Three years after the unexpected death of her husband, Chanel Reynolds posted a warning. She had started a website to help people avoid a predicament she had found herself in after her husband died. His will had an executor but didn’t have signatures, and she didn’t know many of his passwords.
Her message to others, who might not know whom to put down in their will as a guardian for a child or an overseer of their estate, was this: “If you are at a loss for whom to name, get out there and tighten up your friends and family relationships. Find some better friends. Be a better friend.”
With everything we have been through in the past year, I think it would be fair to recommend that all of us have reason to review our estate planning documents. And if you don’t have any, now is the time!
Especially if you are over the age of 60.
Typically, we tend to review our estate plan when we get older or if there has been a significant change in our circumstances. However, if you are over the age 60 and you haven't updated your estate plan in many decades, it’s time to update your documents. After everything has been updated, you should continue to review your plan every two and half years.
Here are a few age ranges and what they mean in terms of estate planning:
A couple should create an appropriate estate plan. If they truly want inheritance rights, they need to execute testamentary documents, such as wills.
For unmarried couples, having an estate plan might be even more important than for married couples, especially if there are children in the family. The unmarried couple does not enjoy the legal protection afforded by marriage, but many of these protections can be had through a well-prepared estate plan.
People are living longer and are having children later in life. Due to this combination of demographic factors, many more people are in the “Sandwich Generation.” Someone in the Sandwich Generation has elderly parents while they still have minor children. All too often, they are torn between their caregiving responsibilities for their children and for their parents. Here is an article regarding the Sandwich Generation which may be of interest.
If you’re part of the Sandwich Generation, how do you alleviate some of your stress?
Planning is one of the best tools.
Estate Planning Advice for Women
Regardless of whether you’re single or married, divorced or widowed, a parent or not, you need an estate plan, particularly if you are over the age of 60. This is true for men and women, but women face some challenges that make it even more important to start planning even sooner.
Women typically live longer, they’re more likely to be custodial parents and they approach retirement differently than men. In general, women tend to be caregivers – worrying about everyone else but themselves – but when it comes to estate planning, it’s more important that they care for themselves first.
If Your Income Depends on Others
One key aspect of estate planning women will often overlook is what will happen when their husband, parents or other relatives die. According to the U.S. Census Bureau, 36 percent of women 65 and older are widowed, compared to 12 percent of men 65 and older.
If you are dependent on someone either financially or emotionally, what happens if something happens to them, if they are disabled or they die?
For example, if a husband starts to receive his pension payments, but chooses to get the maximum benefit in his lifetime — it means the benefits will end at his death.
If he predeceases her, she has nothing. However, if she’d planned for that 20 years prior to his death, there might have been ways to avoid this.
Here is another common scenario. A businessman with significant wealth, will often put his business advisers in charge of his estate plan, rather than his wife and/or children. Yes, the advisers would have a fiduciary duty to the wife upon his death, but they’d have all the power to make decisions about what would be sold, how it would happen, and how it was valued.
For a lot of women, the key is to start planning early. Have discussions with your spouse or family members and set things up with longevity in mind.
Start talking to your family about what their estate plans are. For example, if you’re a caregiver for a parent, talk to your siblings and parents about the potential implications of that: Does your time caregiving have implications for how your parent’s estate is divided?
Plans Will Vary
Your estate-plan focus will vary depending on your situation. Are you married or single? Children or no children?
For a single woman without children, the most difficult decision is going to revolve around who will take care of you, in the event an illness incapacitates you, and who will make your medical and financial decisions.
For married women with children, often the first two estate-planning concerns are naming a guardian for the children and planning for income replacement through life insurance.
For women who are widowed, key considerations include making sure their estate plan has been revised to reflect the husband’s death and to assess whether there are different financial-planning opportunities and challenges to consider.
A first step for anyone who’s gone through a divorce is to check the beneficiary designations on retirement and other financial accounts. Often people will walk away from their spouse, but then never do any of the cleanup work.
Women who remarry or those who come to a marriage with significant assets, should think carefully about their estate plan before tying the knot.
Women tend to be hesitant to discuss their net worth going into a new relationship, but that can be a big mistake. If they keep control of their assets separately, if they divorce, the new spouse won’t have access to that money.
In Washington, a spouse of someone dying without a Will gets 100% of the Community Property and 50% of the deceased's separate property. If the spouse dies with a Will, the Will language controls. However, not all assets pass under the Will. Some pass by beneficiary designation (think life insurance and IRA) and some by joint tenancy with right of survivorship (think checking/savings accounts).
There are a couple of ways to forestall that issue, though none are ideal.
One tactic is to make sure beneficiary designations on retirement plans are set such that your children or other heirs inherit — but those designations need to be in place before you get married. Changing beneficiary designations after you get married may be difficult, because some financial-services firms won’t allow changes that entail disinheriting a spouse without the spouse’s consent.
Another solution is to set up a trust, naming a child or other relative as the recipient, and put assets into it before you get married. You can still borrow from the trust, but the husband will not have access to that money if you die.
Women who remarry should realize that any assets they brought to the marriage are on tap to pay for the new spouse’s medical bills — that includes nursing-home care, which can quickly drain one’s resources. It doesn’t matter whether you’ve been married two days or 50 years, the spouse will have to pay for medical care. Your assets are going to be on the line for their medical care, and you can’t get around that.
Women who bring a significant amount of money to a marriage should consider protecting their assets by purchasing a long-term-care policy for her spouse, setting up a trust before the marriage, and working with an attorney prior to the marriage.
Estate Planning is Important
The prospect of estate planning can be overwhelming. The first hurdle is simply facing the fact of death. The next hurdle is trying to get a handle on complex topics that are often difficult to understand. Then there’s the question of finding and hiring an attorney.
No matter what your age or how much money you have, consider getting these items into place:
At Tacoma Elder Care, we are always working on ways to help you. If you are just beginning to think about your planning, we highly recommend attending one of our FREE workshops to learn more about how to start, and the most important documents everyone needs to have in place. Contact us today to register, or to schedule a FREE consultation.
Based on tax treatment and required minimum distribution rules, these are the three best and four worst beneficiaries to name for your individual retirement accounts.
Individual retirement accounts are some of the most sensible investment vehicles. They are tax deferred, protected from most creditors and can easily be transferred to a beneficiary outside of probate. In addition, they do not have a true maturity date: For traditional IRAs, you have to take required minimum distributions (RMDs), mandatory withdrawals of a certain percentage of the account every year, starting the year after you reach age 70 and increase as you age.
The major sticking point is what happens to these accounts upon your death: How can your beneficiaries optimize tax deferral and continue creditor protection? Who you leave these accounts to and how you leave them can either make or break these objectives?
The following beneficiaries are the best options when it comes to passing on your IRA:
Your Spouse. When you die your IRA typically turns into an inherited IRA. This creates different RMD treatment than when you take the distributions as the owner of the account. The main exception to the inherited IRA issue is transferring IRAs to your spouse.
Your spouse is the only individual who has the option of transferring your retirement plans to his or her name at the time of your demise. If the surviving spouse is younger than the deceased spouse, the receiving spouse now uses their longer life expectancy, and the commensurate smaller required withdrawal percentage, for RMD purposes. This allows for smaller distributions, which means less taxable income and more funds to continue growing tax deferred.
Younger Individuals. The concept of stretching RMDs is somewhat misrepresented to the public and is contingent on whether you live past April 1st of the year following the year you reached age 70. This is the actual time you must start taking RMDs or face a penalty. If you die before this time, meaning no one has ever taken an RMD from your IRA, your beneficiaries can stretch RMD distributions based on their life expectancies.
This is a great benefit to younger individuals: Though they have to take RMDs even if they are younger than 70 years old (inherited IRAs must begin distributing by December 31st of the year after your death, no matter how old the beneficiary is), the percentages to withdraw are quite small based on the beneficiaries' long life expectancies. If you die after the required begin date, RMDs are based on the longer of either your life expectancy or your beneficiary's life expectancy.
A See-Through Trust. Leaving funds to an entity that is not an actual human, such as an estate or charity, completely ruins RMD optimization: The beneficiary must withdraw all funds within five years. This can lead to an income tax burden that you would have wanted your beneficiaries to avoid.
A see-through trust can receive RMDs based on the beneficiary's stretching abilities noted above (thus it "sees through" to their life expectancy) yet protect the proceeds by holding the funds in trust. This is particularly useful when a minor is the beneficiary of a trust, since a minor cannot receive these distributions outright because they cannot individually own property. A see-through provision is often just one component of a trust, meaning it is often just one part of a larger document.
The following beneficiaries are the worst options when it comes to passing on your IRA:
Your Estate. Naming "my estate" as beneficiary to your IRA is the absolute worst thing you can do: You potentially lose creditor protection of the IRA, ensure the five-year withdrawal rule for your beneficiaries, increase court and accounting costs and increase the time and complexity of your probate estate.
Both A Person and a Non-Person. All beneficiaries to a trust must have a life expectancy (i.e. be human beings) or else the five-year rule for distributions applies. This mistake is usually made when an IRA owner leaves a large amount of the plan to family members and a small amount to a charity, such as 90% to children and 10% to a church. Remember that all the IRA funds must go to natural beneficiaries for stretch RMD purposes: Even leaving just 1% to a non-person invokes the five-year rule.
One way around this shortfall is to move some funds to a separate IRA and leave that IRA solely to charity. This will benefit all parties: The charity receives all the funds in its IRA tax-free, and your beneficiaries receive inherited IRAs with stretch RMD treatments available to them.
An Older Person. Leaving IRAs to an older individual is clearly bad for RMD purposes since the distributions are withdrawn at a higher rate. Of course, if you want to leave some funds to an older person and have no other assets to transfer, then RMD treatment might not really be a major concern for you. However, if there is a choice to transfer non-retirement assets instead, then those would be preferable.
A Spendthrift or Person with Creditor Issues. Spendthrift beneficiaries who receive IRA funds are disasters waiting to happen. Remember that every penny taken out of an IRA, inherited or otherwise, is taxable income. Therefore, a person in financial straits would not only deplete an inherited IRA quickly but would also have to pay income taxes for every withdrawal. In addition, in 2014, the Supreme Court decided an inherited IRA is fair game for creditors during bankruptcy judgments.
Instead of making your spendthrift relative the outright beneficiary of your IRA, consider naming a see-through trust and have another family member act as its trustee.
As is often the case in estate planning, knowing the nature of the asset itself is usually not enough: You should know the future nature of the asset and the individual who shall be receiving it.
At Tacoma Elder Care we help you understand the importance of estate planning, paying for long term care without going broke, asset protection, and life planning.
Having a life care plan is essential in protecting you or your loved ones’ future!
Consider attending one of our FREE Workshops to begin planning today! Contact us to register or to schedule your FREE consultation.