1. Review Beneficiary Designations
beneficiaries attached and are updated to ensure your assets pass to the right people when you die.
2. Have Proper Life Insurance
One of the primary uses of life insurance is to protect against the loss of income in the event of an individual’s untimely death. The most important time to have life insurance is typically while you’re working and supporting loved ones with your income.
This can still be the case in retirement. If one spouse creates most of the retirement income through Social Security, continued work, a pension, an annuity, or another income source, it makes sense to keep life insurance in order to provide for the surviving spouse or dependents after the death of the individual.
In addition to protecting against lost income in the event of death, life insurance can also provide a means for passing on income tax-free to the next generation. If one goal of retirement and estate planning is to pass on a legacy, life insurance can be a very efficient vehicle to accomplish that goal.
Furthermore, life insurance can provide much needed cash flow and liquidity for estates that might be subject to estate taxes or that have lots of illiquid assets like family businesses, farms or collectibles. With an irrevocable life insurance trust, funded with a life insurance policy, the trustee could purchase assets from the estate with the life insurance funds in order to provide liquidity to the estate.
3. Avoid Probate with Trusts
Part of effective estate planning is having the correct will and trusts in place. While almost everyone will need a will at some point, the same is not always true about trusts. In some cases, setting up a trust to shelter or control assets is not worth the cost if the individual has very limited resources. However, as an individual’s estate planning needs and assets increase, the value of a trust as part of the estate plan also increases.
There are two main types of trusts: revocable and irrevocable. For general estate planning needs, a revocable trust covers most issues.
Someone can fund revocable trusts with assets and still use the assets today without changing their income tax nature. These types of trusts function as a more effective way to pass on assets outside of probate and allow a trustee to manage assets for their beneficiaries.
On the flip side, an irrevocable trust can be a way to provide creditor protections, separate assets from the annual tax liability of the original owner, and even help reduce estate taxes in certain situations. However, irrevocable trusts can be more complex and expensive. Before you move assets into an irrevocable trust, understand the complexities and restrictions that could be placed on them.
4. Incorporate Charitable Giving
Many Americans give to charities on an annual basis – it’s part of achieving true wealth. True wealth is about having the freedom to achieve your goals, and for many that means being able to leave a legacy to their church, alma mater, charity or other organization or cause they care about.
Charitable giving is a more comfortable way to donate money as you might need the assets to support your income during retirement, but upon your death the money is no longer needed and can be passed onto a charitable goal.
With charitable giving as part of an estate plan, you can do outright gifts to charities or set up a charitable remainder annuity trust (CRAT) to provide income to a surviving spouse or heir, with the remainder going to the charity. Interestingly, you can even set up a CRAT at death by passing along your IRA, which can be an effective way to both generate income for a loved one and give to charity in a tax-efficient manner.
In the end, your estate plan is unique to your situation. Everyone will pass away at some point and you need to have an estate plan in place at that time. A good portion of an estate plan isn’t about money – it’s about protecting family, making sure assets pass smoothly to the heirs you want, and removing complexity for your loved ones. But taxes and liquidity are issues that need to be addressed, too.
Take the time to plan for a good end of life and update your estate plan.