From Our “Ask a Question” mailbag: “Do you have suggestions for Retirement Plan Estate Planning?”

Most recently updated May 5th, 2018

Estate Planning Attorney, Kelly Barse.

Retirement Plan Estate Planning.

If you are like most Philadelphians, you participate in a qualified plan program, such as a 401k, 403(b) or TIAA-CREF program. Otherwise, you may have an Individual Retirement Account (IRA) or a Roth-IRA that you have formed and funded yourself. These plans are designed to hold assets tax-deferred and earmarked for retirement. Except for a ROTH-IRA, when removing the funds, the deferred income taxes come due.

Qualified Plans; Great for Retirement, Tricky for Estate Planning.

These plans can make excellent sense for retirement, but too many people ignore the estate planning complications that they present. Ignoring these complications can lead to terrible tax consequences.

Typically, these plans allow the owner to name a beneficiary who will receive the remaining funds at the owner’s death. Unfortunately, these beneficiary forms often are filled out quickly without any real thought or counseling. Essential information that you need to know to wisely complete the beneficiary form is usually not provided to you.

For example, most people your employer fails to inform you that your spouse is the only person that you can name as the beneficiary that has the power to continue to defer the recognition of income taxes altogether. All other people, including your children that you might name as a beneficiary at your death, must either liquidate the IRA and pay all income taxes due or are given a chance to elect to “stretch” the IRA over the person’s projected lifespan. Stretching means that the beneficiary is required to take out a portion of the IRA each year and pay the income tax on what is taken out, but allows the person to defer recognition on what remains in the IRA.

Picking the Right Beneficiary; Part of Every Estate Plan.

People are also not often informed that they should not name anyone who is a minor as the beneficiary of a quailed plan. Minors include your children. If the person you name a minor beneficiary, at your death, that person cannot file the required forms.  Failure to be 18 might need an expensive petition to the Philadelphia Orphans’ Court to appoint your child a legal guardian.

IRA Trusts.

Congress addressed this issue by allowing you to form a trust with specific terms for non-spouses. You then do not name the child as beneficiary; you name this special IRA Trust as beneficiary. These trusts have special language so the trust can own the IRA and the trustee makes the elections on behalf of the minor child, removing the need to involve the Philadelphia Orphans’ Court. These IRA trusts have the additional advantage of protecting the IRA from the beneficiary’s creditors and spouse.

Your retirement plan is a unique part of your estate plan with its complex planning and tax issues. You are best served by obtaining the advice of an experienced Philadelphia estate-planning attorney about the available options.  A good estate planning lawyerIRA will incorporate your IRA into your overall estate plan.

In Conclusion: Retirement Plan Estate Planning is Vital.

Do not overlook your retirement plan in your estate plan.  Retirement plan estate planning is part of a complete, overall estate plan.

Let our estate planning lawyers review all of your assets and develop a plan to address all of your assets. If you have more questions, please call to speak with one of our experienced estate planning lawyer who is ready to answer your questions. Further, I included links to even more detailed information on my website.  So, let me know how I did, comments and questions are welcome!

Furthermore, I would be happy to answer your questions.  If you have any other matters feel free to contact our office for a free consultation. We try to make the process as painless as possible!

Wills, Trusts, Probate, and Estate Litigation, It’s All We Do!

Estate Planning Lawyer Peter Klenk