You have likely heard how important it is to save for your retirement since you starting working. Likewise, you probably starting stashing as much money as possible as soon as your started working. There is certainly no debate that saving for your retirement is essential; however, if you end up significantly over-funding your retirement you can run into another problem as a result. If you have significant assets left at the time of your death as a result of over-funding your retirement accounts, those assets can be subject to income taxes or estate taxes — or both. Given the often high rate of both income and estate taxes, you could lose over 50 percent of your estate assets to taxes upon your death.
While experts can be easily found who claim to know how much we need to save in order to live a comfortable retirement, the truth is that there are simply too many variables to know how much you will actually need. This uncertainty typically requires people to err on the side of caution and save more. If, however, you are lucky enough to remain relatively healthy until the day you die and do not have any significant financial emergencies, you still have a large portion of your retirement left when you die.
Although leaving the remainder of your retirement to a spouse does avoid estate taxation pursuant to the unlimited marital deduction, this also results in over-funding your spouse’s estate in many cases. When your spouse dies, there may then be an even bigger sum of money and assets subject to taxation without careful estate planning. There are, thankfully, ways to avoid, or at least decrease, your tax exposure if you have over-funded your retirement. The key is to start planning early with your estate planning attorney just as you started planning early for your retirement.