Few people intend for the assets they leave to their heirs to be eroded by income taxes and long-term care costs. Unfortunately, due to a lack of planning, that is exactly what happens in many cases.
One consideration in estate planning is leaving assets to your heirs in a tax efficient manner. Some clients choose to leave money to beneficiaries in IRAs. Other choose to leave money in brokerage accounts possibly in some type of market linked investment. These may be excellent ways to accumulate wealth; but they are not the most tax efficient. When the owner dies, any income tax that is due on these accounts is paid by the beneficiaries. If the accounts are IRAs and the owner took a deduction for their contribution either through a payroll deduction from a company retirement plan or on their personal income tax return, up to 100% of the distributions from the account could be taxable. The amount of taxes due could significantly reduce the overall benefit to beneficiaries.
As an alternative, many people choose to convert their 401ks and traditional IRAs to Roth IRAs or leave money to their beneficiaries through a life insurance policy. The death benefit is 100% income tax free. There are two main types of policies to consider: temporary or term which is for a limited period of time, this will pay out if you die during that term and permanent insurance which will pay out when you die.
Term insurance is an excellent way to provide a large death benefit for beneficiaries because the premiums depending on age and health can be relatively inexpensive. However, many policies expire before the owners die.
If you want to ensure that you are leaving a legacy to your beneficiaries, permanent insurance might be a better solution. Michael Higgins, a Certified Financial Planner with Woodbury Financial based on Long Island says “There are different types of permanent insurance, some have the ability for market linked growth potential to build up cash value, as well as additional riders that are available for access by the owner during their lifetime for long term care events. The right policy can be chosen with the advice of a well-qualified financial planner.”
Another important consideration says Higgins is planning for long term care. Estates are often eroded by such financially devastating costs. Proper planning can help avoid estates from being eroded. The likelihood of needing long-term care increases significantly as we age. It has been estimated that 52% of Americans reaching 65 will need some type of long-term care services in their lifetime. In the state of New York, the average cost of a home health aide for home care services is $62,187.84 per year and for a semi-private room in a nursing home it is $142,059.60 per year. Depending on your needs and financial situation it might make sense to consider some type of long-term care insurance. Otherwise , Medicaid planning and other options exists.
Planning is key. Not having a plan to protect your assets could easily derail your plan for leaving money to your beneficiaries. Having a plan in place to provide for your needs as well as for your beneficiaries makes good sense. Having a seasoned financial planner and elder law attorney on your team of advisors is often a key to preserving assets.
