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We recently met with a gentleman whose wife had passed away three months previously. She had two tax-deferred accounts in her name. One was an IRA, and the other was a 401(k) plan. Together, they totaled just over $1 million.

Unfortunately, those accounts had been incorrectly coded for the beneficiary, and so for three months he had been fighting to gain access to the plans. If the accounts had been appropriately titled, he would have been readily able to move that money into his own IRA.

Instead, he had to incur the cost and hassle of probate. In the state of Iowa, it typically costs about 4 percent of the value of assets to move them through probate. On a $1 million portfolio, that amounts to about $40,000. That is the cost that he faced in fighting for access to accounts that so easily could have been transferred with a simple signature prior to his wife’s death. In Iowa it takes at least six months, and often more than a year, to get through probate and collect assets. Meanwhile, the process, by its nature, was exposing the portfolio to the potential of claims from creditors.

You might call that a mess. None of that, however, was his biggest issue. The probate process meant that those assets no longer would be tax-deferred when he received them. He would have $1 million subject to taxation, and that would put him in the highest marginal tax bracket. The IRS at times makes exceptions in situations such as his, but that involves paying the costs of attorneys and further delays—with no guarantees.

All of this was the consequence of one slip-up, the mistitling of the accounts. All they would have had to do was appropriately prepare the documents, and the money would have been his, free and clear, within his IRA.

Had he begun working with us sooner, this all would have been avoided. As part of our planning process, we do a review to make sure that our clients’ accounts have been properly titled, both for ownership and for beneficiary. Th is is easy to do while the account owner is alive. It’s highly difficult, if it’s possible at all, for the survivors to fix that problem once the owner has passed on. And they will need to contend with the tax situation—which can be the biggest mess of all.

When we talk about preserving a legacy, a lot of people get confused because they have heard so much of the legal jargon that gets wrapped around these strategies. Cutting through that confusion is imperative if we are to establish an effective and appropriate legacy plan to maximize resources not only while you are alive but also after you have passed on.

Your money is a measure of your hard work and your talents, represented after all those years as a balance on a statement. That is one reflection of your accomplishments, but the real power of your legacy will be in making sure that your life has added up to something of significance for the world.

We recently attended a discussion at a large hospital in our community on the power of advanced legacy planning techniques to do good in the world. If you have money sitting in a bank that you will not be needing, or if you are required to take distributions from a retirement plan that you will not be spending, there are strategies that can multiply those moneys for the benefit of causes and institutions that are meaningful to you.

Most people want to give back in some way. They want to make the world a better place. A variety of powerful strategies can fulfill those wishes. We can set up trusts and use provisions of the tax code to maximize resources for the greater good while also streamlining families’ estate planning.

It’s frequently said that if you fail to plan, you can plan on failing. It’s so oft-repeated because it so often holds true. We have seen families destroyed by not having any type of plan. It’s left to the brother-in-law or sister-in-law or siblings to try to figure out where the money should go. The lack of planning can be highly disruptive to loved ones’ lives.

If you don’t have a plan, the government certainly will have one for you. It stands ready to claim a major share of your legacy and distribute it in the manner it sees fit. To prevent that, you need a vision. You should be giving a lot of thought to where and how you wish to direct the proceeds of your life’s work.

A will gives your heirs specific legal instructions on where you want your property and remaining assets to go when you are gone. However, it still must go through probate. In Iowa, an estate is “probatable” if it’s above $25,000. Again, the cost can be around 4 percent of the estate’s value, and it could be many months before your beneficiaries can receive those assets.

Anything that goes through probate becomes public information. The system is designed that way so that creditors can come in to lay a claim. As your heirs sort through the legalities of those claims, the probate time can get considerably

If you set up a revocable trust, however, the assets that pass through the trust will not be subjected to probate. They can go almost immediately to the beneficiaries, avoiding the probate costs. Another advantage is that assets going through a trust do not become public information.

It costs more to set up a trust than it costs to set up a will. It can be well worth it, though, because the trust can save your estate a significant amount of money by shielding it from all of the probate costs. In Iowa, the average cost to set up a trust is about $3,000, depending upon its complexity. The average cost to set up a will is probably $250 or $300. Often, the best strategy is to have both a will and a trust. There are many reasons why you might want both. A last will can do different things that a trust cannot, for example, provide guardianship instructions for minor children, forgive debts, and handle any property that isn’t included in the trust document.

You cannot take shortcuts with those beneficiary designations; they must be set up correctly. It might be tempting to think, This is complicated, so I’ll just name my son as a joint owner on my account, and he’ll take care of it. Taking such estate planning shortcuts can potentially be quite risky, and you need to think about the consequences. Is it possible that your son could get divorced? Th ere goes half of that account
balance. What if he loses a lawsuit?

With a trust, you can exercise controls over payouts—who gets the money and when and under what circumstances. That might seem a good reason to establish a trust as beneficiary for an IRA or 401(k) plan, but be very careful in doing so. This calls for precise wording with the guidance of a qualified estate-planning attorney who specializes in such matters. Generally speaking, designating a trust as the primary beneficiary doesn’t make sense—because of tax considerations. As we pointed out earlier, the trust cannot ordinarily exercise the stretch provision that is available with IRAs and some 401(k)s, and therefore it would be required to liquidate the total value of the retirement plan within five years. That could expose most of that income to taxation at the 35 percent trust rate. Setting something like this up efficiently requires that specific language be incorporated into the trust. Most of the time, if the trust is to be a beneficiary, it should be as a contingent—not as the primary.

When people see libraries and hospitals and other institutions named after a prominent family, they think of how much wealth must be involved for anyone to be able to contribute at such a grand level. And certainly, those are examples of how great affluence can turn to great beneficence.

All around us, however, is the evidence of more modest and yet meaningful giving: a playground at a zoo, a bench in a city park, a brick in a sidewalk that bears the name of an individual or couple or family who cared enough to donate to a worthy cause. Those are not necessarily the contributions from multi-million dollar estates. Much of the charitable work in our nation comes from people of lesser means who did a bit of planning and found ways to make a difference.

Giving back to your community is not so much about how much money you have as it is about your desire to maximize whatever resources are available to you. Perhaps you are grateful for a comfortable lifestyle and do not really need those regular distributions that you are required to take from your retirement plan. You might decide to donate that money to charity rather than see much of it go to taxes. Or you might put the money into a life insurance policy and structure the beneficiary so that someday children might play at a park that you helped to build. You need not command millions to do your part in changing the world. You can do it bit by bit, brick by brick.

Any one of these many strategies might be the best ones to enhance your legacy. A competent team on your side can help you determine which methods would be most effective for you and your family. That team should include specialists in retirement planning, estate planning, and accounting. As retirement planners, our role is to help bring those minds together and coordinate them to provide the best service possible for our clients. An effective estate plan needs to be a collaborative effort involving those who know how to make it work most efficiently for the benefit of all.

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