Retirement Plannning

Retirement planning refers to a life-long process of setting aside assets so that at an age you choose, you can live off of the assets rather than continue to work full-time. The actual age, assets and whether or not you choose to retire fully, step-back to a less active role, or work part-time is a personal choice but from an estate planning perspective, these are all viable and common options.

The notable events which factor into retirement planning are separated into those you can control:

  • The age you want to retire
  • The amount you put into retirement each year to reach your goals
  • What style of living you want to have
  • Whether you want to vacation or not

And the things you cannot control:

  • What the market is doing up to and including the age when you want to retire
  • Applicable laws concerning when you can take certain assets
  • What those assets are taxed at and in what tax brackets
  • Whether your health is in the condition you expected it to be at that time

Your estate plan should recognize and plan for the controllable events and the uncontrolled events equally with emphasis on the parts you can predict and control. Importantly, the estate plan should project that you will live long enough to enjoy retirement and that any estate plan has enough assets available to meet your retirement goals. An example of an estate plan which does not meet these criteria is one that is overly risk-averse, placing all emphasis on avoiding the nursing home without placing an emphasis on what might occur if you never go into the nursing home. Commonly, these estate plans place all of the assets into an irrevocable trust with little or no regard for whether that plan actually 'works'.

A healthy estate plan is one that allows for flexibility to market conditions, contemplation of changing family and life circumstances and the ability to change things if necessary to meet the goals. A common issue with retirement planning is getting 'tunnel vision' from current market conditions. During the 2007-2012 financial crisis, many attorneys had a first-hand look at what happens when there are inadequate investment resources to properly fund retirements. In the year 2020, few estate planners are taking into account that their clients may be in a similar situation and advise the use of irrevocable asset planning to the detriment of the possibility of their client needing that money not protected from their creditors but for themselves.

It is possible to both protect against creditors like the nursing home and leave enough 'outside' of the irrevocable trust to balance these needs. A key part of finding what is the correct balance is ensuring that healthcare providers, financial advisors and planners and beneficiary interests are all taken into account to develop a full picture of the needs and desires for your retirement planning.

Additionally, if you already have estate planning which was done prior to January 1, 2020 and you set up a retirement trust or a trust which may contain retirement assets after your passing, the trust language should be updated to reflect the changes made in the SECURE Act which went into effect January 1, 2020. One of the major changes in the SECURE Act was the elimination of the 'lifetime stretch'. Prior to January 1, 2020 a retirement account which was inherited to a non-spouse beneficiary could be held in an inherited IRA account, with the only requirement that each year the beneficiary take a required minimum distribution (RMD) until their actuarial assumed date of death. This allowed for the account to continue to accumulate in value, tax-deferred, for beneficiaries. It also provided an opportunity for estate planners to protect those assets long-term in trust from creditors, former spouses and others.

One of the issues with these pre-SECURE Act trusts is that some require that RMDs be paid out yearly, as they contemplated that RMDs were required for the lifetime stretch. With there no longer being a lifetime stretch, the most amount of time that an Inherited IRA can remain in trust is ten years. Language in pre-SECURE Act trusts may lead a trustee to believe that the entire asset must be held in trust for the full ten years and in year ten all assets get distributed at once. This not only may run contrary to the intent of the trustor who set up the trust but might also mean that the distribution is taxed at the highest tax bracket. This is a total failure of the document and one that could have been avoided if the document was re-written.

With the passage of the SECURE Act, it is now necessary to re-visit and re-write existing estate planning documents and a reminder that estate planning is an ongoing process so long as you are living, just like your retirement planning. With changes in the law of how assets can be transferred, what they will be taxed at, and what and who can get access to those assets, be it your beneficiaries or your creditors, there has never been a better time to update, create or re-visit your estate plan with our team.