Estate Planning is Important to Everyone According to Jeremy Keating of Capital Income Advisors: Safeguarding Inheritance from Taxes and Expenses

SAN DIEGO, Calif., Sept. 9, 2016- In the latest installment of his "The Retirement Formula: The Retiree's Guide to What You Don't Know" retirement advisory series, San Diego financial advisor Jeremy Keating of Capital Income Advisors (CIA) offers straight talk for retirees on estate planning strategies for all retirees-not just the 1 percent.

While many pre-retirees and retirees are under the mistaken impression that estate planning is only for the very wealthy, it is absolutely necessary for everyone. Estate planning for the majority of people means managing the step-up in basis on inherited assets and income taxes.

The step-up in basis refers to the way assets such as investment property and second homes are valued and taxed after a death, and how taxes are levied against traditional IRAs and 401(k)s inherited by someone other than a spouse. In addition, estate planning requires more than just looking at the federal estate tax exemption-state estate taxes are another consideration, and may kick in once assets exceed $675,000 per person, a number that is not difficult to reach for retirees who have been saving for decades.

Sorting through the complexities of estate planning is best done with a retirement advisor, especially when it comes to abstruse issues like the step-up basis for property. A knowledgeable retirement advisor can also help with drawing up a will, naming beneficiaries, setting up a trust, converting traditional retirement accounts to Roth accounts, and gifting money to heirs while the retiree is still alive.

"Drawing up a will is the obvious first step," Keating says. "But you may be surprised how many people don't bother to draft a will."

In fact, a 2014 survey by Rocket Lawyer found that 64 percent of Americans never bother to draft a will, and another 17 percent report that they do not believe they need one.

However, without a will, one's estate must be divided in probate court, a process that can leave beneficiaries paying a big bill.

"If one's estate is not properly constructed, the only winner is the attorney," Keating says. "Drafting a will is critical."

However, not all assets are disbursed through a will. Some accounts, such as retirement funds and life insurance policies, allow their owners to name beneficiaries for that particular asset. Without a named beneficiary, these accounts will go to probate court, where a judge will decide who gets the money. An advisor can help review beneficiary information after major life changes, such as the birth of children, marriage or divorce, and retirement.
For retirees with a sizeable estate, or those who are worried that their heirs won't utilize their money wisely, setting up a trust and appointing a trustee to distribute their wealth may be a god solution. Trusts can be set up in several ways, but irrevocable, or permanent trusts may provide the most tax benefits.

When money is placed in an irrevocable trust, the assets no longer belong to the beneficiary, but instead belong to the trust itself. As a result, the money cannot be subject to estate taxes. While the trustee controls the trust's funds, the retiree can create stipulations on its use, and money can be distributed from a trust even while the retiree is alive.

A trust is taxed on its income from dividends, interest and other sources, and tax rates for trusts can be higher for individuals. For that reason, it may be beneficial for people to pay expenses from a trust whenever possible. For example, for a retiree who is planning to help a child with a down payment on a house, it may make more sense to transfer money from a trust rather than from a different account. Using money from a trust causes income to be taxed at the beneficiary's potentially lower tax rate, instead of the trust's tax rate.

Traditional IRAs and 401(k)s are subject to income tax if passed to a beneficiary who is not a spouse, something Keating says many retirees don't realize. Currently, those taxes can be spread over the life of the beneficiary, but that could change. 

"Politicians are talking about potentially forcing people to take that money over a shorter period," Keating says. Some proposals call for IRAs to be cashed out and fully taxed in as little as five years, instead of stretching payments-and taxes-over the beneficiary's expected lifespan."

Retirees can avoid leaving their beneficiaries with that tax bill by gradually converting traditional accounts to Roth accounts that have tax-free distributions. A retirement advisor can help clients make a series of conversions over several years, and since the amount converted will be taxable on the beneficiary's income taxes, the goal is to limit each year's conversion so it doesn't push them into a higher tax bracket. 

According to Keating, one of the best ways retirees can ensure their money stays in the family is to simply give it to their heirs while he or she is alive. The IRS allows individuals to give up to $14,000 per person per year in gifts. For those worried about their estate being taxable, those gifts can bring its value down, and the money is also tax-free for recipients.

Another way to reduce one's estate value is through charitable donations. Setting up a donor-advised fund offers an immediate tax deduction for money deposited in the fund, and then allows the donor to make charitable grants over time.

"Complex strategies and ever-changing tax codes can make estate planning seem daunting, "Keating says. "But ignoring it can be a costly mistake for one's heirs, even for retirees who do not have a lot of money in the bank.

"Estate planning is important to everyone," he says.

To learn more, visit the Capital Income Advisors website, email jkeating@capitalincomeadvisors.com, or call (800) 875-1986.

About Capital Income Advisors:

The primary focus at Capital Income Advisors is retirement planning. Jeremy Keating and the CIA team of advisors treat their clients as they would treat members of their own family. CIA strives to help create sound retirement income strategies for men and women in or nearing retirement, thereby instilling confidence that their retirement income will last as long as they do.

Capital Income Advisors serve all of Northern and Southern California, all across Texas including, Houston, Dallas, Austin, San Antonio, Midland, and the New York Tri State area. CIA offers retirement income strategies, wealth accumulation, asset protection, annuities, life insurance, tax minimization strategies, long-term care, IRA and 401(k) rollovers.

Securities offered through Securities America, Inc., Member FINRA/SIPC. Advisory services offered through Securities America Advisors, Inc. and Arbor Point Advisors LLC. Capital Income Advisors, Securities America, Inc., and Arbor Point Advisors LLC are separate entities. Securities America and its representatives do not provide tax or legal advice; therefore it is important to coordinate with your tax or legal advisor regarding your specific situation.

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