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But as my largest asset I want to be sure I can leave it to my three children and avoid probate. What should I do?
Individual retirement accounts or IRAs were often overlooked or disregarded when estate planning was undertaken, but as a result of 401k and pension plan rollovers IRAs hold approximately 27% of all retirement assets in the US with over $4.9 trillion in tax-deferred funds. i While estate planners and wealth management professionals have started to give IRAs increased attention many lawyers preparing just simple wills lack a sound understanding of the post-mortem planning opportunities for IRAs and thus don’t alert their clients to the rules for required minimum distributions (RMDs) that will come into play upon the owner’s death for these tax deferred accounts. Many IRA owners still see their IRAs like a plain savings account and don’t ask questions of their tax professional, financial advisor and attorney.
The most common error that occurs is not naming a “designated” beneficiary (a legal term of art) and a contingent “designated” beneficiary on the beneficiary form. Estates and charities can be named on the beneficiary forms, but they are not considered “designated” beneficiaries. Only individuals and qualified trusts can be designated beneficiaries. “My spouse’s IRA account” is not a proper designated beneficiary and some living trusts do not qualify because they are not fully irrevocable upon the death of the first spouse. Likewise an otherwise qualified sub-testamentary trust in the living trust is not properly named on the beneficiary form. Leaving an IRA to an estate has certain perils, including the possibility of the funds becoming subject to creditors’ claims. Additionally an unwitting personal representative might deposit the entire IRA into an estate account causing it to be subject to immediate taxation. Estate planners also need to consider pre and post nuptial agreements and be certain the wrong beneficiary such as an ex-spouse, or ex-boyfriend or girlfriend or life partner, or someone no longer favored by the owner, who is being removed from the will, is not left on the beneficiary form. If the primary beneficiary predeceases the IRA owner without a “designated” contingent beneficiary, then the default provisions of the IRA rules will apply and that is not always the most financially advantageous result. Proper layering of “designated” beneficiaries is always a good idea.
If your IRA has a proper “designated” beneficiary you will avoid probate of that asset. It remains to be seen whether you have done sufficient planning to avoid probate all together.
You have admirable goals. Sadly studies repeatedly show that family wealth is completely lost by the third generation. Learning how to work, live within your means, save, acquire, grow and maintain money is important for generational family success. Some seniors are able to involve their children in their estate planning, finding they still have valuable lessons to teach on how to select and work with wealth planning professionals during their retirement years.
There are a lot of really important details left out of your question. You need an estate planning team – a tax preparer, a knowledgeable attorney, and a financial advisor who can assure that your IRA beneficiary form is completed correctly and your IRA is invested wisely. Your team should also help you address the other components of a solid estate plan which should include certain legal documents and may include funeral and/or adequate life insurance, long term care and Medicare supplement insurance or other appropriate plan of care to deal with medical expenses and potential incapacity.
i See Employee Benefit Research Institute or www.EBRI.org, “Fast Facts,” #203, June 30, 2011 and also Investment Company Institute or www.ici.org, Washington, D.C., Sept 30, 2011 press release.
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.
WRITTEN BY LINDA KNAPP
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