While pensions are no longer offered by employers as widely as they once were, they still can factor significantly in some Americans’ retirement income.
A small percentage of older Americans can claim income from Social Security, a defined benefit pension plan funded entirely by their employers, and a defined contribution plan that they’ve contributed to themselves, like a 401(k) or an IRA. Retirement income from these three sources is considered ideal for retirement security, yet only an estimated 7% of Americans fall into this category.
An even smaller group – sometimes called the “2% Club” – have the benefit of these three sources, and they’ve saved a nest egg of $1 million or more.
For those who are enjoying this level of retirement security, extra planning can help maximize the fruits of their lifetime of hard work.
It’s Time to Spend, Gift, or Give
A reliable income from a pension and Social Security in retirement can mean that you don’t have to draw down your personal savings as quickly. However, with a sizable nest egg, you must make decisions about spending priorities and whether you prefer to enjoy your wealth now or leave a sizable estate to your loved ones.
First, you’ve earned the right to enjoy your retirement and spend your money in a way that enhances your lifestyle, whether it’s traveling, enjoying a vacation home, or investing in experiences that create wonderful memories. While money doesn’t always equate to happiness, retirees in higher household-asset brackets have reported greater satisfaction in retirement than their cohorts who have lower income. The time is now to put your money into action and check things off your bucket list.
If you still find yourself with a surplus of income and savings, giving to others may be a desirable option, either to reduce your exposure to future estate taxes or for other reasons. Many people enjoy gifting cash and assets while they can witness the recipient’s gratitude and enjoyment, rather than waiting to leave something of special value in a Will. In addition to giving outright cash gifts, gifts can take the form of contributions to 529 Plan accounts, IRAs, or Roth IRAs for children or grandchildren. Clients should also consider giving gifts through one or more trusts, since doing so can add benefits such as asset protection to the gifts. Grantor trusts are often used to receive gifts made in trust; they can be drafted with great flexibility, and they permit the trust’s creator to engage in a number of transactions with the trust without generating income taxes.
If your inclination is to leave a comfortable inheritance to your loved ones, there are estate planning tools like specific types of trusts that will help you achieve your desired outcomes, even if you have concerns over how your beneficiaries might manage a large sum of money.
Tax Planning Can Minimize Tax Liabilities
Income tax planning in conjunction with estate planning can help reduce, avoid, or defer future wealth transfer taxes, including gift, estate, and generation skipping transfer (GST) taxes. This can include finding ways to keep current and future income from being included on an annual income tax return. It can also include finding ways to reduce the recognition of taxable income in any particular year or shifting taxable income to lower-income taxpayer(s) while still allowing the family as a whole to enjoy the benefits of the income. For wealthier families and individuals, now may be a great time to explore wealth transfer strategies that make sense in the current economic environment.
- For many of our clients, GST planning is prudent. A client’s GST tax exemption may be used to help improve the benefits available to the client’s desired beneficiaries by making gifts or bequests to long term or dynasty trusts that will last for multiple generations and can keep the trust assets outside of the wealth transfer tax system for many, many years. Long-term and dynasty trusts offer many potential advantages over outright distributions to beneficiaries. For example, assets distributed outright to beneficiaries through a Will or revocable trust can be exposed to attack by a beneficiary’s creditors, including a beneficiary’s spouse in a divorce, and can be exposed to gift and estate taxes in the beneficiary’s own hands. However, assets left to a beneficiary in a GST-planning long-term trust can receive protection from such problems.
- Another way to draw down a sizable retirement savings balance is to give money to charities that have personal meaning. Charitable gift planning can help ensure that you control how your money is used and can reduce your income taxes as well as helping reduce the chance that estate taxes will take a bite out of your nest egg.
- Qualified charitable distributions (QCDs) can be made from a qualifying tax-deferred retirement account directly to a public charity or a private operating foundation. A QCD will not be included in the donor’s gross income, but it will count towards the donor’s required minimum distribution (RMD) for the year of the contribution. In many cases, the donor can take the full RMD as a QCD and still not recognize any of the distributed amount as income. There are specific rules that apply for a distribution to be a QCD. For example, the donor must be at least 70½ years old at the time of the distribution, and the QCD must be made from a traditional, rollover, or inherited IRA.
- Qualifying capital gain assets can also be contributed directly to a qualifying public charity. Qualifying capital gain assets can include stocks, bonds, other securities, real estate, and certain tangible personal property items like coin collections, jewelry, and artwork. We advise clients to look first at contributing marketable securities such as publicly traded stocks, bonds, or mutual funds; the next best kind of qualifying capital gain asset would be appreciated personal use or investment real estate, such as a home, second home, or lot. Contributions of qualifying capital gain assets can be made outright or to a charitable remainder trust (CRT).
The Metro Atlanta-based estate planning attorneys at Morgan & DiSalvo are highly experienced in navigating wealth transfer strategies, GST planning, and other complex tax planning opportunities for high-net-worth retirees. We would be pleased to schedule a consultation with you to discuss your unique needs and concerns. Please call (678) 720-0750 or email info@morgandisalvo.com.
