Estate Planning: More Than Just Preparing for Retirement

As Vanguard’s “How America Saves 2023” report sheds light on the importance of saving for retirement, a dimension often overlooked in such conversations is the eventual disposition of these funds. For individuals diligently working to amass a retirement nest egg, the question isn't just about the size of the savings, but also about who inherits it. Your retirement savings have a dual role - they secure your future and potentially become a part of your legacy.

Retirement Savings: Where Do They Go After You?

The typical retirement planning focuses on the accumulation phase, monitoring market fluctuations, and trying to hit savings benchmarks, such as having one year's salary saved by age 30, as Fidelity recommends. Yet, few stop to consider the distribution phase: where the money goes once they pass away.

1. Minor Beneficiaries:

If your 401(k) is inherited by minors, it could pose a slew of problems. Minors can't legally control inherited assets until they reach the age of majority. This means a guardian or conservator might have to be appointed to manage the funds, leading to potential complications and unnecessary legal fees. And a guardianship terminates when the beneficiary becomes an adult (at age 18) placing substantial wealth in the hands of a beneficiary who may be immature and impulsive.

2. Beneficiaries on Social Security or with Disabilities:

Leaving large sums of money to beneficiaries on social security or those with disabilities can disrupt their government benefits. Special needs trusts or careful structuring of the inheritance might be needed to ensure that your generosity doesn’t inadvertently make life harder for them.

Strategic Estate Planning:

Understanding your beneficiaries’ situations helps tailor your estate plan to suit their unique needs. Here are some steps to ensure your 401(k) benefits your loved ones in the best possible way:

• Wills & Trusts: While your 401(k) and other retirement accounts will typically pass to your chosen beneficiary outside of your will, having a will or trust is essential. It provides a roadmap for distributing other assets and offers a backup plan should your primary beneficiary predecease you. While a will ensures that assets must pass through the Probate process, a properly funded trust avoids Probate and keeps the distribution private and within your family.
• Review Beneficiaries Regularly: Life is unpredictable. Marriages, births, deaths, and personal fallouts can change your ideal plan for asset distribution. Periodically reviewing and updating your beneficiaries ensures that your assets go to the intended people.
• Consider a Trust as a Beneficiary: In specific scenarios, naming a trust as a beneficiary for your 401(k) can be beneficial, especially if you're worried about asset protection, minors inheriting, or beneficiaries with special needs.
• Seek Professional Advice: Always consult with an estate planning attorney to understand the intricacies and potential tax implications of your decisions.

Looking Beyond Retirement: A Comprehensive Approach

While the “4 percent rule” or estimating annual expenses might give you an idea of what you'll need in retirement, estate planning paints the full financial picture. It's not just about how much you need to retire; it's also about ensuring that after you're gone, your hard-earned savings continue to benefit and support your loved ones in the ways you intended.

Planning for the future isn't just about surviving; it's about leaving a lasting legacy.

Photo credit: The Aero Advisor