Retirement plans and estate planning

Retirement plans (i.e. pension plans, 401 (k) plans, employer-established IRAs, etc.) account for the majority of the assets of most Americans. Plans that meet certain legal requirements set forth in federal ERISA law enjoy favorable tax treatment to promote growth and provide a comfortable retirement for the account holder. For example, the account owner may defer taking any distribution from his retirement account until the calendar year in which he reaches age 70-1 / 2, allowing the account to grow tax-free during that period. . period. Once the account holder reaches age 70-1 / 2, they are required to begin taking required minimum distributions (MRD) and those distributions are subject to income tax.

However, retirement account tax advantages are not intended to benefit heirs or designated beneficiaries after the account owner has passed away, with one exception. If the account owner has designated his or her spouse as the beneficiary of the retirement account, after the death of the account owner, the surviving spouse may any transfer the deceased’s account to his own account gold remain the beneficiary of the decedent’s account and postpone taking distributions until the calendar year in which the deceased spouse would have reached age 70½.

However, estate planning becomes more complex when the beneficiaries of the retirement plan are people other than the surviving spouse. In that case, the beneficiary must take MRD for a period of five years or for the beneficiary’s life expectancy, sometimes referred to as “the stretch period.” If a trust is the designated beneficiary of the deceased’s retirement account and all beneficiaries of the trust are individuals, MRDs are calculated according to the beneficiary with the shortest life expectancy (i.e., the oldest beneficiary).

The whole subject of retirement plans is highly technical, given the requirements of ERISA and the regulations issued by the Internal Revenue Service. Similarly, incorporating the assets of a person’s retirement plan into their estate plan can be a complex exercise. Among the issues to consider are the following:

1. How to maximize the stretch period so that the assets in the retirement account can continue to grow tax-free for the maximum period of time;

2. Ensure that assets are protected from the beneficiary’s creditors; Y,

3. Provide a structure for the distribution of retirement funds (for example, limiting disbursements to prevent a wasteful beneficiary from wasting their share of funds at one time).

Be sure to consider the issues above before proceeding with your estate plan.

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