Estate Planning and Qualified Retirement Accounts

It has been awhile since we last addressed the topic of estate planning and qualified retirement accounts, such as an IRA or 401k.  Americans hold roughly $17.5 trillion in such qualified retirement accounts.  These can be complex assets to address in the plan, but unfortunately most estate plans do not seem to address them at all.  Here are several things to consider in estate planning for your IRA or other qualified retirement account:

  • Who are Your Beneficiaries? A review of beneficiary designations should be undertaken annually to ensure that you have properly named beneficiaries.

  • What are the Tax Consequences of Your Designations? Depending on whether the beneficiary is a spouse, a non-spouse, an estate, a trust, or a charity, different tax consequences occur. The goal is to allow for tax deferral or tax free growth to continue for the longest time possible.

  • Will Your Beneficiary Have Asset Protection? When it comes to beneficiaries, many courts, including the U.S. Supreme Court, have held that the protections available for IRAs do not extend to inherited IRAs. The good news is there are ways to provide this asset protection.

  • Are Your Beneficiaries Protected from Their Own Bad Decisions? Even if you have set things up to provide your beneficiaries the maximum tax benefits – what if they make bad choices and lose those benefits?

  • Are there Minor or Disabled Beneficiaries? The general rule is that an individual is eligible to receive their inheritance outright at age 18. Do you want your minor children to inherit their share outright at that age or would older be better? If you have a disabled child, how would such an inheritance affect his or her benefits?

  • What if a Beneficiary Dies Before You? If your named beneficiary dies before you, the rules established by the brokerage or plan will govern who is next in line. Is it their children? Is it their spouse? Does the share just go to the other beneficiaries? What are the rules?

With proper planning, all of these issues can be addressed.  Unfortunately, the planning is often left to chance.  The goal is peace of mind.  Make sure the loose strings are tied up.