Many Americans who save for retirement can leave gaps in their estate planning, like not updating beneficiaries.

Your retirement and estate plans should work together. Both prepare you for the future: retirement planning builds your savings, and estate planning protects those savings and ensures they're distributed according to your wishes.

Reviewing your estate plan before you retire may help prevent tax issues for your heirs and helps your assets last through your lifetime and beyond.

How Estate Planning Affects Retirement Accounts

1. Beneficiary designations

• Retirement accounts like IRAs and 401(k)s, along with life insurance policies and other financial accounts use beneficiary designations that often override instructions in a will.
• These designations also avoid probate and pass money directly to your heirs or beneficiaries.
• Review the designations regularly or whenever a major life event occurs (a birth, marriage, divorce, etc.).

Without updated beneficiaries, your 401(k) could go to your ex-spouse instead of your children. Even with beneficiary designations, recent changes in laws can create unexpected tax burdens for your heirs.

2. Handling retirement asset distribution after death

The federal SECURE Act and SECURE Act 2.0 set rules for handling retirement funds. Understanding the tax consequences before leaving or receiving an inheritance can be helpful. 

Under the 10-year rule, within a decade of inheriting a traditional IRA or 401(k), many non-spouse beneficiaries must withdraw the funds.

These withdrawals may have consequences for them in their peak earning years. For example, an adult daughter who inherits an IRA might need to withdraw the money soon, possibly pushing her into a higher tax bracket as she pays for her child's college education.

The required minimum distribution (RMD) age is currently 73. In 2033, for those born in 1960 or later, it's scheduled to increase to 75. 

The 2026 federal estate tax exemption is $15 million per person. Maine's estate tax exclusion amount is $7.16 million. Unlike federal rules, Maine doesn't allow each spouse to inherit the unused part of their estate tax exemption, known as portability. Each spouse has a separate exemption.

A financial or tax professional can advise you on tax savings strategies.

Protecting Inherited Assets With Retirement Trusts

Leaving heirs lots of cash can be risky, especially if they're not equipped to manage it or face potential creditors.

When appropriate, a trust carefully drafted to work with IRA beneficiary rules may keep the tax benefits of retirement assets and protect them. A well-drafted see-through or “conduit” trust is one way to meet the IRS’s inherited IRA withdrawal rules without losing tax advantages.

If it suits your situation, naming a trust as a beneficiary lets you provide for minors or younger adults like children or grandchildren while it shields the principal from potential lawsuits, creditors, or mismanagement.

Including Long-Term Care in Your Estate and Retirement Planning

Estate planning isn't focused only on what happens after death. It also helps set up your future life, including retirement and possible long-term care needs.

A durable power of attorney for finances and a living will or advance directive for health-care work alongside a will or trust. These documents let someone you trust manage your affairs if you can't, which can prevent the need for a court-ordered guardianship.

Without a named agent under power of attorney to act for you, if you become incapacitated, your loved ones can't access your accounts or pay for your care.

How Estate, Long-Term, and Retirement Planning Work Together
            
About 70 percent of people over age 65 will require some form of long-term care.

Long-term care costs can drain retirement savings; planning helps you protect your assets while you qualify for benefits like Medicare or Medicaid. Trusts like Medicaid Asset Protection Trusts® may also help with planning.

Having someone you trust as your financial power of attorney helps ensure your bills are paid and investments are managed, even if your health declines.

Setting Your Plans in Motion

The best time to arrange your estate, long-term care, and retirement plans is before you retire, while you have the most options. Start by:

• Reviewing all beneficiary designations
• Understanding how the SECURE Act affects your heirs
• Creating or updating your estate plan
• Planning for potential long-term care costs 

A skilled estate planning attorney can guide you through each step to protect your savings and your future.

To schedule a consultation, contact us online or call (207) 377-3966.