When you secure your retirement and have been diligent in your retirement planning, you’ll quickly find that your concerns may grow. One of the most common questions we get from others is: how to leave money to the next generation.
Our clients have a lot to say about leaving money to the next generation, including:
- I’ve given enough to the next generation.
- My goal is to enjoy my retirement. The kids can have what’s leftover.
But what happens if you’ve done everything that you wanted to do? You’ve traveled, purchased a vacation home and you still have more money than you need. Chances are that you’ll pass away with money that is left for your heirs.
You can use smart retirement planning to make sure that anything left does go to the next generation.
Account Types That You Can Setup
A lot of accounts can be setup so that the remaining funds can be passed down responsibly, including:
- Brokerage accounts
- Life insurance
You may even have private property, such as a home or other belongings that you want to pass down to either the estate or a specific heir.
How We Would Handle These Accounts
When you enter into your retirement, you’re likely going to have multiple accounts that you’ve put money into, with the most common being an IRA and 401(k). Accounts always have their own set of issues:
These haven’t had taxes deducted from them yet, so you need a withdrawal plan in place. But these accounts also make it easy to add a beneficiary to them. You can often log into your account, such as your Charles Schwab account, and add the beneficiary online.
We’ve had a lot of clients that have forgotten about these accounts completely.
If you’re juggling multiple accounts, it’s easy to forget one that may have a few thousand dollars tucked away in it. There’s also the risk that you have already added a beneficiary that you may no longer want to leave money to. For example, your ex may have been the beneficiary, and if still listed as such, he or she will be the beneficiary even if that isn’t your wish.
We recommend that you secure your retirement by consolidating these accounts so that all of your money is in one place, and it’s much easier for you to manage these accounts.
It’s important to note that 401(k) accounts can be consolidated down into an IRA if you’re no longer working or aged 59 ½ or older.
Savings accounts may not have high interest rates, but they’re a good option to have access to cash when you need it. These accounts lack the great returns you’ll see with other accounts, but you can easily setup what is known as a TOD, which is a transfer on death, or POD (payable on death).
When you set these options on your savings or options, the account is able to avoid probate, which your beneficiaries will thank you for.
You can also setup multiple beneficiaries because what happens if your main beneficiary dies before you do?
Setting up a brokerage account properly makes it much easier to separate assets even when compared to a will. The brokerage account may have a beneficiary designation, POD or TOD, that you can designate.
You would name someone to your account.
When you die, all the person has to do is file a claim and provide proof of who they are. This is much easier for the beneficiary than having to deal with probate or the courts.
A life insurance account is one of the best accounts that you can leave to an heir. Why? These accounts are paid tax-free, so beneficiaries never have to worry about advanced tax strategies to keep more money in the estate.
Roth IRAs are tax-free, too. The beneficiary is required to take the money out within a ten-year period.
Assigning Primary, Contingent and Further Benefits
Retirement planning should include knowing who you want to assign as your beneficiaries. The standard beneficiary documentation will include:
- Primary beneficiary, which would be your first choice of a beneficiary. This may be your wife, child or anyone you like.
- Contingent beneficiary or beneficiaries, which are the person(s) that you’ll want to leave your accounts to if the primary beneficiary is deceased at the time the document is executed.
We recommend that if you have a second contingent, you’ll want to add them as well. A good example of this would be your grandchildren, which would be second contingents. You can have percentages assigned to all of the grandchildren, and this is actually tax advantageous in most cases.
An example of the tax advantages:
- You want to leave money to one grandchild to pay for their schooling.
- The child’s parent is wealthy.
- You might think that leaving the account to your child and allowing them to pay for schooling is beneficial, but it is not.
If you list the grandchildren, the parent can use “disclaiming,” which would help them not go into another tax rate. The grandchild will have to take the money out, allowing them to, in most cases, pay far less taxes if the grandchildren are listed.
You need to make sure that the grandchild is listed as a second contingent so that the money can be passed to them rather than their parents through disclaiming.
This is a tactic that is primarily used for a 401(k) or an IRA.
Per Stirpes and Per Capita
When you fill out a beneficiary form, you’ll often have to choose by per stirpes and per capita. If you don’t choose one, it will normally default to per capita. What does this mean? This means that if you put down three beneficiaries, and one of your children dies, their portion would be dispersed to the two remaining children.
This means that the two beneficiaries would now receive 50% of the account.
If you want the money to go to that child’s grandchildren, you will put “per stirpes” next to your child’s name. This would disperse the funds to your child’s children evenly instead of the money going to only your children.
These are some of the best retirement planning methods that you can use to leave money to the next generation. Even if you don’t want to plan your retirement around the next generation, these tactics can help keep money in your estate.
If you want more information about preparing your finances for the future or retirement, check out our complimentary Master Class, ‘3 Steps to Secure Your Retirement’.
In this class, we teach you the steps you need to take to secure your dream retirement. Get the complimentary Master Class here.
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