Young Parents Need to Coordinate Retirement Plans with Estate Plans

If you’ve started saving in a retirement plan, you need to coordinate it with an estate plan or things may not happen as you would want. Here’s what you need to know about retirement savings and your estate.

You might be hard pressed to find disagreement among young parents that planning for the future is one of the most important things we can do as adults, especially where the security of our families is concerned. Yet, astoundingly, more than 40% of adults over the age of 40 have yet to plan their retirement, and nearly 60% of Americans will die this year without a will. We know the results of poor retirement planning: More than 50% of Baby Boomers will likely fall short of their retirement income needs. Less known are the devastating results for families when an estate is probated without proper wills and trusts. Certainly, a lack of planning in either area can be potentially catastrophic; however, a lack of coordinating your retirement and estate plans can be, at the very least, financially disruptive for your surviving family members.

How will my estate plan affect my retirement plan?

While both plans are vital cornerstones of your family’s financial security, they serve separate purposes. Your estate plan preserves your assets for your family, while your retirement plan creates your assets used for retirement income. Planning for one purpose shouldn’t impact the other. There is, however, one place where your retirement plan does intersect with your estate plan and that is in your beneficiary designations.

Qualified retirement accounts are generally held outside of trusts. That’s because they pass directly to your heirs by beneficiary designation without going through probate. The problem arises when your beneficiary designations are not coordinated with your trusts. For instance, if you establish a family trust for the purpose of removing that portion of your estate that exceeds the marital exemption, a retirement plan asset that is designated to pass directly to your spouse may create a taxable event for your estate. In this case, the trust should be made the plan beneficiary.

Similarly, if your children are named as contingent beneficiaries instead of your trust, the asset will flow directly to them, instead of the trust which could include disbursement instructions. Instead, your children could receive the assets in a lump sum with no guidance on their use.

Also, the naming of beneficiaries can affect the rate at which distributions are made from the plan to those for whom they are intended after your death. It’s important to arrange beneficiary designations so that, after your death, the rate of distributions are tied to your spouse’s age and needs so they are not paid out too quickly which can create an additional tax burden.

When should young parents start planning their estate?

The answer is: At the earliest, when you acquire some assets or debt, and, at the latest when you start a family. Without question, you need an estate plan when the value of your assets approaches $1 million. And, when you consider your home, your retirement plans, your personal property and other investments, that can happen fairly soon in life. Then your plan should be reviewed periodically or as your situation requires it.

What should be done at a minimum?

At the very minimum young parents need a will. A will is a legal testament that specifies your wishes for the disposition of your property and declares who oversees it (an executor). If you have children or other dependents, your will establishes guardianship arrangements. In both cases, absent a will, the state will make those determinations.

But frankly, a will is usually not enough. It won’t designate how your assets will be controlled if you become incapacitated and it won’t prevent your assets from being probated which will cause delays and added expenses for your survivors. By adding two simple documents to your estate plan, you will be able to cover those bases. You need both a health directive and a living trust.

The bottom line is that, if you fail to coordinate the objectives and goals of your estate plan with the beneficiary designations of your retirement accounts, they may not be realized in the way you had intended.