As we age, concerns about long-term care and taxes become increasingly relevant. Long-term care costs can be high, and many worry about how they will pay for it. At the same time, taxes can eat into retirement savings and make it harder to transfer assets to heirs. Finding a balance between these concerns is crucial for retirees and their families. A recent article from Kiplinger, "Long-Term Care Planning vs. Taxes: Finding a Healthy Balance," addresses these concerns. This article will discuss different options for long-term care planning and how to minimize taxes during retirement and asset transfer.
Long-term care insurance is a popular option for people under age 65, with investable assets ranging from $1.5 million to $3 million. This type of insurance can cover the costs of assisted living and skilled medical care, which can be significant. The goal of LTC insurance is to provide a hedge against the final bill for long-term care rather than total coverage of expenses. With the chance of needing to live in an elder care facility and an average stay of three or more years, LTC insurance can help protect against the high cost of long-term care and help prevent people from declaring bankruptcy during retirement. However, the premiums for LTC insurance have skyrocketed, and benefits have reduced in recent years due to increased life expectancies with medical conditions.
For people up to age 70 with $3 million to $5 million in investable assets, universal life insurance with accelerated benefit riders (ABRs) can be a better option than LTC insurance. ABRs are a special kind of life insurance rider triggered by medical conditions allowing the death benefit of the policy to be advanced to the owner during their lifetime, often up to 100% of the policy's face value, for funding an extended stay in an assisted living or skilled care facility. The premiums for these policies are higher than those for LTC insurance. Still, they act as a multi-use tool, providing coverage and the opportunity for wealth leveraging for the next generation.
Asset protection trust planning is the focus for most Americans with a net worth of less than $2 million. This is where the pressure of the costs for skilled nursing care becomes more intense. Those with fewer assets have more to lose and need protection more than the wealthy. Self-settled wholly discretionary grantor trusts, which are irrevocable, are used to house certain assets Medicaid would expect families to liquidate or spend before approving benefits to cover the bulk of the cost. Specific provisions of irrevocable trusts can be changed depending on the state of residence, such as who the trustee is and who the beneficiaries are. The trustee should not be one of the grantors of the trust, and there is a five-year look-back on the trust's funding. For example, if a grantor needs long-term care five years after assets were moved into the trust's name, other assets will be required to pay for the care.
Reducing taxes during retirement and upon transferring assets to heirs is also a concern for many retirees. Careful planning with an experienced estate planning attorney can establish a balance between maximizing protection and minimizing taxes. Families are encouraged to plan early—ideally, just before or in the early years of retirement. The family's needs should drive which assets they should place in the trust. However, not everything goes. For instance, placing IRAs or other qualified accounts into an irrevocable trust would be unwise because this would be a fully taxable event. You could place Roth IRAs in a trust. However, then they would lose their Roth status.
In addition to minimizing taxes on asset transfer, it is also essential to implement tax-efficient retirement income strategies. Tax-efficient retirement income strategies can help stretch retirement savings further and provide more detail on this topic.
A Roth IRA is one of the most effective tax-efficient retirement income strategies. Roth IRAs allow for tax-free withdrawals during retirement, which can help retirees avoid the tax burden associated with traditional IRAs and 401(k)s. Roth conversions are also an option for individuals who want to convert their traditional retirement accounts to a Roth IRA. This can be an intelligent move for retirees who expect to be in a higher tax bracket during retirement than during their working years.
Another tax-efficient retirement income strategy is the use of a systematic withdrawal plan. With this strategy, retirees withdraw a predetermined amount of money from their retirement accounts each year. This allows them to control their taxable income and avoid triggering unnecessary taxes. Retirees can also use this strategy to minimize taxes on Social Security benefits.
Charitable giving is another tax-efficient retirement income strategy. Retirees can donate appreciated assets, such as stocks or mutual funds, to charity. This allows them to avoid paying capital gains taxes on the appreciation and receive a tax deduction for the charitable donation. Donor-advised funds are another option for retirees who want to make charitable donations. With a donor-advised fund, retirees can donate appreciated assets and receive a tax deduction for the gift. The investments are then held in the donor-advised fund until the retiree is ready to distribute them to the charity of their choice.
Estate tax planning is another important consideration for retirees and their families. Estate taxes can eat into the assets retirees want to leave to their heirs, reducing the amount of wealth they can pass on. There are several strategies retirees can use to minimize estate taxes.
One of the most effective strategies is to gift assets to heirs during their lifetime. This allows retirees to reduce the size of their estates and avoid estate taxes. The annual gift tax exclusion allows individuals to gift up to $17,000 per recipient per year without incurring gift taxes.
Another strategy is to establish a trust. Families can use trusts to transfer assets to heirs while minimizing estate taxes. There are several types of trusts, including revocable trusts and irrevocable trusts. Revocable trusts allow retirees to maintain control of their assets while alive, but the assets are still subject to estate taxes. On the other hand, Irrevocable trusts remove the assets from the estate and can provide significant estate tax savings.
Long-term care planning, tax-efficient retirement income strategies, and estate tax planning are crucial considerations for retirees and their families. Long-term care insurance, universal life insurance with accelerated benefit riders, and asset protection trust planning can help protect against the high cost of long-term care. Tax-efficient retirement income strategies, such as using a Roth IRA, systematic withdrawal plans, and charitable giving, can help retirees minimize taxes during retirement and asset transfer. Estate tax planning, including gifting assets during one's lifetime and establishing a trust, can help reduce estate taxes and ensure that retirees can leave their heirs as much wealth as possible. Consulting with an experienced Austin estate planning attorney can help retirees and their families establish a plan that balances these concerns and provides financial security for the future.
Reference: Kiplinger (March 20, 2023) “Long-Term Care Planning vs. Taxes: Finding a Healthy Balance”
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