Many people know of the stories of well known celebrities, such as Prince and Aretha Franklin, who died without a proper estate plan in place. We want to plan for a good life and retirement, but it is important to also plan for a good end of life. Here are four ways you can refine your estate plan and take steps to protect your assets and prevent unneeded stress and uncertainty for your loved ones.
1. Review Beneficiary Designations
Many accounts can pass to heirs and loved ones without having to go through the process of probate. Life insurance contracts, 401(k)s, and IRAs can be transferred through beneficiary designations, so you get to decide who you want to inherit your accounts by filing out a beneficiary form. Oftentimes you can use these forms to name successors or backup beneficiaries and even split up accounts by dollar amount or percentages between beneficiaries.
You will want to update and review these forms and designations every couple years – especially after major life events like divorce, marriage, or the birth of children or grandchildren. Sometimes divorce wipes out a beneficiary designation for an ex-spouse, but for accounts such as 401(k)s, your ex-spouse might inherit it unless you change the designation.
Be sure all of your retirement and investment accounts have beneficiaries attached and are up to date to ensure your assets pass to the right people.
2. Have Proper Life Insurance
One of the main uses of life insurance is to protect against the loss of income in the event of an untimely death. It’s typically most important to have life insurance while you’re working and supporting loved ones with your income.
This might still be the case in retirement. If one spouse creates most of the retirement income through Social Security, continued work, a pension, an annuity, or another income source, it makes sense to keep life insurance in order to provide for the surviving spouse or dependents.
Life insurance can also provide a way to pass on income tax-free to heirs. If one goal of retirement and estate planning is to pass on a legacy, life insurance can be used to help do that.
Life insurance can provide cash flow and liquidity for estates that might be subject to estate taxes or that have many illiquid assets (such family businesses, farms, or collectibles). With an irrevocable life insurance trust funded with a life insurance policy, the trustee could purchase assets from the estate with the life insurance funds to provide liquidity to the estate.
3. Avoid Probate with Trusts
Having the correct will and trusts in place is also an important part of estate planning. Almost everyone needs a will, but this isn’t always the case for trusts.
There are two main types of trusts: revocable and irrevocable. For general estate planning needs, a revocable trust covers most issues.
An individual can fund revocable trusts with assets and still use the assets today without changing their income tax nature. These types of trusts function as a more effective way of passing on assets outside of probate and allow a trustee to manage assets for their beneficiaries.
An irrevocable trust, however, can provide creditor protections, separate assets from the annual tax liability of the original owner, and can help reduce estate taxes in certain situations. These types of trusts can be more complex and expensive, so it’s important to first understand the complexities and restrictions that could be placed on them.
4. Incorporate Charitable Giving
Many Americans give to charities on an annual basis – it’s part of achieving true wealth. For many, this includes being able to leave a legacy to their church, alma mater, charity, or another organization or cause they care about.
Charitable giving is a more comfortable way to donate money as you might need the assets to support your income during retirement, but after you pass away, the money is no longer needed and can be passed onto a charitable goal.
With charitable giving as part of an estate plan, you can do outright gifts to charities or you can set up a charitable remainder annuity trust (CRAT) to provide income to a surviving spouse or heir and have the remainder going to the charity. You can even set up a CRAT at death by passing along your IRA, which can be an effective way to both generate income for a loved one and give to charity in a tax-efficient manner.
Everyone’s estate plan is unique to their situation, and much of an estate plan isn’t just about money but about protecting family and loved ones, making sure assets are passed on smoothly, and removing as much complexity as possible. For help updating your estate plan, contact us at Wilson and Wilson Estate Planning and Elder Law, LLC, 708-482-7090 or email@example.com