Make Sure to Do This, No Matter What Congress Does to the Estate Tax

Be careful before you designate a beneficiary.

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Some people have put estate planning on hold until Congress decides what to do about this political hot potato at the end of this year. The current estate tax exemption of $5.12 million will drop back to $1 million on January 1, 2013 unless Congress acts to extend the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. While it is widely expected that nothing will be done until after the November election, this should not mean that all of your estate planning decisions can be put on hold. One of the most common mistakes that people make is failing to name a designated beneficiary on their retirement accounts. You should name both primary and contingent beneficiaries to assure your heirs have the maximum flexibility when distributing money in a retirement account.

But beware! While naming a beneficiary is easy, it should not be done without taking into consideration the impact it may have on your overall estate plan. The beneficiary designation takes the value of that account out of your will and can wreck the intent of your estate planning goals. While your will might designate that 10% of your estate goes to charities, the value of your retirement accounts would not be considered part of the total once a beneficiary is named. More importantly, from a tax perspective, it would be better to give assets to charities from your IRA. Careful thought must be given to the overall estate when dividing it by percentages and including beneficiary designations.

We generally advise charitable-minded clients to designate their preferred charity as a beneficiary of their retirement account. For example, a client with a $1 million estate, of which half is in retirement accounts, wants to leave 10% to charities. We would advise they designate the charities as a 20% beneficiary. The balance of the retirement account and all of the non-retirement assets are then left to their heirs. Remember that due to changes in asset growth, this is not a once-and-done decision. The value of the estate and retirement accounts needs to be monitored annually and the percentages adjusted to maintain the desired outcome. However difficult, the income tax savings is significant and worth the additional effort.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

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2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437