Estate Planning for an Aging Population

In the United States, we’re all living longer—at least, I plan to do so if at all possible. Today, men live an average of 76 years, while women typically live for 82 years.  For comparison, life expectancy in 1950 was just 65 years.

A longer average lifespan has many benefits, but it also means that Americans need more financial support as they age. In 1990, a 65-year-old man would live an average of 15 more years.  Today, a 65 year-old man will live an average of 21 more years.  If not planned for, those additional years of life can cause significant financial strain and threaten our ability to maintain a high quality of life during retirement. In fact, the American Association of Retired Persons published a study revealing that two out of three Americans are more worried about running out of money than dying.¹

And that fear isn’t without reason: the Wall Street Journal recently reported that fewer than one in three of us are financially prepared to survive into our 90s.  The question, “Will my children need to provide financial support?” now takes on a much deeper meaning.  Our aging population, coupled with changes in our tax structure, has created a significant shift in our clients’ goals, fears and concerns related to retirement. We must help clients address these new priorities in their estate plans.

In years past, estate plans focused primarily on avoiding or reducing probate and estate tax.  However, since the estate tax exemption has been raised to $5.45 million, less than .02 percent of the U.S. population is subject to federal estate tax.  Now, our clients should be more concerned with minimizing capital gains and protecting assets to live comfortably in their retirement years.

In light of these concerns, we should see if our clients want to reconsider some of the most common provisions in their estate-planning documents.  If they’re planning for retirement, here are three crucial areas they should address.

 

Take a Second Look at Gift Provisions

Estate plans often include ongoing gift provisions, which allow individuals to give up to $14,000 per year to each done without incurring a gift tax.  This is also a commonly used strategy for reducing estate tax. However, with fewer families subject to federal estate tax after the exemption increase, this strategy is less relevant than it’s been in the past.  Ongoing gift provisions can also leave the door open for giftees to take advantage of the giver, increasing the risk of financial elder abuse.  

Unless a gift is needed as a way to qualify for Medi-Cal or other public benefits, it may be a good idea for clients to remove the ability to make ongoing gifts from their estate plan.  If a gift provision is desired, a more relevant option might be to only permit gifts that would not impede on your client’s ability to afford his lifestyle.

 

Establish Residency Thoughtfully

The varying state income tax rate can have a substantial impact on your client’s ability to maintain his desired lifestyle throughout his retirement years.  For example, California residents can be subjected to a state income tax as high as 13.3 percent, while just over the border in Nevada, the state income tax is nonexistent.  This is an important point for your client to consider when establishing residency.

Determining where someone resides for income tax purposes is a subjective process, one that relies on the concept of a person’s “domicile”: the place where, when absent, the individual would hope to return. Because of this definition, at least one court has held that an estate-planning attorney can’t make a change in domicile through a durable power of attorney, because such a decision is based on an individual’s intent and is too personal.²  To avoid this limitation, your client can consider changing domicile through a provision in a power of attorney for personal care and an appropriate provision in an advanced health care directive.  

Residency may also become an issue when obtaining desired end-of-life care. Residents of five states, including California, presently have access to legal “Death with Dignity care.”  If having that option is important to your client, it may beneficial to change residency.

 

Consider Retirement Trusts

Your client should consider a retirement trust.  They allow children to disclaim all or a portion of the inherited retirement account benefits for their own children.  What’s particularly beneficial about this strategy is that it grows on a tax-deferred basis until the account holder is 70.5 years old, when small required minimum distributions (RMDs) begin.  With proper planning, each of your client’s children can use their own age for the RMD, providing greater growth in value.

For example, my son Patrick is 21 years old. If he inherited a $200,000 IRA from me now, that account could grow to almost $6 million if it grows at an 8 percent rate of return.  The numbers here can be truly staggering. It’s also important to note that this wealth is better protected from creditors, lawsuits and divorce when compared to wealth transferred through inherited IRAs.

Since they’re living longer, our clients’ children and heirs will inherit at an older age.  Their children may be less likely to need their inheritance for their own retirement; instead, they may be more likely to disclaim their interest in inherited individual, corporate and governmental retirement accounts in order to provide a substantially increased benefit for their kids—our grandchildren.

Endnotes

1. “Reclaiming the Future:  Retirement in America will never be the same.” Allianz Life Insurance Company of North America. Retirement & Planning Tools.  Web.  30 June 2016, www.allianzlife.com/retirement-and-planning-tools/reclaiming-the-future/white-paper-findings.
2. Matter of Wilhelm, 134 Misc.2d 448 (1987).