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 (or not as the case may be).
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 you to seek professional guidance (i.e., an estate tax attorney). In typical congressional fashion, Congress has made estate tax laws even more complex and estate tax planning even more unpredictable after enacting legislation intended to reduce the burden of estate taxes on taxpayers. The new estate tax laws begin to take affect in 2002, and each year after that, through at least 2011, different rules will apply for each year.
Once again, timing will be everything because when you die will determine what rules will apply to your estate. For example, consider the potential estate tax rates that might apply:
| Estate Tax Rates |
| Year |
Estate Tax Exemption Amount |
Top Estate Tax Rate |
| 2001 |
$675,000 |
55% |
| 2002 |
$1 million |
50% |
| 2003 |
$1 million |
49% |
| 2004 |
$1.5 million |
48% |
| 2005 |
$1.5 million |
47% |
| 2006 |
$2 million |
46% |
| 2007 |
$2 million |
45% |
| 2008 |
$2 million |
45% |
| 2009 |
$3 million |
45% |
| 2010 |
estate tax repealed |
35% (gift tax only) |
| 2011 |
$1 million |
55% |
If you are still not convinced that part of your retirement planning efforts should involve estate planning, consider the following common misconceptions:
- 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.
- I'm too young to worry about dying. Categorized under the general heading of 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 (whatever that may be in your case).
- I already have an estate tax plan and don't need to revisit this issue. As mentioned above, the estate tax rules are set to change through at least 2011 and are almost guaranteed to change after that. 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:
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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. Most people can actually avoid probate altogether 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.
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