Retirement Savings & Estate Planning

Retirement accounts are just as important to prudent estate planning as real estate and wealth portfolios. With medical and other living costs rising, the key to a responsible retirement savings and estate plan is looking ahead and choosing the right option for your portfolio.

General Rule

As a general rule, what wealth is not spent during retirement is attached to a person’s estate upon death. So, if a couple saves up 3 million dollars in retirement accounts but only spends one million, two million would be attached to the couple’s estate and taxed upon the death of the second spouse. Given the complexity and extent of the U.S. estate tax system, the best strategy for saving is keeping as much wealth out of one's estate as possible, otherwise part of those hard earned savings go straight to the government instead of loved ones and/or charities.

Estate Planning with Traditional Retirement Accounts

Most people are familiar with traditional retirement accounts such as IRA’s and 401K’s. These accounts allow individuals to save a percentage of their earnings, which over time accumulates compound interest. Upon retirement, the account is set up for regular payments to the retired person. The majority of these funds, however, tend to go toward medical expenses and assisted living care. Setting up effective private medical insurance during one’s 40’s or 50’s will allow for most medical costs to be offset and less retirement money spent on end of life care, leaving more for inheritance.

Additionally, these accounts can easily be divided and portions placed into an irrevocable trust. The purpose of an irrevocable trust is to remove excess wealth from the ownership of the person and place it into a trust controlled by someone else. This trust can still be for the benefit of the original owner for the remaining duration of their life, but it ensures that the funds are not considered part of the estate. For especially large amounts of wealth, a series of trusts such as a QPRO or QDRO can be set up to funnel wealth in certain directions based on specific life event triggers such as incapacitation or the death of one spouse.

Pension Accounts

Pension accounts are allocated retirement accounts based on years of service for a company or government agency. The longer an employee works for a company, the higher the pension payments become. With this in mind, it is vital that the person remain with this particular employer for a pension account to be successful. Additionally, single income homes consider a pension plan the property of both spouses after ten years of marriage. So, it is often prudent to consider drafting a provision into a pre-marital agreement that all pensions are the property of the person who's employer provided the account. Otherwise, the pension plan will be pro-rated upon divorce and a portion of the plan will go to the divorced spouse. Finally, pension plans should always have a spouse named as the beneficiary, as most companies will continue to pay the agreed upon amount as a widow’s/widower’s benefit.

Do's and Don't's of Retirement Accounts

There are some things that should never be done with retirement accounts, as the result is a serious loss of wealth. First, avoid borrowing funds against any form of retirement account. Remember that a retirement account is future income for a time when work is not possible, this is too important to risk. Second, only change jobs if absolutely necessary and always transfer over previous retirement savings when entering a new job. Otherwise, accounts tend to get lost over time and funds may never be redeemed. Third, always seek the advice of an estate planning attorney or certified wealth planner when establishing trusts or other forms of wealth allocation. Estate planning attorneys will have up-to-date information on current IRS policy and recommend the best course of action for ensuring full protection of retirement savings.