets.

One way to minimize taxes is to set up a trust. The laws are different in every state, and the applicable federal laws can change at any time. Be sure to you talk with your elder law attorney to set up your estate in a manner that takes tax consequences into consideration. This article does not give tax advice. You should talk with your tax advisor.

Talk with Your Beneficiaries

Open communication is essential, when formulating a wealth transfer plan for your family. Some of your children might already have financial security and would prefer that you give the assets you would leave them to their children instead.

Surprises are seldom a good idea. When a sizeable inheritance drops into a person’s lap without warning, the recipient often lacks the money management skills to handle the assets. This fact is why many lottery winners go broke within a year or two of winning millions. Talking with your heirs can give them time to mentally prepare and educate themselves on investments and other financial issues.

When you talk with your beneficiaries, you can suggest a team of professionals who can advise them on how to safeguard the assets they will receive. If not handled properly, for example, your loved ones could lose a substantial portion of the inheritance in a divorce.

Your local elder law attorney can advise you on how the regulations are different in your state from the general law of this article.

References:

AARP. “Boomers Will Pass Along Trillions, Mostly to Gen Xers.” (accessed December 29, 2018) https://www.aarp.org/money/budgeting-saving/info-2018/generational-wealth-transfer.html

How Do I Include Retirement Accounts in Estate Planning?

You probably made beneficiary designations for your retirement accounts, when you opened them. Remember: who you designated can affect your overall estate planning objectives. Because of this, when including your retirement assets in your estate, ask yourself if anything has changed in your life since then that would affect their status as your beneficiaries, as well as how they’d receive the retirement assets.

Investopedia’s recent article, “Include Your Retirement Accounts in Your Estate,” gives us some things to consider in the New Year.

Beneficiary Designations. Review your beneficiary designations after major life changes. If you fail to make these designations, the funds will most likely go into your estate—a horrible outcome from a tax and planning perspective. If your estate is named a beneficiary, your heirs must wait until probate is finished to access your retirement accounts. It is usually better to name an individual or a trust as your beneficiary.

Protecting Retirement Funds With a Trust. Another option is to include a trust in your estate planning, instead of giving your retirement funds directly to named individuals. This allows you more control over the distribution, while protecting your heirs from additional paperwork and taxes. Trust distributions keep a beneficiary from accessing and spending their inheritance all at once. It’s also a good idea if your beneficiaries include minor children who shouldn’t have direct access to the money until they are adults. Be sure to consult with an estate planning attorney, because there are tax and other complexities associated with designating a trust as beneficiary.

Required Minimum Distributions (RMDs). Your retirement plans have rules about when you are required to start taking distributions. For 401(k) accounts, you are required to start taking RMDs at age 70½. However, if you die and leave retirement plans and accounts to your heirs, these rules apply to them instead. A spousal beneficiary can roll over your retirement funds tax-free into their retirement plan and make their own distribution choices. However, other beneficiaries don’t have the same option. Tax treatment and distribution options vary, depending on who is receiving your retirement assets.

Tax Considerations. The biggest worry you need to address when designating retirement accounts as part of your estate plan, is how they’ll be taxed. Consider how to withdraw from these accounts while you’re alive and how to minimize tax consequences after you’ve passed.

Work with an estate planning attorney who has a strong understanding of retirement accounts and the tax and legal requirements of estate planning. That way you can be certain your retirement assets are distributed to the proper beneficiaries with the least tax liability.

Reference: Investopedia (August 27, 2018) “Include Your Retirement Accounts in Your Estate”

Get These Three Estate Planning Documents In 2019

These may not be the first things you are thinking about as we launch into a brand-new year, but the idea is not to wait until you’re not thinking clearly or when it’s too late and you don’t have what you need to protect yourself, your family and your property. The details, from the Fox Business news article, “3 financial documents everyone needs,” are straightforward. Put this on your to-do list today.

A Will. The essential function of a will is to ensure that your wishes are carried out, when you are no longer alive. It’s not just for rich people. Everyone should have a will. It can include everything from your financial assets to life insurance, family heirlooms, artwork and any real estate property.

A will can also be used to protect your business, provide for charities and ensure lifelong care for your pets.

If you have children, a will is especially important. Your will is used to name a guardian for your minor children. Otherwise, the state will decide who should rear your children.

Your will is also used to name your executor. That is the person who has the legal responsibility for making sure your financial obligations are honored. Without an executor, the state will appoint a person to handle those tasks.

An Advanced Medical Directive. What would happen if you became ill or injured and could not make medical decisions for yourself? An advanced medical directive and health care proxy are the documents you need to assign the people you want to make decisions on your behalf. The advanced medical directive, also called a living will, explains your wishes for care. The healthcare proxy appoints a person to make healthcare decisions for you. As long as you have legal capacity, these documents aren’t used, but once they are needed, you and your family will be glad they are in place.

A Durable Power of Attorney. This document is used to name someone who will make financial decisions, if you are not able to do so. Be careful to name a person you trust implicitly to make good decisions on your behalf. That may be a family member, an adult child or an attorney.

Once you’ve had these documents prepared as part of your estate plan, you’re not done. These documents need to be reviewed and updated every now and then. Life changes, laws change and what was a great tax strategy at one point may not be effective, if there’s a change to the law. Your estate planning attorney will help create and update your estate plan.

Reference: Fox Business (Dec. 19, 2018) “3 financial documents everyone needs”