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Outliving Your Estate Plan

Posted on: February 4th, 2015
retirement savingsAmericans are living longer than ever before. The life expectancy of the average American, according to the most recent studies by World Bank in 2012, is 78.74 years. As this trend continues, healthcare costs and basic living expenses for longer lives need to be addressed in financial and estate plans. 

Barrons recently reported that, while many adult children had planned to receive inheritances in their 40s and 50s, with the increasing longevity of Americans, this expectation is shifting. As a result, some individuals are delaying retirement or planning for a longer retirement, and adult children and other beneficiaries are creating their own plans without the expectation of an inheritance.

Several strategies can help to transfer wealth to family members and minimize taxes: 

Custom trusts. Revocable living trusts are popular estate planning tools that can be amended at any time during the settlor’s lifetime and become irrevocable upon the settlor’s death. Trusts are structured to satisfy the goals of the creator. Perhaps an individual who wants to preserve assets for children is not eligible for Medicaid benefits because of the assets they own. Instead of gifting assets directly to children, the settlor can create a Medicaid Trust which holds the assets in trust for the benefit of the settlor’s children. With the assets in trust, the settlor can qualify for Medicaid. Unlike with revocable living trusts, Medicaid Trusts cannot be amended once funded with assets. For married couples, particularly in a second marriage where one or both spouses have children from a prior marriage, a settlor who wants to provide for a spouse after death can create a QTIP (qualified terminable interest property trust) which provides trust income for the lifetime of the surviving spouse while directing that the balance of the trust be distributed to the settlor’s children upon the survivor’s death. An estate planning lawyer can review various types of trusts and how they may address your goals.

Early and increased retirement contributions. Planning in advance for retirement offers the most flexibility and long-term growth. Tax-deferred retirement investment earnings have greater potential when given more time to grow; starting as early as possible can result in greater returns later. As retirement draws closer, increase contributions to retirement accounts. Account owners age 50 and older may invest more in retirement with ‘catch-up contributions.’ This could provide thousands of dollars of additional contributions annually depending on the type of account.

Timing IRA Rollovers. As of January 1, 2015, each taxpayer is permitted only one tax-free Individual Retirement Account (IRA) rollover annually. Rollovers could offer more growth opportunities, providing a larger cushion later in life. Failing to space rollovers out to satisfy the new rules could result in a tax burden now that might offset potential long-term growth.

Are your estate planning goals to ensure enough savings to cover a long retirement, to provide for children, or both? Longer lifespans will change financial goals. Outliving savings will likely be a problem for individuals who do not plan properly. Not only should one address growing families, deaths, inheritances, and healthcare provisions in their estate plans – they should consider the longer lives ahead to plan accordingly for themselves and for future generations.
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