Greenville Estate Planning Attorney

 

“Avoiding The Complications of Retirement Planning and Getting Everything You Want”

The main goal of retirement planning is to make sure that you have enough money when you retire to maintain your standard of living. How much is enough depends on when you wish to retire, what your anticipated living expenses will be, what rate of return you can expect on your savings, and whether you will continue to work at all after retirement.

The anticipated date of your retirement affects two important factors: how much time you will have to save up for retirement and the number of years you can expect to live after you retire. A qualified financial advisor can help you sketch out your retirement plans in terms of timing and lifestyle. Once you put these down on paper, she can help you calculate how much money you need to set aside to meet your goals and how it should be invested. Unfortunately, one likely answer will be that "You’ll probably need more money than you think." Americans are living longer than ever before and inflation inevitably eats away at the value of dollars saved.

 

The Designated Beneficiary

It used to be that the first rule of retirement plans was to always designate a beneficiary. While it is still important to designate a person or institution to inherit your retirement accounts, the choice of beneficiary is not nearly as critical a decision as it once was.

First, as explained above, your choice of beneficiary generally won’t have an impact on your required minimum distributions. Second, you can change your beneficiary down the road. In fact, your beneficiary can even be changed after your death by the executor of your estate. The date for determining designated beneficiaries is September 30 of the year following the year of your death.

All this mean is that your designation of a beneficiary (or failure to name one) will rarely result in the kinds of tax-planning disasters that were common before. In most cases, your heirs will be able to take steps that will ensure deferral of taxes on retirement accounts over their lifetimes. But these changes also mean that it is doubly important that your heirs consult with a qualified elder law or tax attorney to ensure that they are making the best decisions regarding beneficiaries from a tax-planning standpoint.

 

Designating a Trust As the Plan Beneficiary

For tax planning purposes, many couples with estates larger than $1.0 million set up "A and B" trusts to take advantage of the unified credit of the first spouse to pass away. Where a large portion of the estate consists of retirement plans, it often makes sense to have them payable to the trust rather than to the surviving spouse. Unless the trust is properly drafted, it won’t be considered a designated beneficiary and the surviving spouse will have to withdraw all the retirement plan monies within five years. Making sure the trust is carefully drafted is complicated and requires the services of an attorney experienced in such matters.

Case Study: The Consequences of Failing to Plan

George Parrot* (not his real name) died in January 2006 with an estate of $2.4 million, of which $1 million consisted of tax-deferred retirement plans. At first blush, it would appear that Mr. Parrot did quite well and should have left each of his four children a substantial nest egg. But that’s before taxes.

First, every dollar above $2 million (in 2006) is subject to state and federal estate taxes. (This amount will increase annually until it reaches $3.5 million for those dying in 2009, and as things stand now the estate tax will be eliminated entirely for those dying in 2010.) However, for those dying in 2011 and thereafter, the tax-free credit amount dips back down to $1 million. The tax on Mr. Parrot’s estate will total approximately $180,000.

Second, after Mr. Parrot’s wife died, he did not change the designated beneficiary on his retirement plans to his children. Therefore, the retirement plans are payable to his estate. The children will have to withdraw the funds from the plans within five years of his death. Upon withdrawal, they will have to pay taxes on the income. Assuming a 30-40 percent average tax rate (each child gets $250,000 from the IRA and assuming no 5yr. stretch-out), this will come to approximately $326,000 in income taxes after taking a deduction for the estate taxes paid.

The combined taxes will total approximately $506,000, reducing the estate that will pass to Mr. Parrot’s family from $2.4 million to approximately $1,894,000, and each child’s share from $600,000 to $473,000. This is an effective tax rate of 21 percent.

Could this have been avoided? Yes, at least in part. With careful estate planning, the effective tax rate could have been brought down to less than 10 percent, and possibly even lower. *All actual names have been changed to protect our clients’ identities and interests.

Pete Fields is a Greenville Estate Planning Lawyer in South Carolina. This information is for general informational purposes only and does not constitute legal advice. For specific questions, you should consult a qualified elder law attorney. © 2007 The Fields Law Firm