Key Retirement & Estate Planning Tools

FinanceWealth-Building

  • Author Thomas Swenson
  • Published February 1, 2023
  • Word count 1,242

Retirement Planning

Retirement can begin at any age, and so can planning for it — the earlier, the better. Assets for retirement can include savings, investment accounts, IRAs, employee retirement plans and pensions, even home equity (accessed through a reverse mortgage), annuities and life insurance policies. One way or another, the focus is usually on maximizing growth, minimizing taxes and managing exposure to risks (e.g., market risks, legal liability).

Estate Planning

Estate planning strives to effect the transfer of assets from an individual to others (beneficiaries) in a manner that is tax-efficient and implements the individual’s values and wishes. The transfer of assets may occur during the individual’s life and/or after his death. Methods commonly include Wills, family LLCs and limited partnerships, and trusts. With individual lifetime exemptions for gift and estate tax and generation-skipping transfer tax set at $12+ million through calendar year 2025 (or until the U.S. Congress decides otherwise), some of the tax-related aspects of estate planning have become somewhat simplified for all except the very wealthy.

Yet, many different factors should be considered when forming a plan. They include total value of assets, the type of assets (e.g., family business, family home(s), real estate, stocks and bonds, collectibles), beneficiaries’ ages and their capacity to manage their own financial affairs, and of course, YOUR family values and YOUR personal wishes about how assets should be used.

Asset Protection

Asset protection measures should be included in every estate plan and in every family business plan. The specters of divorce, personal-liability court judgments and a spendthrift beneficiary hang over all accumulated wealth. By minimizing or eliminating such risks, the integrated estate planning of this law practice protects and builds wealth.

Estate planning is more than simply buying a Will or Living Trust

For example, a substantial portion of an individual’s or couple’s wealth is often held in beneficiary-designated accounts, such as, IRAs, 401(k) plans, and insurance policies. By itself, a Will does not control the disposition of such assets. Estate planning, therefore, involves assessing what you have, setting goals, considering the many techniques and investment vehicles available to achieve your goals, and then working with advisers to put plans into action.

Exemplary retirement, estate, legacy and asset protection planning tools include:

Wills

Trusts

General Durable Power of Attorney

Medical Power of Attorney

IRAs

Employee plans, e.g., 401(k), 403(b), Defined Benefit (pension) plan

Investment accounts (managed to control risk while providing growth)

Insurance and annuity policies (risk management, tax advantages)

Long term care (LTC) & disability policies or riders

Life settlement contracts (i.e., sale of life insurance policy)

Reverse mortgages (to tap into the equity of your home, with low risk)

Medicaid trusts (to preserve assets for spouse and family members)

Business entities (e.g., LLCs, FLPs)

General Durable Power of Attorney – Simple Important Document While You Are Alive

For many, a Will and beneficiary designations are the main focus of their pre-death planning. A Will is important, of course. A Will instructs how you want the assets in your estate to be distributed, for example, to spouse, children, charities. In the absence of a Will, your estate will be distributed according to your state's law for non-Will estates, and that might not be what you wanted or what is best for your family members and other beneficiaries. Similarly, beneficiary designations of retirement accounts (e.g., IRAs, 401(k) plans) direct the assets after death according to your wishes.

What about your assets when you are still alive? What happens if/when you become physically or mentally disabled and unable to make decisions or care for yourself? Who has the power to control and manage your assets on your behalf? Well, technically nobody unless you have a valid General Durable Power of Attorney in place. (Exceptions would be for a spouse controlling jointly-owned assets.) A General Durable Power of Attorney appoints fiduciary power in a trusted person to manage your financial assets on your behalf (i.e., exclusively for your benefit). The power can be immediate or it can be triggered by a certain event (e.g., disability). Without such a power of attorney, a legal court proceeding, with its delays and expense, would be necessary to appoint a suitable person to manage your life and your assets. A medical power of attorney is necessary to authorize a trusted person to make health care decisions for you when incapacitated.

Revocable Living Trust – Arguably the Most Flexible and Useful Estate Planning Tool

A revocable living trust keeps you in control of your assets. You can amend at any time before death. It serves as a Will substitute, managing your assets after death. In contrast to a Will, however, it offers options for managing and growing your wealth according to your wishes and your family's circumstances long after your death, even for many generations. It avoids potentially long and expensive probate proceedings for your major assets. In other words, there is an essentially seamless transition of asset ownership upon death. After death, a revocable trust becomes irrevocable, although it can include some continued flexibility. The assets in a revocable trust are subject to estate taxes, but in view of the currently high estate tax exemption ($12+ million per individual, $6+ million starting 2026), estate tax is not an issue for most people. Assets in a revocable living trust get an automatic step-up in basis. When properly designed, the trust provides excellent asset protection to your beneficiaries (e.g., against their angry ex-spouses in divorce, against personal judgment creditors, against financially irresponsible behavior of beneficiaries). Finally, while you are alive, a co-trustee or successor trustee can manage and use trust assets for your care.

Risk-Managed Retirement Income

Surprising to many, a cash-value life insurance policy can serve as a reliable source of tax-free "income" during retirement. The income is in the form of tax-free loans secured by the cash value of the life insurance policy. Under IRC §§ 101 and 7702, cash value in a life insurance grows income tax free. In a specially designed indexed universal life (IUL) policy, cash value grows linked to one or more market indices, but is not exposed to market risk. In other words, cash value increases in a positively growing market, but it never goes backward (i.e., principal is protected in downward markets). Individual income tax rates are likely to increase in the future. Cash-value IUL, therefore, protects against both market risk and tax risk in retirement. Another risk in retirement is longevity risk, the risk of living too long. Annuities can provide market-linked growth, with no downside risk (principal protected). An annuity can also provide guaranteed lifetime income, which you can never outlive.

Copyright © 2023 Thomas Swenson, J.D.

Warning Disclaimer: This is not legal, insurance or tax advice. No person should assume that any information presented or made available on or through this article or linked websites may be construed as legal, insurance or tax planning advice. Personalized legal, insurance and financial planning and advice can only be rendered after written engagement for services. Please contact Law Office of Thomas J Swenson for further information.

Internal Revenue Service Circular 230 Disclosure: As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any transaction or matter addressed herein.

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