10 Steps to Better Retirement and Estate Planning

Sometimes people will set up revocable trusts, transfer assets, and otherwise tie themselves in knots trying to micromanage the distribution of their estates, he says. These activities might be legitimate in their own right, but they shouldn’t be undertaken because of the specter of probate.

You may know that the federal estate tax exemption is $2 million per spouse. But if one spouse dies before the other and the surviving one ends up with all $4 million in his or her possession, only half of the money will be protected when the second person dies.

“You have to have the right kind of will or trust. Whoever dies first, $2 million of their assets should go into a trust,” Olson says. “The surviving spouse can take income from that trust, and the assets will stay in the trust until the second spouse dies. Then it passes tax-free to their heirs.”

Ringham adds that the estate tax code can change, and the way it is written confuses many people. “It’s not only a matter of how do you not lose that credit at first passing, but also that the credit amount is changing,” he says. “It’s $2 million now at the federal level, but it goes up to $3.5 million in 2009. Then estate tax is theoretically repealed in 2010, and then it comes back under the current law at $1 million in 2011.” Ringham adds, “You should update your wills and your trusts irrespective of what the estate tax laws are doing—but understand that they should be written to provide as much flexibility as possible in case they need to be changed.”

Most people are shocked to find that, if you die with a lot of money in your IRA or 401(k), the money therein is subject to estate and ordinary income taxes. Your heirs can be left with just pennies on the dollar. Better to plan for the disbursement of the money so it can be used to maximum effect.

“A lot of people who started investing in 401(k)s in the early ’80s are pretty shocked to see how large those balances have gotten,” Clark says. “It’s not uncommon at all to see a couple million dollars in someone’s 401(k), which is basically an afterthought to what they have been making all along. If something inadvertently happens to you and there’s a distribution, the tax on them can be very unwieldy.”

Clark suggests that for clients who want to make charitable gifts after death, retirement accounts may be an attractive option for those gifts because the tax implications are less harsh than if the remaining funds were distributed outright, which may subject them to income and estate taxes.