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Estate Planning Considerations for Retirement Accounts

These days, I see fewer and fewer clients with pensions that pay them a monthly income for their lifetime, and perhaps for their spouse’s lifetime as well.  Most of my clients now have large retirement accounts to which they and perhaps their employer have contributed.  These accounts may be in the form of a 401k, 403b or other retirement savings plan through a current employer, a rollover IRA (holding funds rolled over from a former employer), an inherited IRA (holding funds from an IRA of which the client was named as beneficiary) or a traditional IRA or Roth IRA established by the individual client.    These types of assets all have certain things in common – the funds in them have for the most part not been subject to income tax (with the exception of a Roth IRA), they are subject to specific and detailed rules for withdrawals during the lifetime and after the death of the account owner, and they often comprise a large percentage of the account owner’s wealth.  These factors combine to make it extremely important for clients to pay close attention to how they plan for these accounts.

As an estate planner, my goal is to make sure that the designated beneficiaries of my clients’ retirement accounts are consistent with the rest of their estate plan, that if someone becomes incapacitated his or her retirement funds can be appropriately managed, and that when the account owner dies these valuable assets are properly administered.  Most people diligently designate their spouse as the primary beneficiary of their retirement accounts, but many people do not designate contingent beneficiaries on their retirement accounts.  Admittedly, the contingent beneficiary designation is a much harder exercise.  Should you name a charity, your children, your grandchildren, your second wife, your Trust?  What if your desired beneficiaries are young and have no idea what a retirement account is?   The decisions that must be made when designating beneficiaries can have far-reaching income tax, estate tax, and other implications for you and your beneficiaries.

Further, many people are not aware that when they die, a non-spouse beneficiary must begin taking minimum required distributions from an inherited retirement account by the end of the year following the year in which the account owner dies.  This holds true whether the beneficiary is age 2 or 72, and leads to the important discussion of how to designate the beneficiary of your retirement account if you want to benefit young children.  There are pros and cons and tax considerations to deciding whether to name the child individually, or a trust for the child’s benefit, as beneficiary.

It is of course important to get good financial advice about how your retirement accounts are invested.  Many of these plans are now self-directed, with on-line tools to help you pick investments that are appropriate for your age and goals.  However, if you have a retirement account with several hundreds of thousands of dollars in it, you really should have a conversation about your investments with a human, preferably an experienced financial advisor, rather than your computer.

While you are dreaming about how you will spend that money in retirement (hopefully on living well, doing good, and having great adventures), take some time to consider what will happen if you do not outlive your retirement funds (which is the goal, after all).  Consult with an experienced estate planning attorney for advice on how best to plan for those retirement funds consistent with your estate planning goals so that the next generation can continue those dreams!

January, 2018

© 2018 Samuel, Sayward & Baler LLC