Coordinating Retirement with Estate Planning

Let's assume, for a moment, that you have made it to retirement after living a virtuous and profitable life. After abstaining from unhealthy vices and doing all the right things, you are rewarded with a hefty retirement nest egg. (You should have something to show for leading such a vice-free life.) In addition, you manage to preserve your nest egg from special situations that affect retirement planning such as divorce, creditors, and various other things that can drain your retirement resources, like illness, poor money management, or unforeseen circumstances.

Then the unexpected happens. In one of life's great ironies, you die before enjoying the retirement wealth you have so diligently accumulated. This is matched only by the irony of a person winning a multi-million dollar lottery toward the end of their life. Timing, as they say, is everything.

The question then is, what happens to your retirement savings when you are no longer around to enjoy them? The answer, of course, is that somebody else gets to enjoy your hard-earned retirement savings after you are gone. However, by coordinating your retirement planning with estate tax planning, you can have some control over who gets the benefit of your earthly goods while you are reaping your eternal reward.

In 2013, the top estate tax rate is 40% and the estate tax per-person basic exclusion amount, as adjusted for inflation, is $ 5,250,000.

Although an overview of estate tax planning is a topic in and of itself, there are some things you need to know before you go off to continue your quest for knowledge. Probably the most important thing you need to know is that estate tax planning is a very complex area that may ultimately require professional guidance (i.e., an estate tax attorney).

Estate tax planning is for rich people. A basic assumption of estate planning is that you have or expect to have assets that must be distributed at the time of your death. However, this doesn't mean you have to be rich to consider estate planning issues. Being "rich" is a relative term, only partially relating to the amount of money you have at hand. For example, unused retirement funds, retirement plan survivor benefits, and life insurance payments quickly add to your other assets that must be distributed after your death.

As a result, you should at least consider doing some basic estate planning even if you don't consider yourself to be rich. And, the best way to ensure you minimize the tax you owe is to keep your taxable estate as small as possible--and that means working with a qualified financial or estate planner to develop a plan that suits your needs.

If you are still not convinced that part of your retirement planning efforts should involve estate planning, consider the following common misconceptions:

• I'm too young to worry about dying. Categorized under the general heading "famous last words," it is a mistake to believe that you will live out your actual life expectancy. Tragedy may strike you at any time, unexpectedly cutting your life short. Moreover, a tragedy does not have to be fatal to interfere with estate planning. If you are legally incapacitated (e.g., in a coma or severely paralyzed after a stroke), you lose the power to initiate or revise estate plans. So do your estate planning while you are still of sound mind and body.
• I already have an estate tax plan and don't need to revisit this issue. The estate tax rules have changed routinely through the past decade, and are still in a state of flux. They are almost guaranteed to change with each Congress. Because of this, your existing estate tax plan, just like your retirement plan, needs a periodic tune-up to take into account any legal changes that occur through the years. Any personal changes in your life may also require some fine tuning to your planning efforts.

When considering estate planning, the following sections discuss issues concerning specific areas of retirement planning:

• Qualified Plans and Estate Taxes
• IRAs and Estate Taxes
• Nonqualified Plans and Estate Taxes

Work Smart Estate tax issues are separate from probate issues, although the two may overlap. When you die, three things can happen to your assets: they get distributed according to provisions in your will, a court distributes them by operation of state law when there is no will, or they are automatically distributed to a designated beneficiary (e.g., by naming a beneficiary in an IRA or 401(k) plan). The first two ways are costly and time consuming because they involve probate court proceedings and associated legal fees. The third way to distribute assets is generally preferable over going through probate. Many people can avoid probate almost completely by naming beneficiaries in advance or by holding jointly owned assets (e.g., checking and savings accounts; real estate; cars). Even if you don't have to go through probate, however, a separate estate tax determination must be made.