LEARN MORE ABOUT A VALUABLE MEASURE OF YOUR FINANCIAL HEALTH
Choosing to leave an inheritance to your children will greatly impact your retirement planning. You will need to adjust the amount you save, which retirement plans you choose and how you’ll take your distributions from them. However, the decision to leave wealth to your heirs requires careful consideration of other factors, too.
1. Your Income Needs
One of the most damaging errors you can make is to give away retirement savings that you’ll actually need for your own income in retirement. While it’s admirable to want to share your nest egg with your children, you need to consider how much personal income you’ll need to live the retirement life you desire. If you’re unsure how to determine this amount, try a retirement calculator like this one from Bankrate. It can help you determine how much to save and how much to withdraw annually once you retire.
Our proprietary Retirement Funding Score (RFS®) process is a time-tested way to assess where you will be given your current financial foundation. With an accurate RFS®, we are able to help our clients see where they are, where they will be and what they may need to do to stay on track or align their financial decisions with their goals.
2. Rising Costs of Health Care
Your retirement income – and any planned inheritance for your children – will be at the mercy of potential rising health care costs, especially in the event you experience a serious illness. If you need nursing home care in the future, government programs likely will not cover the majority of your costs. Medicare does offer limited coverage, but Medicaid requires you to spend down nearly all your savings before offering long-term care assistance. You may choose to protect against this risk by purchasing Long-Term Care Insurance, but these policies can be costly and come with their own considerations.
3. Your Life Expectancy
As life expectancies continue to rise, there’s always the concern that you’ll outlive your nest egg. For this reason, it’s important that you properly manage your retirement plan withdrawal amounts. If you overspend, there’s the chance you may not be able to pay your bills at the end of your life, relying on family to assist you. This, of course, has the opposite effect of providing them with an inheritance. To guard against this, one option is to purchase an immediate annuity, which would at least guarantee you a source of income for as long as you live.
4. Tax Implications
Certain inherited assets, including mutual funds and stocks, are eligible for a favorable tax treatment called a step-up in basis. If you’re considering passing inheritance to your children, leaving this type of asset could provide them with fairly significant savings.
5. Consider a Trust
At times, it could make the most sense for you to set up a trust to control the distribution of assets from your estate to your heirs. If you or your spouse have children from previous relationships, for instance, a trust would ensure that designated assets go to specific children.
6. Your Investment Portfolio
You may find yourself in a situation where your children are likely to pass on the assets they inherit from you to your grandchildren. In this scenario, you will need to choose your investments wisely so that your portfolio will last for multiple generations. Your investments should be designed to grow and preserve capital, but also to generate income, such as with a portfolio including laddered bonds with various maturity dates. You’ll also want to be careful to withdraw income only, leaving your principal untouched.
7. How You Will Pass an Inheritance
There are numerous methods for passing along an inheritance to your heirs, so you should carefully consider your options:
If you’d like your loved ones to have access to your money while you’re still alive, you can accomplish this by gifting assets. So-called “annual exclusion gifts” – those that qualify for an exclusion from the gift tax – allow you to gift assets completely tax-free. They do not even necessitate the filing of a gift tax return. Furthermore, this exclusion applies separately to each person to whom you make such a gift. As of 2018, the annual exclusion amount is $15,000. Any capital gains your gift recipients receive, however, will be taxed at their applicable rate.
If you’d like to make a gift to children or grandchildren who are under 18, you could choose to open a joint account with the minor child, or buy savings bonds in the child’s name. Alternatively, you could use a custodial account set up per the Uniform Transfers to Minors Act or the Uniform Gifts to Minors Act. Be aware, however, that the earnings could be taxed at your tax rate rather than the child’s – it all depends on the gift recipient’s earned income and status as a student.
Note that bequests made as charitable gifts to non-profits are deductible from ordinary income.
Creating a Trust
Trusts are beneficial because they protect your heirs’ interests. The assets in trust avoid probate, which means they maintain privacy. You may choose to appoint a trusted friend as the trustee to manage assets and control trust distributions, or you can appoint the company with which you built the trust to act as trustee.
There are multiple types of trusts to choose from, too. In the case of an irrevocable trust, you cannot take it back which means this type of trust is considered a gift. Conversely, a revocable living trust is one that you own and control during your lifetime, and it passes to beneficiaries as part of your estate assets.
Tax-Deferred Variable Annuities and Life Insurance
Annuities allow you to invest in the market through stock and bond mutual funds, and they also carry a life insurance component. This is true of both fixed and variable annuities. Be on the lookout for hidden fees with these policies, however, and don’t be afraid to shop around for the best option for you.
With a life insurance policy, your named beneficiaries will receive the money tax-free. They will not be required to go through probate, and there are no concerns about market fluctuations with this option, either.
8. Legal Considerations of Estate Planning
Don’t assume your estate plan will be carried out in the way you wish. Utilize the services of an estate attorney or a financial planner who is knowledgeable in estate planning to ensure you’ve taken care of any legal details that could affect the eventual distribution of your estate.
Make sure you clearly state beneficiaries for each of your accounts and ensure your spouse is comfortable with them. Changes to beneficiaries often require your spouse’s consent, too. You should also list secondary beneficiaries just in case you outlive a primary beneficiary.
Note: Your retirement accounts will pass directly to listed beneficiaries without going through the probate process. However, if you leave an account to your estate, it is likely to have to go through the sometimes lengthy probate process before your assets can be distributed.
It’s a good idea to become familiar with the probate laws in the state in which you reside, as any investment accounts that lack a stated beneficiary may have to go through probate in order to pass to an heir. The probate process can be both lengthy and costly and is best avoided when possible.
If there is one piece of advice should you follow regarding estate planning, it would be to draw up a will. If you die without one – referred to as “dying intestate” – state law determines how your assets are divided and which of your loved ones will receive your money. If you have no living relatives, your assets will transfer back to the state itself – a process called escheat.
You may not see the application of all of the above suggestions to your particular situation, but it is of utmost importance that you determine how you want your nest egg to be distributed to your heirs. Once you have solidified your wishes, it is wise to consult an attorney or financial advisor to determine the best course of action to ensure your wishes will be carried out upon your passing.
Securities offered through Triad Advisors, LLC, member FINRA/SPIC. Advisory services offered through TriCapital Wealth Management, Inc. TriCapital Wealth Management, Inc. is not affiliated with Triad Advisors, LLC.