Estate Planning for Retirement Accounts


Volume 5 • Issue 3 • March 2015

The Counselor is a monthly newsletter of Hallock & Hallock dedicated to providing useful information on estate planning, business succession planning and charitable planning issues. In this month’s issue, we will discuss estate planning for retirement accounts.  If you are interested in learning more about the ideas and processes discussed in this newsletter please contact us for an initial consultation.

An often over looked asset in estate planning is retirement accounts. Whether it is a Roth IRA, Traditional IRA, 401(k) or some other qualified retirement plan, these accounts increasingly make up the bulk of a family’s wealth. While making a beneficiary designation may seem like a simple proposition, the rules governing these accounts after death are incredibly complex. In this month’s newsletter we will take a closer look at estate planning involving retirement accounts.

Beneficiary Designations Control

The first simple rule to understand is that the beneficiary designation you list on the beneficiary designation form will almost always control. There are potential exceptions to this general rule. The first is that certain accounts are required to list the spouse as beneficiary unless he or she has waived that right. Additionally, in some states, if a former spouse is not removed as a beneficiary following a divorce there will be a presumption that he or she was removed. Generally speaking, you should presume that who you listed as beneficiary will be the one(s) who inherit the account. We recommend an annual check-up of all beneficiary designations with your advisor. It is not uncommon to find that these designations are not as they were believed to be.

The Tax Bite

Whether you like it or not, if you have a Traditional IRA or other tax-deferred retirement account, the IRS is a beneficiary. The question is when will the IRS receive their cut? This happens when you begin to take distributions. But, you cannot put off distributions forever. The law has a required beginning date (RBD) at which time you must take required minimum distributions (RMDs). In most instances, you will be required to take your first RMD by April 1 of the year following the year in which you reach age 70½. For example, assume you are retired and your 70th birthday was June 30, 2013. You reached age 70½ on December 30, 2013. You must take your first RMD (for 2013) by April 1, 2014. However, if your 70th birthday was July 1, 2013, you would not reach age 70½ until January 1, 2014. You will not have an RMD for 2013. You must take your first RMD (for 2014) by April 1, 2015. If this isn’t complex enough, when you die things really get interesting.

Spouse as Beneficiary

Listing a spouse as the beneficiary may be required and the spouse has the most flexibility. The spouse may “roll” the account over into their own IRA, if so you go back to the rules set forth in the prior section as the spouse is now the owner. The spouse could opt to treat the account as an “inherited IRA.” If so a different set of rules applies. If the owner of the account dies before the RBD, the spouse may defer required distributions until the year the owner would have reached age 70½. Thereafter, RMDs are calculated based upon spouse's life expectancy. If the Owner dies after the RBD, the RMD for the year of owner’s death must be taken based upon the owner’s life expectancy. Subsequently, the applicable distribution period is the longer of: (1) the surviving spouse’s life expectancy; or (2) the life expectancy of the deceased spouse. There are various requirements that must be followed in determining life expectancy.

Non-Spouse Beneficiary

A non-spouse beneficiary will not have the option to “roll” the account over into their own account and defer until age 70½. A non-spouse can choose to take distributions over their life expectancy (this is known as a “stretch”) or liquidate the account and pay taxes within five years of the original account owner’s death (the five-year rule). The stretch option can be lost if the first RMD is not taken by December 31 of the calendar year following the year in which the owner died. Special precautions should be taken where minor children are involved, absent planning to the contrary the child will gain control of the funds when he/she turns 18. Consideration should also be given as to what happens if a child dies before you. Do their children inherit that share or is it re-distributed among your other children.

Naming Your Estate

A common mistake that retirement account owners make is to name their “estate” as the beneficiary. This can be intentional or inadvertent, such as when no beneficiary is named. In this instance the five year rule will apply and there will be no option to stretch. Additionally, what is normally an asset that does not require probate may now require a probate to transfer to the ultimate beneficiaries.

Naming a Trust

While some may advise to never list a trust as a beneficiary, this is not wholly accurate. A properly drafted trust can be a beneficiary of a retirement account without losing the benefits that non-spouse beneficiaries have. But beware, done improperly it will limit options and accelerate the income taxes. Naming a trust as a beneficiary is usually best done with a special purpose trust sometimes known as a Retirement Plan Legacy Trust, or Stand Alone Retirement Trust. Such a trust can control the timing of distributions and provide asset protection.

Leaving the Retirement Account to Charity

Retirement accounts are a great way to make gifts to charity. With a $100,000 account, a child or other individual would receive what is left over after taxes, maybe as little as $60,000 or $70,000 depending on the tax bracket, whereas the charity would receive the entire $100,000. Therefore, if you want to make a gift to charity your retirement account can make a great option.


A retirement account is often a substantial part of an individual’s net worth. Failure to properly designate beneficiaries can result in unintended distributions and unfavorable tax consequences. It is important to review the beneficiary designations on these accounts regularly to avoid these negative outcomes.

This Newsletter is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.