Estate Planning and Administration
The Fourth Pillar - Sound Financial Planning
Effective in January of 2001 for IRA’s and January of 2002 for 401(k)’s, the IRS table commonly known as The Uniform Table applies to all such qualified plan withdrawals. Account holders are now treated as if they have a beneficiary ten years younger than them and they are only required to take their minimum distributions based on the combined life expectancy of themselves and their fictitious beneficiary. Many account holders now take approximately forty percent less than was required under the former minimum distribution rules.
Who are these new rules good for? Actually, they are good for everyone. Since everyone gets more deferral, they have less current income taxes to pay. This means they will have more for later on if they need it and, if they don’t need it, they’ll have more to leave to their heirs (which can then be stretched out, as we’ll see shortly). The new rules can’t hurt you, since one can always take out more than the minimum by simply paying the additional taxes.
The real planning opportunities occur on the distribution end, at the death of the account holder. This is known as the stretch-out IRA and is best explained by way of an example. Let’s say a surviving parent, in this case the mother, dies leaving an IRA of $300,000 to her daughter, age 42. The daughter is not permitted to roll the IRA over and make it her own, and is required to take a distribution by December 31st of the year after her mother died. Nevertheless, according to IRS life expectancy tables, the daughter has a remaining life expectancy of forty years so that, if she elects to take the distribution over her lifetime (by keeping the IRA in her late mother’s name, changing the Social Security number on the account to her own and listing herself as a beneficiary), she only has to take a distribution of one fortieth of the account. The next year she has to take one thirty-ninth, then one thirty-eighth, etc. Assuming she earns a conservative six percent rate of return on the declining balance, the IRA will still multiply over four times, to greater than $1,200,000 in total distributions over the daughter’s lifetime. Tax commentators have called the stretch-out one of the biggest tax breaks in the Internal Revenue Code. You would think that everyone would take advantage of a tremendous benefit such as this but many people fail to since they are unaware of it. Unfortunately, when the general practice lawyer who drew the will settles the estate, the family is unlikely to receive this valuable, IRA tax planning advice.
The Four Pillars of Estate and Financial Planning may be summarized as follows (1) Trust Planning to reduce delays and expenses and keep control in the family in the event of death or disability (2) Long-Term Care Planning to finance home care and to protect assets if nursing home care is required (3) Sound Financial Planning to minimize the risk of investment losses and diversify into fixed, guaranteed assets, and (4) IRA and 401(k) Planning to avoid current taxation and maximize deferral.
For the majority of retirees, planning based on The Four Pillars should make them feel secure that, no matter what happens to come their way, they have an effective estate and financial plan to meet the challenges, provided, of course, that the client’s needs are reviewed by their planning professionals on a regular basis.
-View an Overview
-View the First Pillar
-View the Second Pillar
-View the Third Pillar
-View the Fourth Pillar
For more information on how we can help you with an estate plan, you may request our FREE Estate Planning Guide, come to one of our FREE Seminars or contact us at our offices.