To retire comfortably, you need to save and invest regularly.
For example, you need to contribute as much as you can afford to your 401(k) and IRA. But once you retire, you’ll need to switch gears somewhat and move from wealth-accumulation strategies to wealth-transfer strategies.
An effective wealth-transfer strategy can help you accomplish a variety of goals, such as distributing your assets the way you choose, avoiding probate and reducing estate taxes.
And you can explore a variety of wealth-transfer tools, including the following:
• Gifting — You can give up to $12,000 per year to as many people as you’d like without incurring gift taxes.
And if you want to help a child or grandchild pay for college through a Section 529 college savings plan, you can bunch the $12,000 limit over five years to make one $60,000 gift, or one $120,000 gift if it comes from you and your spouse. (If you group the contributions together this way, you won’t be able to make another $12,000 gift to that same child or grandchild for the next five years.)
• Will — A will is simply a plan for distributing your assets to family members and other beneficiaries.
If you were to die intestate (without a will), state laws would determine how your assets should be distributed — and there’s no guarantee that the end result would be what you would have chosen.
• Beneficiary designations — Many of your financial assets, including annuities, life insurance, IRAs and 401(k) plans, allow you to name a beneficiary.
Upon your death, your beneficiary will automatically receive these assets, avoiding the sometimes time-consuming, expensive (and public) process of probate.
Because beneficiary designations supersede any instructions you might put in a will or living trust, it’s essential that you periodically review these designations to make sure they reflect your current wishes.
• Trusts — Different trusts can help you accomplish a variety of wealth-transfer and estate-planning goals.
For example, a revocable living trust can help you leave assets to your heirs without going through probate.
You can also structure the trust to stagger payments over a number of years, rather than all at once, or include other restrictions or incentives.
An irrevocable life insurance trust allows you to keep the death benefit of your life insurance policy outside your estate, so the insurance proceeds won’t increase your estate tax liability. And a charitable remainder trust allows you to transfer an appreciated asset — such as a stock or piece of real estate — to a charitable trust, thereby allowing you to defer or even avoid capital gains taxes on the sale of the asset.
Plus, the trust can provide you with a lifetime income stream while the remainder of the assets can be distributed to your favorite charities.
As you can see, trusts are versatile instruments, but they are also complex.
Consequently, you’ll need to consult with your tax and legal advisers regarding your particular situation.
In fact, all the wealth-transfer techniques we’ve looked at will require some careful thought and preparation on your part — so don’t wait too long before getting started.
Time has a way of sneaking up on all of us, but it’s especially sneaky when we’re unprepared.
Scott Flake is a financial adviser with Edward Jones. He hosts a biweekly informal investment discussion on the second and fourth Tuesdays of each month at 10 a.m. at the Good Samaritan Society Majestic Rim, 310 E. Tyler Parkway. For more information, call (928) 468-1470.