June 1, 2020

Edited 01/27/21

Estate Planning for Retirement: What You Need to Understand

Your estate plan can impact your retirement income if it's not updated or reviewed after major life changes.

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Regardless of the size of your income and bank account, everyone needs to understand some basics about estate planning for retirement. It’s important to have your legacy organized and planned for your family to carry out your wishes once you pass. When your kids were young or when you first bought a house, you may have created an estate plan then and haven’t looked at since then. However, estate plans should not have a “set and forget” mentality. There may be changes in law, taxes, the state you reside in, assets you own, additional children or grandchildren that will need to be accommodated in your estate plan.

What Is Estate Planning? 

Estate planning is the process of naming who will receive your assets and take care of your responsibilities in the event of your death or incapacitation. One of the key goals is to allow your beneficiaries to easily receive or manage these assets with the least amount of cost or inconvenience. When done correctly, proper estate planning can give you peace of mind and ensure that your assets will go to the people and organizations you care about most, while minimizing costs and taxes.

The first step is to create or review all of your estate planning documents, including:

  • Last will and testament,
  • Durable financial power of attorney,
  • Healthcare power of attorney, 
  • Living will and advanced directive, and
  • Ethical will.

You should carefully inventory all of your assets, including:

  • stocks, 
  • bonds, 
  • mutual funds,
  • savings and checking accounts,
  • annuities, 
  • real estate and
  • business interests.

Then, you should check the beneficiary designations for things like life insurance, 401(k) accounts, IRA accounts, annuities, and health savings accounts. Make sure the beneficiary designations are up-to-date, accurate and don’t leave any beneficiary sections blank.  Naming beneficiaries on certain accounts means you can keep them out of the probate process—something your beneficiaries will certainly appreciate.

When You Should Update or Review Your Estate Plan?

Like you would with a will, you should update or review your estate plans after any major life changes or financial changes. It’s recommended that you review your estate plan every 3 to 5 years to account for any recent major changes or foreseeable changes in the future. 

Although this can seem overwhelming, there are digital estate planning services that make it simple, fast, and secure to ensure your estate is protected immediately. If you haven’t created or updated your estate, Trust & Will, can offer you the same services as you would have with a lawyer. It’s important to protect your estate and have your loved ones carry out your wishes during your own convenience at an affordable price.

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Tax Considerations for Estate Planning in Retirement

There are a lot of tax considerations you need to be aware about while planning your estate in retirement. For example, your estate plans can serve as a tax deduction if you assign a charity as your beneficiary.

You’ll need to understand how four types of taxes work on the state and federal level: estate tax, inheritance tax, gift tax, and generation-skipping transfer tax.

Most Americans don’t need to pay the federal estate tax because their estate is likely small enough to fall within the exemption amount. 

Federal Estate Tax

The federal estate tax is based on your total estate value, after subtracting bequests made to charity, payments toward mortgages and other debts, and costs and fees incurred in settling the estate. You can also subtract the total amount transferred to your surviving spouse. That means spouses don’t pay federal tax on what they inherit from their late spouse.

The federal government exempts the first $11.4 million. Only estates whose values exceed $11.4 million after the eligible deductions are made will be subject to the federal estate tax.

If your estate is taxable, then your survivors will need to file a federal estate tax return.

Thirteen states and the District of Columbia have an estate tax in addition to the federal estate tax. Consider consulting with an estate planning attorney if the federal estate tax would apply to your assets.

Inheritance Tax

Keep in mind that an estate tax (based on the full estate) is different from an inheritance tax (based only on what a specific individual inherits). The federal government does not collect inheritance tax, but six states do have an inheritance tax: Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

Gift Tax

Usually, state inheritance and estate taxes are deductible on your federal estate tax return. 

There are ways to reduce your estate to avoid paying estate taxes. First, before you die, you can give a total of $15,000 (or $30,000 for married couples) to an unlimited number of people each year without incurring the gift tax. You also can give unlimited amounts to qualifying charities and your spouse. Another option is to pay for college tuition or medical expenses for your child or grandchild, as long as you pay the amounts directly to the education or medical provider. 

Generation-Skipping Transfer Tax

The generation-skipping transfer tax may apply if you give assets to a person who is two or more generations from you, such as a grandchild or a nonrelative who is 37.5 years younger than you.

You could reduce the size of your estate by creating a trust, which is a legal arrangement that holds assets for a beneficiary under certain terms.

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Important Conversations with Family

Discussions about money can be difficult even among close family members. It’s common for families to not communicate well, especially about money. However, it’s important to discuss your estate plans with your spouse and heirs, so everyone is on the same page. If you don’t talk to your family about your estate before you pass away, you’re probably setting the stage for miscommunication, misunderstandings and some hurt feelings. 

When you should have this conversation depends on your age and health status. Also consider the independence and financial capacity of your heirs, especially if a family member has developmental disabilities. 

An executor can help you have these important conversations with your family. The goal is to give them an accurate picture of your finances and a clear roadmap to carry out your wishes after your death. 

Revisit your estate plan every few years, or when your circumstances change, such as experiencing a spouse’s death, a divorce, a retirement or a job loss. That will ensure that the plan will honor your wishes and serve your survivors well. 

Estate planning for retirement is especially important for tax saving strategies during your retirement or with your family after you pass. By not regularly updating your estate plans, you can eventually be stuck with a huge tax bill on your estate, paying more taxes than you need to which will decrease your retirement savings, and cause confusion amongst your family and friends.