For retirees that wish to truly enjoy their retirement but still want to provide a legacy, setting priorities and finding a balance will be key. Most would agree that ensuring one's stability in retirement should be the top priority. The first step to ensuring you can enjoy retirement is to make sure you have enough money saved in the right type of accounts to make this happen.
If we assume you have done a thorough job of retirement planning and you do, in fact, have enough saved to enjoy retirement without the haunting fear of outliving your assets, you are on the right path to providing a legacy. I would first recommend analyzing the assets you currently own and the tax impact of those assets. For example, if you are in a relatively low tax bracket and your children are in relatively high tax brackets, it may make sense to spend your IRA assets first and leave Roth or Non-Qualified assets to your children. This may not impact the total dollar amount your children inherit but it may be a way of maximizing the "after-tax" value of their inheritance.
In terms of legacy, planning is one of the most important things you can do to ensure the right assets have the proper beneficiaries. Many investors wish to leave a legacy by impacting not only their children but also charitable and/or religious organizations. This provides another opportunity for tax planning. Since charitable organizations do not pay taxes, it is prudent to leave pre-tax assets such as IRAs and 401ks to these organizations and to leave after-tax or tax-free assets to individual beneficiaries.
Here’s an example: Jon has a $500,000 IRA and a $500,000 life insurance policy (the death benefit is tax-free on life insurance). Jon wishes to leave an inheritance to his son, Little Jon, and a legacy to his church, "First Church." If Jon leaves the IRA to First Church and the life insurance to Little Jon, the church will receive the $500k IRA tax-free and Little Jon will receive the $500k life insurance benefit tax-free. On the other hand, if Jon made his son beneficiary of the IRA, Little Jon would be required to pay taxes on his inheritance. If we assume Little Jon is in the 32% federal tax bracket, he could end up paying $160,000 in federal taxes on his inheritance plus potential state taxes! Meanwhile, First Church is paying 0% tax on an already tax-free asset (the life insurance).
This brings me to one of the most powerful legacy planning tools and that is: life insurance. Due to the facts that life insurance as a death benefit is tax-free and that large dollar amounts can be purchased for modest premiums, life insurance is an incredible legacy planning tool. If providing a legacy is high on your priority list, a policy that is intended to replace spent retirement assets may work in your plan; particularly policies such as second to die policies for married couples. This is a way of providing a legacy at a more affordable premium than traditional life insurance policies.
Ultimately, if providing a legacy is a priority to you then it's merely a matter of finding balance between retirement lifestyle and ensuring that legacy. Once you find a balance utilizing the right planning strategies and tools, you can help maximize your legacy and minimize Uncle Sam's share of the pie.
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This article is written by Brice Carter.