Estate planning isn’t just about what happens to your assets after you’re gone. However, that is usually the primary driver. This article, from Kiplinger Online by Sandra Block, published on 9/1/24, provides a great overview of giving to your loved ones (or charities) while you’re still around. If that interests you, read on. It is a lengthy article, so I’ve split it into two posts; Part Two will be published next week.
“Managing your money later in life includes defining a destination point for the next generation of your wealth. Baby boomers are expected to transfer more than $50 trillion in wealth during the next 20 years, with much of it going to Gen X and millennial children. But many don’t want to wait until they die to help their heirs and charities.
Legendary investor Warren Buffett has pledged to give away most of his fortune before he dies so he can make a difference during his lifetime. Other wealthy individuals, such as Bill Gates, have also adopted Buffett’s pledge.
These billionaires can give away most of their wealth without worrying about how they’ll pay the bills during the final years of their lives. However, boomers who don’t own yachts but have succeeded in building a good-sized retirement nest egg face a more difficult calculation. Many want to provide financial assistance to family members and their favorite charities but worry about jeopardizing their retirement security, particularly when it comes to paying for long-term care.
More than half of 65-year-old Americans will need long-term-care services of some kind, according to research by the U.S. Department of Health and Human Services, and one in five will develop a disability that will require care for more than five years. At the same time, only 8% of Americans have long-term-care insurance, so most seniors will have to rely on their savings and government assistance to pay for long-term care. (To estimate the cost of care in your area, go to www.genworth.com/aging-and-you/finances/cost-of-care.)
The easiest solution to this dilemma is to postpone gifts to family members and charities until you die, when you’ll no longer need funds for living expenses or long-term care. That’s the default option for many retirees: More than 60% of Americans say they plan to transfer their wealth when they die, according to a survey by RBC Wealth Management.
But holding on to your wealth until you draw your last breath has its downsides, too. There’s a good chance you or your spouse will live into your nineties, which means your children will probably be in their sixties, or even seventies, when you die. That’s a long time to wait if they need money for a down payment on a home or are struggling to repay their student loans.
“Providing for heirs after life is wonderful, but if you help them while you are living, you get to see how your support impacts them,” says Abrin Berkemeyer, a certified financial planner with Goodman Financial in Houston. “This also applies to those who want to give to charity, as you can follow the work of the organization you are financially supporting.”
Financial planners say that including “giving while living” in your estate plan provides a way to assist children and grandchildren in reaching important goals, such as paying for college and buying a house, while allowing you to gauge how they’ll manage their inheritance. Where charities are concerned, making significant donations while you’re alive can help you to determine whether your money is being used wisely — and provide some valuable tax benefits as well.
Creating guardrails
Before you start writing checks to your kids or your favorite charity, it’s important to figure out how much you can afford to give away. That requires more intentional planning than simply spending what you need in retirement and leaving the rest in your estate.
One strategy is to create a timeline of your income and expenses in retirement, which will help you determine how much you need to withdraw from your savings each year to pay for any expenses that you can’t cover with Social Security benefits (if you’ve filed for them), pension payments and other sources of income.
This exercise allows you to make adjustments as your circumstances change — once you’ve paid off your mortgage, for example. It will also help you get an idea of how much you can afford to give away. You may need professional guidance (or a retirement-planning software program) to get the most out of this strategy, because you’ll need to project your investment returns as well as taxes you’ll owe. A financial planner can help you avoid projecting overly optimistic investment returns or underestimating your taxes.
Laura Rhoades, a CFP with Savant Wealth Management in Birmingham, Ala., says she helps clients create a “live on” financial plan that allocates funds from savings, Social Security and other sources to cover their expenses throughout their lifetimes, including long-term care. To estimate long-term-care expenses, she factors in the possibility that her clients may need nursing home care for four to five years. “If anything, we want to overestimate what that cost will be,” she says.
Once clients have determined that there’s a high probability they’ll have enough money to meet those expenses, they can create a “leave on” portfolio made up of funds they want to give while they’re living to children or charities, she says.
Estimating how much you’ll need for long-term care is difficult when you’re in your sixties, and financial planners use different scenarios to help their clients figure out how much they should save for that expense. Berkemeyer recommends saving enough to pay for three years of in-home care for eight hours a day. While many people assume they’ll end up in a nursing home, he says, they’re more likely to use in-home care.
Factors to consider when estimating how much you’ll need for long-term care include your health, family medical history, marital status (single people are more likely to require care in a nursing home than married seniors) and other sources of funds, such as traditional long-term-care insurance or a life insurance policy that has a long-term-care component.
Home equity should also be part of the equation. Seniors held more than $13 trillion in home equity in the first quarter of 2024, according to the National Reverse Mortgage Lenders Association. Seniors often use proceeds from the sale of their homes to pay for care in an assisted-living facility or nursing home. If you prefer to age in place, you may be able to use a reverse mortgage to pay for in-home care.
Creating a source of guaranteed income that ensures you’ll have funds coming in no matter how long you live could make it easier to give away money while you’re still alive.
Many retirees don’t have a traditional pension, but you can create a do-it-yourself pension by annuitizing a portion of your nest egg. The most straightforward annuity is a single premium immediate annuity, or SPIA. With this annuity, you give an insurance company a lump sum in exchange for a regular payment — usually monthly — for the rest of your life (or, in the case of a joint-and-survivor annuity, as long as the surviving spouse lives) or for a specific period.
With the calculator at www.immediateannuities.com, you can enter the amount you’d like to invest and your age to get an idea of how much income your money will buy. Some annuities include a provision that will increase your payout if you need long-term care.
Another option that could serve double duty — providing a source of guaranteed income while fulfilling your charitable goals — is a charitable gift annuity, discussed below.”
That wraps up Part One. I hope you have found this information useful; next week, I’ll provide the rest of the article that covers helping the next generation and charitable giving. Keep in mind that if you have an existing will or trust, if you haven’t reviewed it for updates in the past few years, that’s something you shouldn’t neglect. An out-of-date estate plan can be almost worse than none at all. Feel free to call me at 513-399-7526 to schedule our consultation, or visit my website, www.davidlefton.com. You can schedule our meeting from there as well.
Source: Kiplinger online 9/1/24 by Sandra Block