Most people understand the importance of setting up a trust to manage and control their property at incapacity and death. But we often see a serious disconnect when it comes to retirement account planning. Many families do a decent job planning where their house, bank accounts and personal property go when they pass on, but they failed to properly plan for the succession of the retirement accounts. Retirement accounts often account for the largest portion of a couple’s estate. We commonly see clients with several hundred thousand to several million dollars in these deferred income tax vehicles.

The main problem we see with clients is that they have done the planning for their non-retirement accounts but not their IRAs, 401(k)s, defined-benefit plan accounts, etc. We often see that clients have listed their spouse as the beneficiary, but they’ve not designated a contingent beneficiary on their retirement accounts or they have listed a minor child as the contingent beneficiary. Sometimes the disconnect comes because there is an assumption that their trust somehow will control the retirement accounts if their spouse predeceases them or they were to die together.

Another problem we see often is that if there is a contingent beneficiary listed, it is usually their children or grandchildren. This can be a problem for several reasons. If the child is a minor, the IRA custodian is going to require court action designating a Guardian at Litem for the distribution of the funds. The Guardian at Litem might decide to accelerate the account and pay a hefty income tax. This action creates a loss of stretch-out of the inherited account. This is bad because the account could’ve been income-tax deferred for the lifetime of the beneficiary based on their age and life expectancy. Even if the designated Guardian at Litem doesn’t accelerate the account, the child will have control over the account when they reach the age of 18 and that point could accelerate the distribution from the account and be left with a huge tax bill and no asset protection.

So why do we care? If your retirement account is large, the money could be mismanaged, squandered or even be destructive in the hands of an immature beneficiary. And I don’t think it’s the intention of any parent to create an unproductive or lazy adult by placing too much money in their hands too early in life. When we are talking about large accounts, typically we are talking about accounts with $250,000 or more in total including both spouses’ accounts.

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