Klenk Law

Estate Planning with a Retirement Plan

Posted on Sun Mar 30, 2014, on Estate Planning

If you are like most Philadelphians, you are provided the option of participating in a qualified plan program, such as a 401k, 503(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 but, with the exception of a ROTH-IRA, when the funds are removed, the deferred income taxes come due.

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 are typically filled out quickly without any real thought or counseling. Essential information that you need to know in order to wisely complete the beneficiary form is often not provided to you.

For example, most people when handed a beneficiary designation form for a qualified plan are not told that your spouse is the only person that you can name as beneficiary that has the power to continue to completely defer the recognition of income taxes. All other people, including your children, that you might name as beneficiary at your death must either liquidate the IRA and pay all income taxes due or are given the chance to elect to “stretch” the IRA over the person’s projected lifespan. Stretching means that the beneficiary is required to take out an 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.

People are also not often informed that they should not name anyone who is a minor as the beneficiary of a quailed plan. This includes your children. If the person you name as beneficiary is a minor, at your death that person cannot file the required forms, which might require the expense of petitioning the Philadelphia Orphans’ Court to appoint your child a legal guardian. 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 own complex planning and tax issues. You are best served by obtaining the advice of an experienced Philadelphia estate-planning attorney about the available options, and then incorporate your IRA into your overall estate plan.

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