Tempe Arizona Estate Planning

What are Benefits of Using a Trust, Instead of a Person as IRA Beneficiary?

The question is simple. The answer is not. This is an area where you’ll need to rely on a very experienced professional, since the rules for using a trust as an IRA beneficiary are extremely complex.

In the right situation, and when handled with great proficiency, there can be advantages to naming a trust instead of an individual as a beneficiary of an IRA. However, before putting what may well be your largest asset at risk, make sure that the person who is helping you is well-educated and up-to-date on the latest tax laws. A mistake here could leave your heirs with an unexpectedly large tax bill.

Investment News’ recent article on this subject asks, “Should you name a trust as an IRA beneficiary?” The article explains that individual retirement account assets can't be put into trusts directly during a person’s lifetime without destroying the IRA's tax deferred structure. Therefore, a trust may only be named as the beneficiary of the IRA. The trust would inherit the IRA upon the owner’s death, and beneficiaries of that trust would have access to the funds.

Asset protection is the main rationale for making this move because trusts shield IRA assets from lawsuits, business failures, divorce, and creditors. Taxpayers enjoy state and federal protections for IRA assets during their lifetime. However, heirs who inherit an IRA directly—not through a trust—don’t receive those protections unless provided by state law. Trusts also allow for some control over the assets. The terms of a trust can stipulate the way in which distributions are made if an heir is a minor, disabled, financially unreliable, incapacitated or vulnerable.

Naming a trust as an IRA beneficiary may not be practical for people who plan to bequeath their IRA to a spouse, rather than their children, grandchildren or others. Spouses are allowed roll over the decedent's IRA assets into their own IRA tax-free.

There are many technical rules to follow, like the IRA beneficiary form must indicate before a person’s death, that the trust is the primary beneficiary. After death, the IRA must be retitled as an inherited IRA. Required minimum distributions (RMDs) would still also be required to be taken by the IRA beneficiaries following the principal's death, regardless of whether the principal was taking RMDs or not. This is an area where using the right type of trust is important. A "see-through" or "look-through" trust may be the best bet.

Structuring a trust as a "see-through" or "look-through" Trust maintains preferential tax treatment, by allowing a trust beneficiary to spread the RMDs over a long period based on his life expectancy. This is called a “stretch IRA.” The RMD amount would be based on the oldest beneficiary of the trust. However, beneficiaries with separate trust shares would have different RMDs.

In addition, the trust's language must also state that distributions from the IRA can only go to "designated beneficiaries," not to pay expenses. The risk of not creating the trust as a see-through or including the proper trust language is that the IRA assets are distributed and the resulting tax paid within a much shorter time frame—potentially five years.

Trusts may also be set up as "conduit" or "accumulations" trusts.  As was already mentioned with  a conduit trust, the annual RMDs pass through the trust to beneficiaries, who pay tax at their individual rates. Accumulation trusts don't distribute the RMDs out of the trust and pay tax at the more punitive trust tax rates. However, they keep the most post-death control over assets.

Taking this approach may require the input from several of your advisors. Speak with your estate planning attorney, CPA, and financial advisor to gather information from three independent sources to ensure that the IRA and heirs are protected.

At the Soto Law Firm we can help you make the best decision for your family based on your goals and asset values.  Contact us today to schedule a free consultation to discuss your estate plan and retirement accounts.

Reference: Investment News (February 22, 2019) “Should you name a trust as an IRA beneficiary?”

Blending Families? Be Mindful of Your Estate Plan

An estate plan is the perfect solution to making sure that your assets are passed on to your children from a prior marriage—if you make sure that is addressed in your estate plan. If you neglect to do this, you could disinherit your own children.

Here are some interesting statistics: the rate of remarriage has decreased over time for all age groups, except those who are 55 and older. In 1960, only 42% of those 55 and older remarried, and in 2013, that number jumped to 57%. About 17% of people who divorce, eventually remarry. If you are among those who take that leap of faith and marry for a second (or third) time, you’ll want to be sure to have an estate plan that protects your children from prior marriages, says CNBC in a recent article, “Remarried after having kids? Here are tips to avoid accidentally disinheriting them.”

Many people don’t have even a basic will. The risk can be higher, if you have no estate planning when you remarry—your children could unintentionally be disinherited.

The older you are when you remarry, the more apt you are to be bringing assets into the marriage, such as retirement savings, life insurance, brokerage accounts, real property and family heirlooms. Estate planning helps to avoid family conflict.

If you die without a will (intestate), Arizona state statutes who the heirs of your estate will be and how much each heir will recieve. Of course, everyone’s situation is different, and some estates can be more complex than others. However, here are some keys to consider, when thinking about how to make sure your heirs end up with the assets you want them to have.

Account beneficiaries. It’s easy to miss this when you remarry. Update the beneficiary designations on retirement accounts, life insurance policies and other accounts. This designation supersedes any intention stated in your will.

Your home. Remarriage frequently involves a jointly-owned home. Depending on state law and how the property is titled, your intention for your children to inherit your share of it could be thwarted.  If the house is deeded as "joint tenancy with right of survivorship" or "tenancy by the entirety," the property typically automatically belongs to the surviving spouse, regardless of what your will says. If you own the house in "tenancy in common," you can leave your share to a person other than your spouse, if you want.

Your personal property. If you want your children to get some particular items when you pass away, be as detailed as possible in your will, so there is no room for confusion.

Power of Attorney. Select someone to handle your finances, if you reach a stage where you can’t. A durable power of attorney for your finances allows your agents to be in charge of paying bills and filing tax returns. A durable power of attorney over health care permits the named person or persons to make important health-care decisions on your behalf, if you are unable to make your own decisions.

Living Will. A living will expresses your wishes if you’re placed on life support or suffer from a terminal condition. It helps guide your proxy's decision-making regarding life support and comfort care at the end of your life.

The process of updating your estate plan starts with a conversation with your spouse and your estate planning attorney. Make sure that your will reflects your wishes. Don’t leave it to chance, or hope that your kids will somehow work it out with your spouse or their step-siblings. Put it in writing, and make it legally enforceable with an estate planning attorney.  Contact the Soto Law Firm today for a free consultation to start the process to protect your family.

Reference: CNBC (January 17, 2019) “Remarried after having kids? Here are tips to avoid accidentally disinheriting them”

Top Five Estate Plan Epic Fails

The problem with mistakes to an estate plan, is that many are irreversible and cannot be fixed. Those that can be fixed are often expensive. It is best to do it right the first time.

Many of the top reasons for estate plans to fail, are a matter of maintenance. Just as your home or car needs ongoing care, so does your estate plan. The simple things often lead to the biggest problems.

Investopedia’s article, “5 Ways to Mess Up Estate Planning” gives us a list of these common issues.

Not Updating Beneficiary Designations. Be certain those to whom you intend to leave your assets are clearly named on the proper forms. Whenever there’s a life change, update your financial, retirement, and insurance accounts and policies, as well as your estate planning documents.

Forgetting Key Legal Documents. Revocable living trusts are the primary vehicle used to keep some assets from probate. However, having only trusts without a will can be a mistake—the will is the document where you designate the guardian of your minor children, if something should happen to you and/or your spouse.

 

Bad Record Keeping. Leaving a mess is a headache. Your family won’t like having to spend time and effort finding, organizing and locating your assets. Draft a letter of instruction that tells your executor or personal representative where everything is located, the names and contact information of your banker, broker, insurance agent, financial planner, attorney, etc. Make a list of the financial websites you use with their login information, so your accounts can be accessed.

Not Funding Your Trust.  A Trust can be thought of as a legal container into which you fund your assets during your lifetime.  Your trust then controls your assets in the event of disability or death.  Just like a shiny new car, a new trust is a great thing to have, and just like a car that won't be going anywhere without gas in the tank, your assets are the fuel for your trust.  If you don't properly fund, coordinate, or re-title assets into the trust, it will be much more difficult to get where you want to go.   You should also keep up to date with funding as you sell or acquire new assets.  Keeping your trust properly funded is a moving target that needs to be constantly reviewed and kept up to date.

Not Creating a Plan. This last one is one of the most common. There are plenty of stories of extremely wealthy people who lose most, if not all, of their estate to court fees and legal costs, because they didn’t have an estate plan.

The solution is simple: make a recurring appointment with your estate planning attorney every two or three years, or when something big in your life changes. Follow through on the instructions, like funding a trust or talking with heirs about your thought processes for asset distribution.  Contact the Soto Law Firm today to make sure that your estate plan will be an epic success.

Reference: Investopedia (September 30, 2018) “5 Ways to Mess Up Estate Planning”

Are My Retirement Accounts Part of My Estate Plan?

Don’t neglect your retirement accounts, when creating or reviewing your estate plan. Knowing who is named as a primary beneficiary and who is a contingency beneficiary of your retirement accounts is important for your wealth distribution plans, in large part because of tax rules governing the distribution of these assets at death, warns Investopedia in its recent article, “Include Your Retirement Accounts in Your Estate.” Always re-examine your beneficiary designations after major life changes like marriage, divorce, or the birth or adoption of a child.

If you don’t designate beneficiaries for your retirement accounts, the designation may default to your estate. That can be one of the worst possible outcomes for your retirement accounts, from a tax and planning standpoint.

If your estate is named as beneficiary, your heirs have to wait until the probate process is complete, before they can access your retirement funds. Be sure to name an individual or a trust as your beneficiary. Each state may have a different requirement concerning who you can name as a beneficiary. For example, the federal ERISA law requires you to name your spouse as the beneficiary of your 401(k) account, unless he or she gives permission in writing to name another person or charity. Talk to an estate planning attorney in your state.

Another option is to include a trust in your estate planning, instead of distributing retirement funds directly to specific individuals. This gives you more control over the distribution and protects your heirs from additional paperwork and taxes. If you want to leave the assets in your retirement accounts to a relative who you think won’t manage the funds well, you can use a trust to provide a third party to be the trustee of their trust share and ensure regular distributions from those accounts. The third party trustee will keep a beneficiary from tapping into their inheritance and spending it all at once.

A trust is also a good choice, if your beneficiaries are minor children who cannot have direct access to the money until they become legal adults. All that noted, however, very careful planning must be done to avoid unintended consequences, when designating a trust as beneficiary of retirement funds. Otherwise, you may actually trigger unnecessary taxation and lose the ability for the trust beneficiaries to “stretch” their distributions as long as the law allows.

Required Minimum Distributions (RMDs). Your retirement plans have rules about when you must begin taking distributions, known as required minimum distributions. For accounts like a 401(k), you are must start taking RMDs at age 70½. However, if you die and leave retirement plans and accounts to your heirs, the rules apply to them, and they can get pretty complicated. A spousal beneficiary can roll over retirement funds (tax-free) into his or her own retirement plan and make their own distribution choices. However, other beneficiaries don’t have the same option. Learning how the tax treatment and distribution options vary based on who’s receiving your retirement assets is a crucial part of the overall estate planning process.

In addition, some beneficiary designations may qualify for the stretch IRA provision. This lets them withdraw their inherited retirement plan assets over the course of their lifetime—or they may be required to withdraw the entire balance within five years of your death. Who your beneficiary is and determining what distribution rules apply to that person, can make a big difference in how much of your retirement assets are actually passed on to your intended beneficiaries.

Taxes. The biggest worry to address when designating retirement accounts as part of your estate plan is how they’ll be taxed. Retirement accounts are some of the most heavily taxed assets you can pass on after your death. When reviewing your financial and estate plans, find out how you can withdraw from these accounts while you’re alive and how to minimize tax consequences to your beneficiaries after you’re gone.

The overall goal is to create an estate plan that has the least adverse tax consequences. An estate planning attorney can help you gain a clearer understanding of both the legal requirements of your estate plan and how to ensure that your retirement accounts are distributed in the most tax and asset protection efficient manner.

Reference: Investopedia (August 27, 2018) “Include Your Retirement Accounts in Your Estate”

Retirement Accounts as Part of Your Estate Plan

It’s easy to focus on your home and personal possessions when doing estate planning, but your retirement accounts might constitute the majority of your assets. The rules are different for this class of assets, so work closely with an advisor to make sure retirement accounts are aligned with the rest of your estate plan.

Think back to when you started your retirement savings, with your first IRA—maybe at your very first job. Has that account moved with you to a few jobs? Or did you convert it to a Roth IRA at some point? How about the first life insurance policy you ever bought? You may not remember doing this, but every time you opened certain accounts, you named someone to be the beneficiary of the accounts at your death. If you haven’t reviewed those beneficiary designations or can’t remember who was named, it’s time to address this part of your estate.

Investopedia’s recent article, “Include Your Retirement Accounts in Your Estate,” gives us some things to consider in the New Year.

 

Beneficiary Designations. Review your beneficiary designations after major life changes. If you fail to make these designations, the funds will most likely go into your estate—a horrible outcome from a tax and planning perspective. If your estate is named a beneficiary, your heirs must wait until probate is finished to access your retirement accounts. It is usually better to name an individual or a trust as your beneficiary.

Protecting Retirement Funds With a Trust. Another option is to include a trust in your estate planning, instead of giving your retirement funds directly to named individuals. This allows you more control over the distribution, while protecting your heirs from lawsuits or creditors. Trust distributions keep a beneficiary from accessing and spending their inheritance all at once. It’s also a good idea if your beneficiaries include minor children who shouldn’t have direct access to the money until they are adults. Be sure to consult with an estate planning attorney, because there are tax and other complexities associated with designating a trust as beneficiary.

Required Minimum Distributions (RMDs). Your retirement plans have rules about when you are required to start taking distributions. For 401(k) accounts, you are required to start taking RMDs at age 70½. However, if you die and leave retirement plans and accounts to your heirs, these rules apply to them instead. A spousal beneficiary can roll over your retirement funds tax-free into their retirement plan and make their own distribution choices. However, other beneficiaries don’t have the same option. Tax treatment and distribution options vary, depending on who is receiving your retirement assets.

Tax Considerations. The biggest worry you need to address when designating retirement accounts as part of your estate plan, is how they’ll be taxed. Consider how to withdraw from these accounts while you’re alive and how to minimize tax consequences after you’ve passed.

You’ll want to be sure that these accounts are integrated with your overall estate and tax plan. That will best be done with an experienced estate planning attorney. They’ll make sure your assets are distributed the way you want and address any possible opportunities to minimize your tax liability.  At the Soto Law Firm, our experience estate planning attorneys will counsel with you to establish a customized estate plan that matches your family goals.  Contact us today for a free consultation.

Reference: Investopedia (August 27, 2018) “Include Your Retirement Accounts in Your Estate”

 

Money Basics for the “Seasoned’ Adult

If you’re in your 50s or 60s, things may be looking good. Your nest egg is growing, the kids are out of college and your life is moving into pre-retirement years. Now is the time to make that big push to make the most of your earnings, before it’s time to relax.

If you’re looking for the bright side of turning 50, here’s one: you are now eligible to make catch-up contributions to retirement accounts. You can add $1,000 to an IRA or a Roth IRA, and an extra $6,000 to your 401(k). That could ramp up your retirement accounts to as much as $61,000 in a solo 401(k). Just be aware that the $61,000 limit is for all of your 401(k) accounts ever year.

Two Cents’ recent article, “What to Know About Money in Your 50s and 60s,” adds that if your kids are out of the house and that house is maybe even paid off (or close to it), you can move some of that extra savings toward your retirement accounts. According to Forbes, even $1,000 extra in an IRA can make a huge difference, if you contribute it every year between 50 and 67.

 

For example:

• 5% annual return: $26,000
• 7% annual return: $31,000
• 10% annual return: $41,000

To see if you’ll have enough retirement savings, take your total income…

• Less any contributions to retirement accounts
• Less any expenses that will go away in retirement
• Plus, any added expenses you’ll have when you’re retired
• Less taxes (estimate high, as taxes will likely to go up, not down)

That gives you your rough total.

If it’s a long way from the budget you’ve been living on, dig deeper and you can see where to make improvements.

Your 50s are the critical time, when preparing for retirement. Review your savings to see the mix of tax categories on your investments: pre-tax, post-tax, and tax-free.

If you have almost all your savings in pre-tax accounts, which decreases the flexibility to pay for retirement, consider building up after-tax and tax-free savings, so you have more flexibility once you retire. This may include investing in a Roth IRA. Consider a backdoor Roth conversion, if you make too much to contribute to a regular Roth. If you’re taking qualified withdrawals (the account’s been open for at least five years and you’re 59½ or older), then your taxes won’t be impacted in retirement, which can be a helpful strategy.

Next, if you’ve made a will already, you should check to ensure that you’ve titled your assets properly. For example, on a bank or brokerage account, you can add beneficiaries to that account, called a Transfer on Death (TOD). This works the same as adding beneficiaries to an IRA account or a retirement plan. Titling your assets properly, lets you avoid probate. It’s a faster and cheaper transfer.

Your 50s and 60s are also the time to start looking into Social Security benefits. You know that waiting until age 70 will maximize your monthly benefit, but your circumstances may dictate an earlier need for benefits. Make this decision thoughtfully, as the repercussions may last decades.

And if you haven’t already had an estate plan created, or if your will hasn’t been updated since the last kid moved out of the house, make an appointment with an estate planning attorney. There have likely been changes in your life, including family changes. You may want to setup a trust for a new grandchild or update your healthcare directive to reflect a marital change.

Contact the Soto Law Firm today to get started on or update your estate planning with an an experienced attorney.

Reference: Two Cents (August 17, 2018) “What to Know About Money in Your 50s and 60s”

 

Four Fast Financial Fixes

Some financial tasks take a long time, so we put off doing them until they become bigger in our minds than they are in reality.  However, in one hour, you can actually get a lot of good stuff done.

You know how setting up a system that is intended to save you lots of time always takes less time than you thought?

The Washington Post’s recent article, “Got an hour? Chalk up 4 quick financial wins,” gives us a couple of financial tasks that could save you a lot of money and stress in the future. Each of these can also be accomplished in 15 minutes or less, once you’ve decided on a plan and have your information ready.

Adjust Your Withholding. With the tax reform legislation passed last year, you should look at the new tax brackets and the elimination of deductions. It could mean that you’re withholding too much or too little. Don’t wait for April for an unpleasant surprise: do this now!

Draft Powers Of Attorney. You should have at least two estate planning documents. You grant the authority to those you name to make decisions for you, if you become incapacitated. With a medical power of attorney (also known as an advance health care directive), name your toughest advocate—the person who’s devoted enough to carry out your wishes and stand up to doctors or any of your relatives who disagree. With a financial power of attorney, you designate the individual who’s good with money and extremely ethical.  You should also name backups to both positions.

Start College Saving. If you have children, they’re going to need some schooling or post-secondary training to succeed. Consider a state-run 529 college savings plan to save. You don’t have to use your own state’s plan, so if you don’t qualify for a tax benefit in your own state, look at one of the plans Morningstar named as best in the country. These were Illinois’ Bright Start Direct-Sold College Savings Program, Nevada’s The Vanguard 529 College Savings Plan, Utah’s my529 and Virginia’s Invest529 plan.

Roll Over A Retirement Account. Is your current 401(k) plan better than the one you had at your old job? If so, ask if they’ll accept a rollover from the previous account. Ask for help and let them guide you through the process so you don’t make any expensive mistakes.

Don’t overlook another option. You are allowed to roll that old 401(k) into an IRA, which may have more investment options.  You should also ask for help with these transactions. They can be complicated, and mistakes can be costly.

Reference: Washington Post (September 10, 2018) “Got an hour? Chalk up 4 quick financial wins”

 

How Baby Boomers and Entrepreneurs Put Their Retirements at Risk

Is starting a business part of your retirement dream? Many boomers start a passion-fueled business during retirement, thinking they’ll earn big bucks, while finally doing what they’ve always dreamed of.

The number of boomers launching businesses is on the rise, with boomers now twice as likely to plan on starting a business as millennials, as reported by the Kaufman Foundation. The one thing they both have in common: putting retirement savings on a back burner.

US News & World Report’s recent article, “7 Reasons Entrepreneurs Don't Save for Retirement,” examines some of the biggest mistakes entrepreneurs make when it comes to retirement planning.

1. No plan. Some business owners say they’re just too busy to plan, whether it's business planning, estate planning or financial planning. About 34% of small businesses owners don't have a retirement savings plan, according to a 2017 survey of 1,960 small business owners by Manta, an online resource for small businesses owners. However, setting up a retirement account offers benefits like tax breaks and the ability to earn compound interest.
2. Putting everything back into the business. Entrepreneurs won’t put their money into retirement because they worry they’ll lose quick access if they need it for the business. However, diversifying your assets can help you to better handle emergencies and save for the future.
3. Believing that the sale of the business is the retirement plan. Most entrepreneurs overestimate the value of their business and their ability to sell it, when they’re ready to retire. It may not be that easy. Plan with your head and not your heart—take the emotion out of it, and plan conservatively.
4. Poor business structure. Some entrepreneurs begin as sole proprietors and remain sole proprietors. However, not structuring your company as an LLC, can put your personal assets at risk. That can put your retirement at risk.
5. Not diversifying. If most of your net worth is in the business, you should seek out low risk investments for money outside the business and be sure to contribute to your own retirement plan, besides investing in the business.
6. Failing to save. Business owners can save up to 25% of their compensation or $55,000, whichever is less, in a SEP-IRA in 2018.
7. Funding a new business with retirement savings. Starting a business is a risky venture. Using retirement funds later in life, could lead to a financial disaster. If the business does not succeed, you are not likely to be able to make up a lifetime of savings, investment growth or interest income during retirement.

Business owners and entrepreneurs sometimes may also fail to plan for future problems such as who will run my business if I become incapacitated, or how can a trusted agent access my retirement accounts for my benefit when I am incapacitated.  Coordinating your business and retirement plans with your estate plan can avoid costly problems such as a conservatorship that my erode your retirement plans and savings that have been set aside for your later years.  Talk to an estate planning attorney today at the Soto Law firm to learn more about how a Financial Power of Attorney and ownership of your business through your trust can help you avoid these complications.

Reference: US News & World Report (May 11, 2018) “7 Reasons Entrepreneurs Don't Save for Retirement”

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Can You Name a Charity as the Beneficiary of a Retirement Account?

You can accomplish the same thing two different ways: by naming a charity as the beneficiary of an IRA, or making the IRA a POD, the charity will receive the funds directly after you pass.

When you decide to gift your retirement account to a charity, it is recommended to speak with an estate planning attorney in order to avoid  future complications. If you designate a charity as the beneficiary of your IRA, when you pass away, a representative from the charity can claim the donation once the IRA custodian has confirmed your death.  By directly naming the charity through the IRA custodian’s beneficiary designation forms, the donation is transferred directly without the need for probate.

After the asset owner dies, the charity will contact the bank or IRA custodian and complete the required forms to claim the funds. A death certificate will again be required at that time.

Since the charity was named directly as a beneficiary, it won’t be necessary for it to go through probate to claim the IRA benefits.  Naming the charity directly as the beneficiary of an IRA also avoids income taxes that would have to be paid if an individual were named directly on such an account.  Because there are many income tax and estate tax issues involved in this decision it is smart to sit down with an estate planning attorney to discuss the best options that will accomplish your goals.

Another important tip: the retirement account owner should tell the charity that it has been named as a beneficiary.

Similarly, most banks offer a Payable-on-Death (“POD”) or “Transfer on Death” (“TOD”) option for most accounts they manage. A POD or TOD bank account is another easy way to keep money out of probate. All a person must do is properly complete the bank’s POD or TOD forms to indicate whom they want to inherit the money in the account or certificate of deposit at the death of the owner of the account.

The bank transfers ownership of the account to the named beneficiary, be it a charity or individual, once the bank receives confirmation of the owner’s death.  This process circumvents the need for probate.

The Houston Chronicle’s recent article, “A charity can be named beneficiary of a retirement account,” explains that designating a beneficiary on a retirement account and designating a person as the POD beneficiary, both accomplish the exact same thing.

However, most people don’t realize that this solution will no always avoid probate.  If a charity no longer exists, or if an individual does not survive the account owner, then a probate may be required to pass the bank account or IRA to the proper beneficiaries.  Similarly, if the account owner becomes incapacitated, having a financial power of attorney in place can allow a trusted agent to step in for the account owner to perform needed transaction or distribute money on their behalf, and will avoid the need for a costly conservatorship to appoint that agent. 

At the Soto Law Firm, we guide clients through the estate planning process and help them understand the best ways to organize their assets and beneficiary designations to avoid incapacity and conservatorship issues, and be assured that their assets will avoid probate after they are gone.  Call us today for a free consolation to learn more about your options.

Reference: Houston Chronicle (May 7, 2018) “A charity can be named beneficiary of a retirement account”

If You Might Need Life Insurance During Retirement, Don’t Delay

If You Might Need Life Insurance During Retirement, Don’t Delay

Even if you don’t earn a king’s ransom, good planning and diligent saving can prevent you from having to rely on Social Security benefits.  However, there are other tools to consider, including life insurance.

Like so many pieces of the retirement puzzle, addressing financial concerns in your 30s and 40s can help prepare you for the future and boost your confidence in your ability to manage money. It’s far easier, for example, to buy life insurance in your thirties than in your fifties.

USA Today’s recent article, “Financial planning: How to determine if you need life insurance in retirement,” notes that many older Americans wonder if they’ll need life insurance in retirement. They are concerned whether their surviving spouse and loved ones will need the capital generated by the life insurance policy—the death benefit—to replace their income and to preserve assets.

The answer depends on the facts and circumstances. Some experts believe that if you planned well enough prior to retirement, you won’t need life insurance. You’ll have no debt, plenty of assets to replace the income lost due to your death, and sufficient money to leave to heirs. That all sounds good in theory, but reality may be different.

Run the numbers. Examine your cash flow statement before and after the death of either spouse. If there’s more than enough income to cover the surviving spouse’s living expenses throughout retirement, then you might not need life insurance. However, if there’s not enough income, even after you calculate the amount the couple has saved and whether that can reliably provide for the surviving spouse — then you might need life insurance.

Life insurance can be used for other goals, in addition to income replacement and paying off debt. It can be used for estate taxes, taxes due on inherited IRA distributions, taxes due on death-bed Roth conversions of qualified accounts, or for charitable planning.  If you have minor children or intend to leave assets to minor beneficiaries, life insurance that names a trust as the beneficiary can allow you to leave assets to minor beneficiaries and avoid the problems associate with probate and conservatorships.

A retiree with a large farm or business worth more than $22 million might want their heirs to use life insurance proceeds to pay estate taxes and to avoid selling the bequeathed asset.  They can also use required minimum distributions (RMDs) from IRAs to purchase life insurance that will provide a tax-free legacy to heirs, while designating a non-profit organization as the eventual beneficiary of the retirement account. This strategy may allow a retiree to double the impact of their retirement account, while eliminating income taxes on the retirement savings.

In addition, with the possible need to fund long-term care expenses in retirement, retirees might consider buying a permanent life insurance policy with a rider for long-term care. In other cases, insurance policies with a large death benefit can be a substitute for long-term care coverage for the beneficiary, the surviving spouse.

Speak with your estate planning attorney to work through the numbers and make sure that any insurance policy you purchase, works as part of your estate plan.  Contact the Soto Law Firm today to discuss the best ways to coordinate your life insurance with your estate plan.

Reference: USA Today (May 2, 2018) “Financial planning: How to determine if you need life insurance in retirement”