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With This Estate Plan, You May Take My Coat

By September 14, 2011No Comments

Individuals sometimes ask me, why, if they are not millionaires, do they need an estate plan, ending with something akin to, “I’m not rich; I don’t have anything.”  My response is usually the typical T&E (Trusts and Estates) mantra, “You don’t need to be ‘rich” to need an estate plan.” Furthermore, the converse is generally true – the smaller estates need equal, if not more, protection. Moreover, non-millionaire employees are “richer” than they think. Like an IRS person once said, “Stop thinking it’s your money.” So, if you’ve been steadily employed, don’t think that the federal government sees you as a pauper, irrespective of your current financial woes.

Acknowledging that these are horrendous economic times citizens worldwide, I must say that millions are also fortunate. They are employed; have retirement or profit-sharing plans; have life insurance; and they have a house, which may be worth less than what they paid for but they still own a home.  My “Who Killed Kenny” winter down coat is worth less than what was paid for it but, considering January in Chicago, it would take a permanent move to my favorite desert oasis to get me to sell that coat.

Pardon my slight digression, though I think you got the point: It may feel like you’re managing paycheck-to-paycheck, but even so, you may find solace in the midst of this economic maelstrom.

Consider your retirement plan. It may have taken a beating over the summer, like most of our financial accounts. However, you may still be able to use your plan to your advantage in the long-term and/or to your loved ones advantage.

The 2 most popular retirement accounts are 401(k)s and Individual Retirement Accounts (IRAs).  A 401(k) is typically a qualified plan where your employer matches your contributions.  Teachers often have 403(b) accounts that operate in basically the same way as a 401(k).

  • While 401(k) contributions are tax deductible, generally any income earned is taxed on withdrawal. Additionally, once you reach 70 ½, you must make a required minimum distribution (RMD).  With a 401(k), your spouse is presumed to be the beneficiary, so if you designate other beneficiaries in your will, your spouse must waive their right to the distribution in order for the other beneficiaries to take.  Also, because 401(k) plans are governed by federal law, civil union partners cannot be designated spousal beneficiaries of 401(k) plans.
  • IRAs provide a little more flexibility than 401(k)s, because there is no RMD at any age and withdrawals from Roth IRAs are not taxed. However, the maximum contribution is significantly lower than that of a 401(k) and an IRA account may not even be available if you also have a 401(k). Still, unlike a 401(k), with an IRA, there is no presumption of a spousal beneficiary, so who you names as beneficiary, even if it is your civil union partner or same-gender spouse, is the beneficiary. If that person passes away, then the beneficiary will be the person named next or if there’s no contingent, the distribution will follow the state’s testamentary code. Equally important, you can provide for your grandchildren by creating IRAs for them, so that the distribution that would be made to your children is instead rolled over into accounts for your grandchildren.

So before you think you’re “not rich,” consider your retirement plan. Basic it may be, but if properly implemented, it could provide you with comfort like my “Who Killed Kenny” coat on those cold, January, Chicago days.

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