"Estate planning isn't just for the rich," says Frank Armstrong, founder of Investor Solutions, Inc. and co-author of "Save Your Retirement: What to Do If You Haven't Saved Enough or If Your Investments Were Devastated by the Market Meltdown." "Everyone should insure that the distribution of their assets is as efficient as possible. But, estate planning includes 'living wills,' power of attorney in case of disability, gifting during life, proper designations for insurance, IRA and qualified plan assets and many other contingencies."
Here are five things you should do that will stand the test of time:
Fund your own retirement
Perhaps the biggest financial gift you can give your kids is independence – independence from being your financial caretaker after you stop working. When Armstrong was growing up in the 1950s, he recalls having both sets of grandparents and a godfather living with his family. "Everyone thought that was normal. Today, they would not think that was normal," says the certified financial planner. So the first order of business is making sure you have enough money to live your golden years out in comfort.
Stretch that IRA
Take advantage of the "stretch" IRA, a provision that allows you to defer taxes or avoid taxes until the money is distributed to family members as far down the line as your grandchildren. "If I set it up so my grandchild is a beneficiary for part of my IRA, each year he will have to take a minimum distribution over his lifetime," explains Armstrong. "Initially that may only be 1-2%. And it doesn't get very large until he gets to 75-80. So the vast majority of the fund is growing in a tax free or tax deferred environment until very, very late in the grandchild's life."
The provision is applicable to both the traditional IRA and the Roth IRA.
Name the right names
Hence, when it comes to IRAs, Roth IRAs, pensions, annuities, and life insurance, pay attention to whom you've designated as a beneficiary. Not only can you stretch assets like the IRA and the Roth IRA, you can also protect them from creditors. Armstrong rolled over a large pension plan into his IRA because in Florida where he lives, IRAs are protected against creditors. In addition, he warns, pension plans "can't take complex beneficiary instructions so you can't designate trusts or other things you would like."
Different states have different rules about retirement assets so do your research.
Spend on education
Make it irrevocable
But "irrevocable" is just what it sounds. If you change your mind about your beneficiary, you may not get your money back.