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Your Wealth's Purpose

Although “growth” and “performance” are normal expectations for an investment adviser, we believe that approach, although certainly important, should only ever be coupled with the word “purpose.” As Certified Financial Planners™ and fiduciaries for our clients, we are charged with going beyond investments, focusing as well on how to protect our clients’ assets, and help educate and advise on how to best transfer those assets at death, aligned with the client’s goals.


“I’m not rich, I do not need a Trust”

Your last name doesn’t need to be Kennedy or Rockefeller to reap the benefits of a basic Trust. Too often, well educated and successful people and families shrug-off the idea of creating a Trust because they believe it is a tool reserved for the “ultra-wealthy.” If your net worth is at least $100,000 (this includes retirement accounts, assets (such as your house), life insurance, etc.), you have the potential to benefit from a Trust.


The Probate Process

To better understand the potential benefits of a Trust, you must first know about the court administered Probate process. Probate is the mechanism created for the court to “settle” the assets and debts of the deceased person’s estate. The court works with the executor of the estate to gather all applicable information about the decedent’s estate so that it can pay any outstanding debts and distribute the estate’s remaining assets. Many people will simplify the benefits of a basic trust by saying it avoids the time, cost and uncertainty of the probate process. Probate provides an opportunity for anyone to contest your will and estate, including any third party such as a creditor. It allows for the court to hear and rule on any entity (including a family member) that thinks they deserve a portion of your estate differently than the way it is written in your will. Another big critique is lack of privacy. Everything that occurs in probate court is a matter of public record, including the value of your estate and the list of beneficiaries. Anyone can go to the county courthouse and access this information. Third, it can be a timely and costly process. Probate can take up to two years, and beneficiaries sometimes have to wait until that process is complete before they can access any assets. It can also cost between 5% to 7% of your estate.


The Benefits of a Basic Trust

A properly funded trust bypasses the probate process entirely, ensuring that your assets are distributed privately, efficiently and in the exact manner intended. Although it sounds morbid, a trust also allows you to control the disposition of your assets after death, commonly referred to as “making decisions from the grave.” Examples include adding age restrictions, limiting/specifying the amount, timing and/or purpose of distributions, and writing provisions for health and/or education expenses. You can also name a successor trustee, who not only takes care of your estate after you die, but also is empowered to manage the trust if you become unable to do so. It is important to note that all trusts are complex and varied. Different types of trusts are beneficial for different types of people/situations, each with unique advantages and disadvantages, which is why it is critical to thoroughly discuss your situation with your estate planning attorney before making any decisions.


Maximize your retirement distributions simply through the ordering of account types

Estate planning is certainly not limited to the creation of trusts and naming beneficiaries. There are plenty of other strategies you can use that will add value and benefit to you and your beneficiaries, all without you immediately “gifting” or ever changing your desired lifestyle. The first step is simple. When using your assets in retirement, use your after-tax money first. Preserve the tax benefits inherent in your retirement-type accounts as long as possible. Those taxable account assets have already been taxed by the IRS, and any growth or appreciation in those accounts is taxed in the year in which you receive income or gains from your investments. Retirement type accounts either defer or eliminate that tax consequence – and you want to take advantage of that until otherwise necessary. Regardless of if you know whether or not you want and/or plan to leave any assets to beneficiaries, it is best to use your after tax dollars first in most scenarios. If you do not foresee taking any distributions from your retirement type accounts, unless otherwise required by the IRS, there are two additional strategies that can really maximize the life and distributed amount of your accounts.


The Stretch IRA

A Stretch IRA allows you to pass your existing Traditional or rollover IRA assets to your spouse or younger beneficiary, and extend the life of the tax-deferred earnings growth on those assets. For those who don’t need to live on the assets in their existing traditional IRA or rollover IRA in retirement, “stretching” an IRA can prove to be a great tool to transfer wealth in a tax-advantaged way. The big necessity of pulling off the Stretch IRA strategy is ensuring you and your beneficiaries limit their distributions to the Required Minimum Distribution (RMD) over the entire life of the IRA.


Roth IRA as an Estate Planning Tool

Many investors are already aware of the lucrative tax benefits of a Roth IRA, yet most do not realize how equally beneficially it can be as an estate planning tool. Owning a Roth IRA eliminates the income tax owed on any future distributions to you or your beneficiaries. Another compelling feature is the IRS does not require the owner to take Required Minimum Distributions (RMDs), unlike the traditional IRA that forces the owner to start taking distributions at age 70 ½. In fact, you can also continue that benefit after you pass if your spouse is the beneficiary and he/she treats it as her own Roth IRA. Only until the assets pass to their non-spouse surviving beneficiary does the IRS stipulate when you have to take out the money (option of taking RMDs on the beneficiaries life expectancy or forced to liquidate the entire balance within 5 years). Let’s look at an example: A husband retires at age 65 and does not access any of his Roth IRA assets for retirement expenses. At the time of his passing at age 79, the wife inherits the Roth IRA and treats it as her own. From age 75 when she inherited the account until age 90, she too is thrifty and does not access any of those dollars. Their daughter receives the account at age 55 and elects to take distributions from the account over her IRS calculated life expectancy of 30 years. The account has now lived 14 years with the husband, 15 years with the wife, and 30 years with the daughter – with all earnings and distributions tax free. Actually, what the parents have done is created an incredibly low cost and tax free (non-insurance based) annuity for their daughter.

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