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How do I include retirement assets in my estate plan?

by | May 31, 2021 | Estate Planning

An estate plan can do more than transfer assets, it can also reduce the tax bill. The first step is to figure out what you need for retirement. Set aside enough to cover anticipated expenses with some extra in case of surprise bills. This should include everything from medical and long-term care to travel and leisure.

Next, as noted in a recent piece in Kiplinger, review retirement income. This is likely to include pensions, annuities, Social Security, and investments as well as IRAs and other qualified plans. Finally, take steps to pass surplus assets wisely.

What does it mean to pass surplus assets wisely?

It is important to know how the Internal Revenue Service (IRS) taxes these assets. Various legal tools are available to give you more control and increase the amount you leave to your loved ones instead of giving your assets to the government in the form of a tax bill. Some things to consider include:

  • Step-up tax basis. When an owner sells or transfers certain assets, the IRS taxes them. This tax is based on the amount the asset appreciated in value from the initial purchase to the time of sale or transfer. Stocks are a common example. If you transfer these assets wisely, they can qualify for a step-up tax basis. This means the IRS values the asset at the amount it was worth when you make the transfer instead of the entire amount it grew. This can result in a huge tax savings.
  • Charity. IRAs can also result in a tax bill. However, in most cases there is an exception: charities. The government generally allows the transfer of these assets to charities tax-free. If you plan to donate to charity anyway, this can be an advantageous way to do so while freeing up other assets for other beneficiaries.

It is important to point out that the laws that govern the taxation of these assets often changes. As a result, it is best to double check that the right rules are applied before making changes to or setting up an estate plan.

Is there anything else I should know about estate planning and retirement assets?

In addition to these steps, it is also important to review beneficiary designations. These are used to transfer a variety of accounts including savings accounts and life insurance policies. It is also important to review these documents on a regular basis. Changes to tax law or family structure can result in a need to update the plan.