What Do I Need to Retire? – Annapolis and Towson Estate Planning

Research from the Employee Benefit Research Institute’s Retirement Confidence Survey shows a lack of preparation in retirement planning. According to the annual survey, 66% of those 55 years and older said they were confident they had sufficient savings to live comfortably throughout retirement. However, just 48% within the same age group have not figured out their retirement needs.

Kiplinger’s article entitled “Ready to Retire? Not Until You’ve Done These 3 Things” says knowing where you are now and knowing what you will need and want in retirement are important to protect your portfolio throughout your golden years. If you want to retire at 65, then age 55 is when you will want to start making some important decisions.

Let us look at three steps to take in your last decade of your working years to help create a safety net for a long retirement:

At 10 years or more before retirement, you should diversify your tax exposure. You may have a large portion of your portfolio in an employer sponsored 401(k) or in IRAs. These tax-deferred accounts give you plenty of benefits now, because you are not taxed on the contributions. At age 50 and older, you can make additional catch-up contributions that let you put away $26,000 in 2020 in your 401(k) each year. Because you are probably going to pay a lower tax rate in retirement when you begin taking taxable withdrawals, it gives you a nice tax advantage today.

In the years before your retirement, build assets in tax-free accounts for flexibility, so you can keep tax costs down in retirement. Assets in a Roth IRA or a Roth account within your 401(k) can give you a source of tax-free income in retirement. You paid taxes on the money you put into a Roth, so it grows tax-free and withdrawals after age 59½ are income tax free. If you are over 50, then you can add up to $7,000 into the account this year.

When you are five years from retirement, create a health care plan. A huge expense in retirement is health care. Plan for out-of-pocket health care costs as well as long-term care. Taking advantage of a health savings account, if you are in a high-deductible health insurance plan is a good way to save for the out-of-pocket health care expenses that will not be covered by Medicare or your private health insurance. You can fund an HSA up to $7,100 for families ($8,100 if you’re 55 or older). Contributions are made on a pre-tax basis, so your account grows tax free, and withdrawals are tax- and penalty-free, if used for qualified health care expenses. You should also look at long-term care insurance.

When you are just a year from retirement, start spending as if you are already retired. Be sure you can live comfortably, when spending at your retirement budget.

No one can see the future, but you may be able to limit the effects of shocks to your retirement savings.  Adding in these layers of protection at least 10 years prior to retirement, can help you secure your retirement goals.

Reference: Kiplinger (Jan. 24, 2020) “Ready to Retire? Not Until You’ve Done These 3 Things”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Am I Making One of the Five Common Estate Planning Mistakes? – Annapolis and Towson Estate Planning

You do not have to be super-wealthy to see the benefits from a well-prepared estate plan. However, you must make sure the plan is updated regularly, so these kinds of mistakes do not occur and hurt the people you love most, reports Kiplinger in its article entitled “Is Anything Wrong with Your Estate Plan? Here are 5 Common Mistakes.”

An estate plan contains legal documents that will provide clarity about how you would like your wishes executed, both during your life and after you die. There are three key documents:

  • A will
  • A durable power of attorney for financial matters
  • A health care power of attorney or similar document

In the last two of these documents, you appoint someone you trust to help make decisions involving your finances or health, in case you cannot while you are still living. Let us look at five common mistakes in estate planning:

# 1: No Estate Plan Whatsoever. A will has specific information about who will receive your money, property and other property. It is important for people, even with minimal assets. If you do not have a will, state law will determine who will receive your assets. Dying without a will (or “intestate”) entails your family going through a time-consuming and expensive process that can be avoided by simply having a will.

A will can also include several other important pieces of information that can have a significant impact on your heirs, such as naming a guardian for your minor children and an executor to carry out the business of closing your estate and distributing your assets. Without a will, these decisions will be made by a probate court.

# 2: Forgetting to Name or Naming the Wrong Beneficiaries. Some of your assets, like retirement accounts and life insurance policies, are not normally controlled by your will. They pass directly without probate to the beneficiaries you designate. To ensure that the intended person inherits these assets, a specific person or trust must be designated as the beneficiary for each account.

# 3: Wrong Joint Title. Married couples can own assets jointly, but they may not know that there are different types of joint ownership, such as the following:

  • Joint Tenants with Rights of Survivorship (JTWROS) means that, if one joint owner passes away, then the surviving joint owners (their spouse or partner) automatically inherits the deceased owner’s part of the asset. This transfer of ownership bypasses a will entirely.
  • Tenancy in Common (TIC) means that each joint owner has a separately transferrable share of the asset. Each owner’s will says who gets the share at their death.

# 4: Not Funding a Revocable Living Trust. A living trust lets you put assets in a trust with the ability to freely move assets in and out of it, while you are alive. At death, assets continue to be held in trust or are distributed to beneficiaries, which is set by the terms of the trust. The most common error made with a revocable living trust is failure to retitle or transfer ownership of assets to the trust. This critical task is often overlooked after the effort of drafting the trust document is done. A trust is of no use if it does not own any assets.

# 5: The Right Time to Name a Trust as a Beneficiary of an IRA. The new SECURE Act, which went into effect on January 1, 2020 gets rid of what is known as the stretch IRA. This allowed non-spouses who inherited retirement accounts to stretch out disbursements over their lifetimes. It let assets in retirement accounts continue their tax-deferred growth over many years. However, the new Act requires a full payout from the inherited IRA within 10 years of the death of the original account holder, in most cases, when a non-spouse individual is the beneficiary.

Therefore, it may not be a good idea to name a trust as the beneficiary of a retirement account. It is possible that either distributions from the IRA may not be allowed when a beneficiary would like to take one, or distributions will be forced to take place at a bad time and the beneficiary will be hit with unnecessary taxes. Talk to an experienced estate planning attorney and review your estate plans to make certain that the new SECURE Act provisions don’t create unintended consequences.

Reference: Kiplinger (Feb. 20, 2020) “Is Anything Wrong with Your Estate Plan? Here are 5 Common Mistakes”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Does Recent Legislation Mean for the Generation-Skipping Transfer Tax (GSTT) Exemption? – Annapolis and Towson Estate Planning

Congress has made some significant changes through the planned sunset of the Tax Cuts and Jobs Act (TCJA) increased exemptions and through the recent changes to retirement planning in the Secure Act.

Think Advisor’s recent article entitled, “Estate Planning Tips and Updates,” looks at some of the most notable of these.

  1. Increased Estate Tax Exemption Amounts. The current applicable exemption amount of $11.58 million each (or $23.16 million for a married couple) lets many people totally avoid transfer taxes. However, the applicable exclusion amount reverts to its prior inflation adjusted amount in 2026. Therefore, if you have a gross estate of $11 million and previously made, say, $7 million of gifts, the rules eliminate any claw back of those gifts, if death occurs in 2026. However, you have no applicable exclusion amount remaining, says the IRS. As a result, after the sunset, you have a gross estate of $4 million and no remaining exemption. With this example, you would be wise to consider implementing one or more strategies, including gifts and sales to grantor trusts, before the end of 2025 to be certain you fully use the disappearing exemption.
  2. The Increased Generation-Skipping Transfer Tax (GSTT) Exemption. The TCJA also upped the GSTT exemption to $11.58 million each. This allows many people to exempt transfers for several generations, if not in perpetuity, under the laws of certain states. However, they must intentionally draft trusts to establish legal situs in states like Nevada to leverage longer perpetuities periods. This will result in avoiding additional estate, gift and GSTT taxes for longer periods, normally a net positive.
  3. Annual Exclusion Gifts. Regardless of the increased exemption amounts, continued annual exclusion gifts (currently $15,000) are still going to be a crucial component of most estate tax reduction planning, removing the amount of the gift and its future appreciation. The tax-exclusive nature of the gift tax makes gifts more tax-efficient.
  4. Basis Harvesting. The increased exemption amounts often will result in some people with previous trust planning no longer having estate tax issues. These people could look at reforming, amending, or decanting an existing trust to add older generations in a manner to cause inclusion in their estates. This inclusion triggers the basis step-up rules in the code and may dramatically reduce taxes upon a liquidity event, like the sale of a business interest previously gifted or sold over to the trust.
  5. Secure Act Age Changes. For those born after July 1, 1949, the Act raises the beginning age for minimum distributions (RMDs) to 72.
  6. Employer Inducements. The Act increases the current $500 credit for setting up a retirement plan to $5,000 in some situations and provides a $500 credit for three years to encourage the use of auto-enrollment.
  7. Inherited IRAs. The Act substantially restricts the use of “stretch” IRAs. For deaths after December 31, 2019, a recipient of an IRA from the deceased must generally take distributions from the IRA over no more than a 10-year period. However, the new rules exempt accounts inherited by a spouse, a minor child, a disabled or chronically ill person, or anyone less than 10 years younger than the deceased account owner.
  8. Annuities. The “stretch” IRA provisions also apply to annuities with one important exception. Annuities making payments before January 1, 2020, may still pay out over two lives. The new law encourages greater investment in annuities through 401(k) plans, and especially plans offered by smaller businesses, by decreasing the risk associated with offering annuities. As a result, employers offering annuities as investments will not have fiduciary duties as to those potential annuity investments, assuming they choose an issuer in good standing with the applicable state insurance commission. The Secure Act also offers portability for annuities, if you change jobs. This is a direct transfer between retirement plans.

Reference: Think Advisor (March 25, 2020) “Estate Planning Tips and Updates”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Big Mistakes in Planning for Retirement – Annapolis and Towson Estate Planning

You know it is not always a lack of savings that keeps people from enjoying a great retirement. Despite having a nice nest egg, people can make some common mistakes that mess up their retirement plans.

Kiplinger’s recent article entitled “Avoid These 4 Mistakes That Often Derail Retirement Plans” advises you to avoid these four mistakes, so you do not wreck your golden years.

Early Withdrawal Penalties. It is critical that you know the rules of your retirement plans, if you want to keep the plan on track. If you want to tap into your IRA or 401(k) before age 59½, you will have an early withdrawal penalty. You will also have to add that money in your gross income for the year and pay an additional 10% tax penalty. There are a few exceptions to early withdrawal penalties.

Forgetting about your Employer Match. A recent survey found that roughly a third of workers do not contribute enough to their 401(k) or employer-sponsored retirement plan to get the full match from their employer. The value of this oversight is about $750 each year. That itself can add up to almost $100,000 in missed retirement savings over the course of your career. Retirement savers need to leverage this free money at work.

Paying High Investment Fees. Figure out how much you are paying for your investments. Investment costs that may sound tiny—perhaps 2%—can chip away at your savings over time. These fees compound along with your returns, so you are losing the growth that money could have had.

Missing Out on Compound Interest. Compounding is one of the best rationales for saving early. On a very basic level, compound interest is earning or charging interest on top of interest. When retirement savers are not aware of the value of compound interest, they are missing out on growing their money more quickly. Time is critical when allowing compound interest to work for you, and that is why you should think long-term, when saving for retirement.

Many people think they can plan for retirement alone. However, the closer you get to retirement, the more crucial it is that you have a sound plan that will keep you on track. However, only one in five people has a written plan for retirement.

A comprehensive plan will help get you to and through your later years. Your comprehensive plan should include strategies to pay for health care and a plan for claiming Social Security, as well as strategies to be tax efficient in retirement and leave a legacy for your family.

Reference: Kiplinger (Jan. 29, 2020) “Avoid These 4 Mistakes That Often Derail Retirement Plans”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys