Category: Accumulation Trust

Accumulating Income in the Decumulation Phase of Life: Retirement

Retirement is often called the “decumulation” phase, when retirees are steadily spending down their assets. However, many retireesare not only leaving their nest eggs intact but are also saving a large part of their income. Recent studies say that they’re accumulating assets as they move through retirement.

Kiplinger’s new article, “Shifting Gears from Saving to Spending in Retirement,” explains that it’s not just the wealthiest retirees who fall into this category. Retired households with at least $100,000 in financial assets save 31% of their income, on average, according to a recent study. A third of Americans age 65 and older took no retirement income from their nest eggs during the past five years, according to a 2015 study. 10-04-2016

Saving money is good, but if you’re cutting out basic comforts because you think you’ll live to 108 and have huge medical expenses or because you worry that you won’t be able to leave an inheritance for your children, you might want to reconsider the severity of those risks and how you’re managing them.

On the other hand, if you’re on a cruise every other month and touring in a new Lamborghini but still spending less than your income, that’s a different issue. You should think about minimizing your tax liability as you continue to accumulate wealth throughout retirement. Also, keep reinvesting any extra income according to your goals, donate to charity or give away assets to family members.

Saving is becoming a bigger part of retirees’ financial plans, especially with defined-benefit pension plans going away. Retirees now must depend more on nonguaranteed sources of income—like 401(k)s and IRAs—to cover expenses. As a result of the greater uncertainty involved with generating income from stocks and bonds, retirees who draw their income largely from investment accounts tend to save more than those relying on guaranteed-income sources.

Many retirees say that saving is hardwired, but if you’re stuffing money under the mattress, think about how much retirement is really costing you and whether you’re saving up for future expenses that may never happen.

While many retirement-planning tools say that your spending will increase by the rate of inflation each year of retirement, recent research contends that this may overestimate retirement costs. In inflation-adjusted terms, spending actually decreases 1% annually in retirement. Major expenses, like a mortgage or the children’s college tuition, may go away in retirement. Also, you might spend less on big vacations and other active pursuits as you get older. So, the amount you must withdraw from your portfolio to cover expenses might significantly decrease during retirement.

Many retirees overestimate their spending needs. While optimistic, it might be a little unreasonable to plan on living to 110. You can look at a detailed calculator to factor in your health, family history and lifestyle to give you a better idea of your life expectancy.

A recent study found that the wealthiest 20% of retirees could safely draw down as much as 50% more than what they’re spending.

Reference: Kiplinger’s (August 2016) “Shifting Gears from Saving to Spending in Retirement”

An IRA Trust Might Be Preferred Over Naming Individuals or a Revocable Living Trusts as the IRAs Beneficiaries

If you maxed out your work 401(k) by taking advantage of matching funds and rolled this to an IRA when you retired, you might not need all of that money—especially if you are a spouse with a pension and Social Security. One thought is to designate children or grandchildren as primary beneficiaries of the IRA. However, you don’t want them to be able to withdraw more than the required distribution based on their life expectancy. 9-20-2016

The Charlotte News-Observer’s article, “To ‘rule from the grave,’ establish an IRA trust,” suggests that you speak with a qualified estate planning attorney and explore the benefits of establishing an IRA standalone trust—which is also known as an "IRA trust,” an “IRA stretch trust” or an “IRA protection trust.”

This type of trust is approved by the IRS and may be more advantageous than designating individual children or grandchildren—or naming revocable living trusts as beneficiaries of IRAs. If you name your revocable living trust as a beneficiary, you must be certain that it has the appropriate conduit-trust language and that the wording of the beneficiary designation is correct to take advantage of the stretch-out of the required minimum distributions (RMDs).

Remember that if you go ahead and designate individuals as beneficiaries, you may create some headaches for them—including requiring a guardian to request permission from the courts to make distributions if the beneficiary is a minor. Also, the beneficiary may take higher distributions than necessary—often leading to increased taxation, eliminating the value of tax-free compounding and possibly running out of money. If the beneficiary is disabled, there is a risk of potentially losing needs-based government benefits. Other potential issues include the loss of control as to who will ultimately inherit the IRA after the death of the primary beneficiary and—if the beneficiary is not the spouse—the IRA being fair game for creditors.

Typically, a surviving spouse beneficiary can make the IRA his or her own and take RMD based on his or her life expectancy. The RMD doesn’t need to begin until the spouse reaches age 70 ½ or April 1 of the following year. An IRA inherited by a spouse and converted to his or her own IRA will still be protected from creditors from personal injury lawsuits, bankruptcy and the like. Distributions from an IRA inherited by a non-spouse are required to commence the year after the death of the IRA owner. The RMD is based on the beneficiary’s life expectancy.

A non-spouse inherited IRA isn’t protected in bankruptcy and may be hit with the claims of the beneficiary’s creditors. But the assets in a standalone IRA trust are protected by trust law, and they’re also protected from creditors. The trust can also control distributions so that they’re limited to the RMD based on the beneficiary’s life expectancy. That will defer the payment of income tax within the IRA, providing the greatest “stretch-out” of benefits to the beneficiary.

Your estate planning attorney can help you decide if the trust should be a conduit or an accumulation trust. The RMDs have to be distributed to the beneficiary in a conduit trust, but with an accumulation trust, RMDs may be accumulated in the trust. The accumulation trust is better if you require additional protection for the beneficiary who’s in a bad marriage, a high-risk profession, has addictions or has special needs.

It's a very complex issue. Again, work with a qualified estate attorney to create a sound action plan based on your personal situation and objectives.

Reference: Charlotte News-Observer (July 30, 2016) “To ‘rule from the grave,’ establish an IRA trust”