It’s easy to focus on your home and personal possessions when doing estate planning, but your retirement accounts might constitute the majority of your assets. The rules are different for this class of assets, so work closely with an advisor to make sure retirement accounts are aligned with the rest of your estate plan.
Think back to when you started your retirement savings, with your first IRA—maybe at your very first job. Has that account moved with you to a few jobs? Or did you convert it to a Roth IRA at some point? How about the first life insurance policy you ever bought? You may not remember doing this, but every time you opened certain accounts, you named someone to be the beneficiary of the accounts at your death. If you haven’t reviewed those beneficiary designations or can’t remember who was named, it’s time to address this part of your estate.
Investopedia’s recent article, “Include Your Retirement Accounts in Your Estate,” gives us some things to consider in the New Year.
Beneficiary Designations. Review your beneficiary designations after major life changes. If you fail to make these designations, the funds will most likely go into your estate—a horrible outcome from a tax and planning perspective. If your estate is named a beneficiary, your heirs must wait until probate is finished to access your retirement accounts. It is usually better to name an individual or a trust as your beneficiary.
Protecting Retirement Funds With a Trust. Another option is to include a trust in your estate planning, instead of giving your retirement funds directly to named individuals. This allows you more control over the distribution, while protecting your heirs from lawsuits or creditors. Trust distributions keep a beneficiary from accessing and spending their inheritance all at once. It’s also a good idea if your beneficiaries include minor children who shouldn’t have direct access to the money until they are adults. Be sure to consult with an estate planning attorney, because there are tax and other complexities associated with designating a trust as beneficiary.
Required Minimum Distributions (RMDs). Your retirement plans have rules about when you are required to start taking distributions. For 401(k) accounts, you are required to start taking RMDs at age 70½. However, if you die and leave retirement plans and accounts to your heirs, these rules apply to them instead. A spousal beneficiary can roll over your retirement funds tax-free into their retirement plan and make their own distribution choices. However, other beneficiaries don’t have the same option. Tax treatment and distribution options vary, depending on who is receiving your retirement assets.
Tax Considerations. The biggest worry you need to address when designating retirement accounts as part of your estate plan, is how they’ll be taxed. Consider how to withdraw from these accounts while you’re alive and how to minimize tax consequences after you’ve passed.
You’ll want to be sure that these accounts are integrated with your overall estate and tax plan. That will best be done with an experienced estate planning attorney. They’ll make sure your assets are distributed the way you want and address any possible opportunities to minimize your tax liability. At the Soto Law Firm, our experience estate planning attorneys will counsel with you to establish a customized estate plan that matches your family goals. Contact us today for a free consultation.
Reference: Investopedia (August 27, 2018) “Include Your Retirement Accounts in Your Estate”