Estate planning is so much more than filling in the blanks on a few forms that you have printed out from the internet. In addition to having the proper documents and fiduciaries, you need to make sure that the estate plan is coordinated so that your beneficiary designations do not upset what you think is a perfectly drafted estate plan. For example, if your will leaves everything to your son and daughter equally, but your money is in a bank account that is joint with your daughter, then she will inherit all the money in the joint bank account notwithstanding what the will says.
Retirement account beneficiary designations present additional challenges due to the fact that, for many clients, this is where the bulk of their wealth is, and retirement plan custodians often have their own set of internal rules and policies that must be complied with. Thus, in many instances it is difficult to figure out how to complete your retirement account beneficiary designation, especially if you have a living trust or would like to leave money to charity or wish to minimize income taxes.
If you are married, naming your spouse as the beneficiary of your retirement plan is usually (but not always, especially in a second marriage situation), the best option. This is due to the fact that a surviving spouse can “rollover” your retirement account into his/her own which typically leads to the best tax results. If you are re-married and have children from a prior marriage, there may be better options available to you that would involve the use of a trust. However, this area of the law is fraught with traps for the unwary so please make sure you proceed with a competent estate planning attorney.
If you have charitable intentions, leaving money to a charity from a retirement account is often an excellent choice since the charity will not have to pay income taxes on the distributions from the retirement account after your death. Whereas, if you name an individual as the beneficiary of your retirement account, he/she will have to pay income taxes on the distributions. Thus, if you leave your $100,000 retirement account to your daughter, depending on her own personal tax situation, she may have to pay $35,000 in taxes and would net only $65,000 from your retirement account. If you left the $100,000 retirement account to a charity, the charity would net the entire $100,000; a much better result. You could leave your daughter $100,000 from a non-retirement account and she would also net the entire $100,000.
The recently enacted SECURE Act made significant changes to retirement plan distributions, including eliminating the stretch IRA, except in the case of eligible designated beneficiaries (EDB). An EDB is a spouse, disabled or chronically ill individual, an individual who is not more than 10 years younger than you or a minor child. For EDBs, the stretch IRA still lives and can result in significant financial and tax benefits to your family if all the relevant criteria are met. However, please note that the rules are complicated, especially if you want to leave your retirement accounts to a trust. A trust could be a good idea if you are concerned about protecting the retirement assets from the cost of long-term care of a disabled or chronically ill beneficiary.
Retirement account beneficiary designations can be challenging, and it is important that they be coordinated with the overall estate plan. When reviewing and updating your estate plan, do not forget to include a discussion of all your beneficiary designations, including retirement plans.
We have discussed just a few of the reasons why you might not want to throw your will and other estate planning documents in a drawer, never to be taken out until something happens to you. There are many more reasons to pay attention to your estate plan as we all go through this journey we call life. So, think of your estate plan as a work-in-progress that will likely need a bit of fine-tuning from time to time. Contact us here.