Coordinating Your Retirement Plans with Your Estate Plan

Why are retirement plan beneficiary designations so important for coordinating your retirement plans with your estate plan?

Retirement Plans with Your Estate Plan Your retirement plans cannot be owned  by your revocable trust, so you need to  carefully consider who you list as the  primary and contingent beneficiary on  your 401(k)s, IRAs and other  retirement plan accounts. In most  circumstances, it is wise to list your  spouse as the primary on your  retirement accounts because the tax  benefits can only be exercised by a  spouse. One of these benefits includes  deferral from taking out the required  minimum distribution until retirement age in most cases.

However, for retirement accounts that are inherited by a non-spouse beneficiary, required minimum distributions must begin by December 31st in the year following the plan participant’s death. That is of course if the non-spouse beneficiary takes the positive action to stretch the 401(k) or IRA. Many beneficiaries either inadvertently take a lump sum distribution or decide to take the lump sum distribution so that they have more money now. If the balances in the cumulative IRAs, 401(k)s or other retirement accounts is large enough, however, I’m sure you can see what will happen on the tax filing for that year. It could put the beneficiary in the top tax bracket and cut the retirement account in half for the beneficiary.

Two alternatives do exist to take the power to stretch the account out of the hands of the beneficiary. The first of which is to list your revocable trust as the beneficiary (or contingent beneficiary if you’re married) and allow your Trustee to make the election to stretch the account. One drawback of this option however is that the trustee must hand over the required minimum distribution to the beneficiaries of the trust and cannot accumulate them in a continuing asset protection trust that has been set up for the beneficiary inside your revocable trust. Also note that your revocable trust must contain certain conduit provisions in order for your Trustee to effectively stretch your retirement accounts.

A second option is a Retirement Plan Trust. A Retirement Plan Trust can allow your Trustee to not only stretch your retirement account, but also to protect the retirement account’s Required Minimum Distribution for your beneficiary. For instance, if your beneficiary is your child, the time deferral for the stretch-out is going to be much longer than it would’ve been for you because they are one generation below you.

The amount of the account could be five times greater or more than the balance at the time he or she inherits the account. For example, if you have $1 million in your retirement account, that could mean $5 million or more for your child if properly stretched out over his or her lifetime. The Required Minimum Distribution (RMD) could be quite large on that size of retirement account so it makes sense to try to protect that account for your child from creditors, predators or a future divorcing spouse. And if the accounts are not exhausted during his or her lifetime, the accounts can go on to benefit your grandchildren with the same protections in the Retirement Plan Trust.

To schedule an appointment time with me to discuss whether or not a Retirement Plan Trust is right for you and your family situation, please call Geiger Law Office  at 760-448-2220 or email me Lisa@geigerlawoffice.net.

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