By Steven Merkel

As you accumulate items, investments and various insurance policies over your lifetime, they can tend to carry a lot of paperwork and can sometimes be overlooked during the tedious hours of everyday life. Life-changing events such as marriage, divorce or the birth of a child quite often trigger a reason for a financial review. It might be something as simple as a beneficiary change or something as time consuming as setting up a trust and having to retitle property. In any case, this chapter is designed to get you thinking about simplifying your life and taking another look at those often forgotten financial documents.

Insurance Review
Various periods throughout your life will require different levels and types of insurance to protect you and your family. Life insurance you purchased while you were young might have been purchased to cover a mortgage obligation, whereas life insurance in retirement might be used to pay potential estate taxes.

Common insurance policies used in estate planning include permanent life insurance, long-term care and life settlements. Life settlements are conducted when a policy owner sells the contract for an immediate lump sum payout, either with the insurance company or through a private institution or individual. If the policy is sold to a new owner, the buying party pays the premium and is thus entitled to the death benefit payout when the insured individual dies.

Long-term care insurance is commonly purchased to protect assets and provide nursing care if you are unable to care for yourself. The insurance itself can carry a costly annual premium of around $2,200, but considering annual care at a nursing facility can cost $60,000 to $70,000, it can actually be a good asset protector and will provide peace of mind for the elderly.

Retirement Plan Consolidation
Throughout your lifetime it's likely that you've changed jobs at some point. If you had a 401(k) plan with your former employer, you might have decided to let your the funds in your plan grow over time. Under ERISA law, your contributions to your plan are rightfully yours, but you should be aware that as more time passes it could become more time consuming to roll over the assets. It's always a good idea to complete an IRA rollover while you're still familiar with the plan administrator and the paperwork process of the plan.

To make things easier for you and your estate administrators, you should consider consolidating your retirement plan accounts. Think about combining your IRA accounts at multiple locations into one IRA. If you have multiple 401(k) or 403(b) accounts, you should also consider consolidating them into your IRA. This not only reduces the amount of paperwork for you but it usually improves your investment options, makes it easier to change beneficiary designations and reduces the amount of work for your estate administrator. (For insight on how to safely move plan assets, see Tips For Moving Retirement Plan Assets, and Moving Retirement Plan Assets: How To Avoid Mistakes.)

Beneficiary Review and Update
Investment accounts, annuities, life insurance, retirement plans and other plans where you have the option to list a "beneficiary" are passed at your death by what is known as passing by "contract". This is in contrast to what is known as the probate or court election process. In almost all cases, a beneficiary selection will take precedent over different selection methods, so it is very important that your beneficiary listings are correct.

If you've had a life-changing event recently, such as marriage, divorce, the birth of a child or the death of a close relative, you should review the beneficiaries of your accounts, pensions and insurance and annuity plans. Even if you didn't have a life-changing event, it's good practice to get in the habit of reviewing all of your beneficiary selections at least once every two years. If you've recently updated your will or established trust documents, it's equally important that you check and modify your beneficiary designations in accordance with your new will and trust terms.

Transfer-on-Death Feature
Due to the popularity of beneficiary designations, many financial institutions have now developed their own forms and procedures to allow customers to name beneficiary designations to accounts such as checking and savings accounts, joint and individual brokerage accounts and retirement accounts.

This process of naming a beneficiary to one of the above account types is known as "transfer-on-death" or "TOD" selection. Another common variation is called "payable-on-death" or "POD." It's a simple process that requires just a brief meeting with your financial institution to obtain the forms to make the election. Once you make a TOD election, you can change it at any time, but make sure it is correct, because it will also take precedence over other documents.

Avoiding Potential Estate Taxes
The estate tax is a voluntary tax in the true aspect of the word. While the IRS views it as a mandatory tax if you exceed the exclusion amount base, it's actually a tax that anyone can avoid if their estate is set up properly. The federal estate exclusion amount for 2011 is $5 million, which means any estate exceeding that amount could be taxed at the federal maximum rate of 35%. Between 2001 and 2011, the exclusion amount has typically increased, while the applied tax rate has generally been decreasing.

In order to prevent your heirs from being hit with federal estate taxes, you can pursue several options, including:

  • Implementing a more even asset titling distribution with your spouse and other heirs
  • Gifting assets to children or grandchildren
  • Gifting assets to your favorite charities
  • Seeking the support of life insurance agents who provide estate tax planning services
  • Removing assets from your estate by setting up irrevocable trusts
You should also know about the "marital exemption", which allows all property to pass federal-estate-tax-free to your spouse at the time of your death. While this is a nice no-tax feature for the surviving spouse, you should be careful not to overload your spouse with all of your assets or you could put the person in a position where substantial estate taxes will be inevitable at their death. (Changes to federal legislation will affect how your assets are treated once you're gone - be prepared. To learn more, read Get Ready For The Estate Tax Phase-Out.)

Gifting
An often under-used strategy for avoiding estate taxes is gifting. If your goals is to reduce the size of the assets in your estate prior to your death, an effective way of doing this is to employ various gifting strategies to charities, children, grandchildren, caretakers and other relatives.

Each year, the IRS allows each individual to gift money to multiple individuals without having to pay any type of gift tax. In 2010 and 2011, the annual gifting amount was $13,000; this amount is indexed annually for inflation. Therefore, a married couple in 2011 with two children and four grandchildren could gift $26,000 to each child and grandchild (total of $156,000) to help reduce the value of their estate. This strategy can be used each year to gift to any individual in an amount of your choice as long as you stay under the maximum gift amount set per person for each year and the $1 million lifetime gifting cap set by the IRS code. Since tax regulations are regularly changing, ensure that you discuss your potential alternatives with a tax expert. (For more insight, read Gifting Your Retirement Assets To Charity.)

Using Tax-Free Opportunities
There are several types of accounts that parents and grandparents can use for tax benefits and investing for the future of their children and grandchildren. One such account is the 529 College Savings Plan offered through most mutual fund companies and discount brokerage firms. These plans are a great place for grandparents and parents to invest the annual gifting amount to their children or grandchildren. If the funds from a 529 plan are used for qualified education expenses, the investment growth is free from tax. The beneficiary of the 529 account can also be changed from generation to generation should the original beneficiary fail to use all the funds in the account or elect not to further their education after high school.

Another investment concept for tax-free growth and withdrawals is the Roth IRA. The Roth IRA is by far the best retirement savings vehicle for younger individuals, because in some cases, the funds can be used for first-time home purchases and education expenses. You will need to make sure that a Roth IRA account gets set up in your beneficiary's name (or under a custodian if the person is a minor) and be careful not to exceed the annual contribution limits. Not only does it help you to remove assets from your estate, but it's also a great way to introduce minors to saving money and financial products. (For more insight, see An Introduction To Roth IRAs.)

Next: Advanced Estate Planning: Final Arrangements »



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