We often think of retirement accounts as monolithic resources. It is easy to see why – we spend our working years socking away money for our future. Unfortunately, though, the rising cost of healthcare can quickly deplete even the largest of retirement funds. Because retirement accounts tend to be the largest assets in a person’s estate, it is crucial that proper planning is done to handle one’s retirement fund.
The first thing you need to do is ensure you have the assets you need to take care of yourself and your family. With the increased costs of healthcare, it is crucial you have what you need after you retire and can manage your medical expenses on a fixed income. While we would all hope for a quiet retirement, finances can be unexpectedly stressful. In addition to budgeting out a financial strategy to keep you comfortable during retirement, we can also work with your financial advisor to help you develop a strategy for distributing any leftover funds upon your death.
In addition, the rules surrounding the taxation of retirement accounts can be difficult to understand, further complicating a potentially stressful retirement experience. Upon retiring, you will have to take a required minimum distribution, which will be subject to income tax. Most people are used to having income tax withheld from their paychecks, but sometimes overlook that they will still have a similar tax liability for their retirement account.
It is also important that your strategy for passing on the account takes into consideration the tax consequences. As mentioned above, because these accounts are created with pre-tax contributions, the required minimum distributions made to the owner are subject to income tax. When these funds are distributed to a designated beneficiary after the owner’s death, there are still income tax concerns regardless of who is named as the designated beneficiary. It’s why working with a trusted financial advisor and attorney is so important to enjoying your golden years. With these experts on your side, you’ll rest easy knowing you’ve taken care of your family in the present and future.
Ultimately, you will benefit most from ensuring your retirement plan and estate plan align. By working with your trusted financial advisor and us, you can ensure the goals you have for your retirement and for your estate do not contradict one another. For example, you may have designated one beneficiary for your account when you signed up for your 401k but may now wish to change who or how the beneficiary will receive your assets upon your death. Or, you may have originally anticipated the excess funds from your retirement account being used to care for an aging loved one, but due to the market, you may need to find additional sources to cover these anticipated expenses. Meeting with your financial advisor and us is crucial to making sure your family and loved ones are not stuck in financial hardship after you have passed.
When it comes to retirement, it can be difficult to know what you do not know. If you are concerned about the state of your retirement account, assets and estate plan, schedule a meeting with your financial advisor and us today. With so much on the line, it pays to do your homework, connect with professionals and ensure your final wishes are documented and respected.
Receiving an inheritance is a huge blessing but, if not handled properly, can also become a curse. Often times, the inheritor does not know what to do with the new asset and runs into financial trouble, squandering most, if not all of it. This could happen due to the inheritor having outstanding creditor issues or tax troubles or being inexperienced with managing the new assets. No matter what the financial obstacles maybe, estate planning can help address or even eliminate these issues. For these reasons, it is vital to update your estate plan - or create one if you have not already - if you have received or are expecting to receive an inheritance.
How Inheritances Affect Estate Plans
An inheritance will likely change your assets in a major way, which may result in a change in your tax and financial planning needs. An inheritance may also increase your exposure to lawsuits since people are more likely to seek out the “deep pockets” in a lawsuit. If your inheritance is the first time you have invested or have had substantial assets, an estate plan can set up safeguards to both manage and protect your wealth. If you already have an estate plan in place, it is critical to update it so that the plan incorporates your recent inheritance. The presence of more assets may require a revision in order to make sure that your intentions are properly carried out. This is particularly true if you have a blended family, have changed from a non-taxable to a taxable estate because the value of your assets is now over $5.6 million for D.C. residents ($11 million federally), or if your original estate plans involved utilizing a charitable strategy. Putting your inheritance to work - whether it be for short-term or long-term financial goals - will help you avoid wasting your inheritance.
Preserving Your Family’s Wealth
Another important reason to re-evaluate your estate planning when you receive an inheritance is to preserve your family’s wealth. Unfortunately, statistics on wealth preservation across generations are grim. Studies estimate that 70 percent of wealthy families lose their wealth by the second generation, and 90 percent lose it by the third. One common reason for these surprising statistics is the lack of communication among generations. Needless to say, proactive steps are necessary to preserve wealth for the long-term. Families fail to discuss this important topic because money can be a taboo topic to discuss openly, the older generations fear that the younger generations will become lazy and entitled if they are made aware of their inheritance too soon, or they fear their private financial information will be leaked to those who should not have the information. But, if your family is open, honest, and everyone plans properly, your family does not have to see its collective fortune evaporate within a couple generations. Estate planning can provide the foundation to ensure assets continue to be managed properly and are preserved instead of dissipated. Proper planning can also make wealth a part of the family legacy instead of a burden or societal ill
Seek Professional Advice
An inheritance can be used up faster than you would think, but proper planning can reduce this risk. If you have received an inheritance - or expect to receive one in the near future - it is vital that you seek out financial and legal advice. Give us a call to schedule an appointment so we can discuss your options to help preserve your family legacy.