Our estate planning attorneys know that the key to any effective estate plan is a mindful review of your assets and structuring of your beneficiary designations in a coordinated way with your will, trust agreement and overall estate plan. Properly establishing and filing primary and contingent beneficiary designations of retirement assets is essential to allow your beneficiaries to take full advantage of income tax deferral opportunities. Failing to name a proper beneficiary, however, may cause the estate or beneficiaries of the estate to immediately face income taxation on the retirement plan proceeds and significantly reduce the long-term growth potential of the assets. Our attorneys are experienced at creating effective estate plans and structuring beneficiary designations that work to accomplish our clients’ long-term goals, taking the following into account:
- It is important to name a beneficiary of an IRA or other qualified retirement benefit, such as a 401(k) plan or 403(b) account. These assets will be subject to income tax at some point, either to the owner as he or she receives distributions, or to the beneficiaries following the owner’s death. Often, the objective is to defer the income tax payments as long as possible, allowing the assets to grow without payment of income tax until distribution.
- A spouse, who is named as a beneficiary, can roll over an IRA or other qualified retirement benefit to an IRA, continuing to defer distribution and tax until the surviving spouse reaches age 70½ and must take required minimum distributions based on the surviving spouse’s life expectancy.
- A non-spouse named as a designated beneficiary has the option to establish an “inherited IRA” in the deceased owner’s name. The non-spouse beneficiary may take distributions over the beneficiary’s life expectancy, which could be lengthy if young children or grandchildren are the beneficiaries.
- Like IRAs and other qualified retirement plan benefits, life insurance and tax-deferred annuities also pass by beneficiary designation or contract, not necessarily under the will or trust agreement, unless the beneficiary designation is structured to pass the benefits through the estate or trust.
- A younger couple may execute wills and establish trusts for the benefit of their minor children. However, if life insurance or retirement plan benefits name the minor children directly as the beneficiaries, rather than the trust established under the wills or under a trust agreement, the trust will not be funded and the proceeds of the insurance and retirement plan benefits will be administered by the court system and distributed when the minor attains age 18. In most cases, this is contrary to the owner’s intentions and objectives.