Retirement Assets

Q.    Can I pass my retirement assets by will?

A.    Maybe, but are you sure you want to?

If you are talking about a pension probably not because it is governed by a contract and very likely federal laws.  Distribution on death is limited to the choice you selected at retirement and usually further limited to a surviving spouse and possibly dependent children.

Most of your assets, such as a house, a car and a checking account were purchased or acquired with after-tax dollars.  Traditional IRAs, 401(k) s and similar retirement plan accounts are made from pre-tax dollars so year after year contributions and interest grow tax free.  When distributions are made to the participant they are taxed as income. When a participant dies leaving retirement assets, the assets are subject to income tax when distributed and possibly probate fees, if proper planning does not happen.

Your will usually does not determine who receives your retirement assets, rather these assets pass under a contract for which you hopefully named a beneficiary.  The beneficiary form may also allow you to select alternate beneficiaries.  This form could be the most important component of your estate plan, yet few individuals even know if they signed it, where a copy is, and who they selected as primary beneficiaries, much less alternate beneficiaries.  Failure to properly designate a beneficiary for a traditional IRA or 401k or other retirement account can result in acceleration of the required minimum distributions so that either full distribution must be taken immediately or within five years, and this often results in a higher percentage of taxes being paid by the receiptant.

By law only people or a qualifying trust can be designated a beneficiary.  Your general estate is not a person or a trust, therefore not a proper legal beneficiary for a retirement asset.  You could create a testamentary trust in your will that names a trustee to receive a retirement asset for a specific beneficiary.  This is done to protect some or all of the asset from a second spouse, the beneficiary’s creditors, a minor child, or from reckless spending by the beneficiary him or herself do to a history of financial misuse or lack of savings of their own funds for their own retirement, or perhaps due to drug and/or alcohol abuse.   Usually separate trusts are used for each beneficiary.

When retirement benefits pass by contract and not by a will, they are not part of the probate estate.  This is a good thing because probate can result in probate fees, time delays and become expensive.

People generally understand that the income tax consequences of a retirement asset can be deferred.  For example a spouse can roll an IRA and receive benefits for many years after the participant’s death based on his or her own life expectancy.  And a spouse might even be able to minimize the payout to just the required minimum distributions (RMDs) so that the bulk of the asset is later available to children and even grandchildren.  Leaving an inherited IRA to a trust is different from putting other assets into a trust after death, but there could be a back-up option that allows a spouse to legally disclaim the IRA within 9 months from the participant’s date of death in order to let the spousal portion go into a pre-drafted testamentary trust.

There are no fixes for mistakes by the grantor or the drafter.  Estate planning requires informed choices.  Choose wisely who will explain your choices to you and who will draft your documents.

Disclaimer:  Information contained in this column is meant to be of general information on frequently asked questions concerning disability, elder law, estate planning and probate law, and does not contain specific legal advice to a client.  No attorney-client relationship is created by reading this column. 2018

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