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California Estate Planning: Saving for Retirement Saves Inheritance

California estate planning includes planning for retirement through pension plans and life insurance policies

Passing Nest-Egg to Loved Ones

Let’s face it. You’re not getting any younger. And after that health scare from last year, you’ve been thinking more and more about protecting yourself and your loved ones in the future. With retirement looming, you created a comprehensive California estate planning package that includes a willtrustadvance health care directive, and durable power of attorney for finances. Your kids will inherit everything on your death now, right? Not exactly. Even though you’ve set-up the right California estate planning documents to avoid probate and help ensure a clean and straightforward estate administration, you’re named beneficiaries won’t automatically get your estate on death. Stand in line, kidos. Keeping your California estate planning docs up to date is only one step of planning for the future.The bigger concern. Having a nest egg to pass on. Due to medical advancements, humans are living longer. The consequence. People need more money during their now-extended retirement years. Proper California estate planning includes obtaining a sufficient retirement plan and life insurance policy to cover your needs now and provide for your loved ones in the future.

Benefits of Acquiring Pension & Life Insurance

California estate planning with retirement and life insurance plans in place helps to avoid creditor action A pension and life insurance policy give retirees financial solace in the golden years. They also help to “keep it in the family” for your loved ones in the future.

Case Example 

Sherry passes away without California estate planning documentation including a will. Sherry had a pension of $300,000 with her 2 kids named as beneficiaries. She also left a life insurance policy of $250,000. The policy was to pay off her kids’ student loans with the remainder to be distributed to her only sister and 2 kids in equal shares. Sherry’s love of Bingo toward the end of her life caused her to leave credit card debt of $30,000.

Avoid Probate & Creditor Action

Under current California estate planning law, if Sherry owned a home in her name or in the name of her revocable living trust then the assets would be subject to the claims of her creditors and her credit card debt would be paid off by the estate. Retirement accounts and life insurance policies, on the other hand, are not subject to probate so long as there’s a designated beneficiary. Furthermore, these accounts are exempt from creditor claims of a decedent, except for federal estate tax purposes. This shouldn’t be a problem due to the Fiscal Cliff legislation, which made the federal tax exemption amount $5,250,000. Result. The credit card debt doesn’t have to be paid. The life insurance proceeds can be used to pay off the student loans with the remaining money distributed according to Sherry’s wishes.

Avoid Medi-Cal Recovery Lien under California Estate Planning Rules

Medi-Cal planning involves qualifying elderly people into the Medi-Cal system by gifting, investing in “non-resource” assets and avoidance of a state recovery lien. Putting money into a retirement account or life insurance policy (non-resource assets) with named beneficiaries allows the elderly to receive the Medi-Cal benefits during their lifetime while avoiding a state recovery lien on death.

Delay Tax by Rolling Over Pension to Inherited IRA

The money in the retirement account should also not be used to pay-off Sherry’s debts. The Pension Protection Act (2006) allows beneficiaries to “roll over” retirement account money into an inherited Individual Retirement Account (IRA). By rolling over the retirement account into an inherited IRA, Sherry’s kids will be able to control when they pay the income tax due. Rather than paying all the income tax at once the kids can stretch the distributions out over their lifetimes to avoid tax build up.

About Dan Hanley

Specializing in estate planning, elder law and real estate law, Dan brings a wealth of experience and knowledge to help his clients with a variety of legal needs. In addition to a MBA and Juris Doctorate from Santa Clara University, Dan is also a licensed real estate broker since 1980.

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