A Word on Planning With Retirement Plans

In the arena of estate planning, retirement plans (such as 401k plans, IRA’s, SEP IRA’s, etc.) deserve special care and consideration. Why? These accounts have a tax deferred status, are governed by complex rules, and pass in accordance with the beneficiary designation on file with the custodian or administrator. They are subject to income tax and estate tax. They are not governed by someone’s will or trust. They do not go through probate unless they are designated to go to your estate. Designating an IRA so it is payable to your estate is something one should never do. The reason is that your estate is not considered a designated beneficiary. As such, the rules would compel the entire funds in the plan to be distributed within five years. During this time, all the income taxes would be due and the cherished tax deferred status would be lost.

In every case my office handles, we want the client’s IRA to go on as long as possible in a tax deferred environment. We want to avoid acceleration of income taxes due. Generally, there are settlement options that need to be considered. Publication 590, issued by the Internal Revenue Service, outlines some rules regarding settlement options on retirement assets. Surviving spouses generally have three options if they are named as a primary beneficiary on such a plan. We also want to make sure that there are contingencies in effect. Since we usually utilize the benefits afforded by revocable trust planning (to avoid unnecessary probate), we usually direct that the contingent beneficiary on an IRA to be the IRA owner’s trust (e.g.: the then serving trustee of the owner’s trust dated _______, and any amendments thereto). If their trust is drawn properly, then the oldest beneficiaries’ life expectancy can be used to compute the required minimum distributions. Since we are trying to maximize the deferral of income taxes, this can be tremendously beneficial.

If we want to benefit a grandchild, we can dictate the terms of their trust within your revocable trust and their trust can be funded in whole or in part with retirement assets. If this is done properly, the results can be amazing. Why? We can effectively make it so the minimum distributions are required to be distributed over the grandchild’s life expectancy. Since, a grandchild has a long life expectancy, the distributions that they would be compelled to take out would be less than of the beneficiary had a shorter life expectancy. The less distributions that come out of a retirement plan, the less income tax is due and the more tax deferred growth there can be. Always remember, a little bit of planning can make a big difference.

Contributed by: Mark F. Winn, J.D., Master of Laws, LL.M. in Estate Planning, is a local tax, asset protection and estate planning attorney.