|
When we meet with families to work on their estate planning, the majority of individuals want to keep as much money tax-deferred as feasible, pay the lowest possible income taxes, and provide for their loved ones as long as possible. Retirement accounts and 401(k)s are one of the major assets we often must consider when planning. Our clients are often surprised to learn that they have options when it comes to selecting beneficiary designations. This article is meant to help educate you on the options and prepare you to better protect your estate.
There are generally two main options you have in naming beneficiaries for your 401(k) plan or retirement account. You may list your spouse, children or other loved ones individually, or you may name a trust. One other important rule to know is that the new beneficiary's age and life expectancy will determine how much the required distributions are each year after the owner dies; therefore, generally, the younger the beneficiary, the less the account is required to distribute each year.
Naming Individuals as Beneficiaries
While naming individuals as the beneficiaries may seem like the easiest way to plan, naming a beneficiary outright has several disadvantages:
-
If the beneficiary is a minor, payments must be made to a guardian; if no guardian can be found, the court will have to designate one.
-
A beneficiary may be tempted to take large disbursements or even cash out the entire account in a single year, jeopardizing your tax-advantaged growth objectives.
-
Because the beneficiary is unrestricted, the funds could be lost to a beneficiary's creditors, lawsuit or ex-spouse(s).
-
There are no limitations on who the new beneficiary names as a replacement beneficiary should something happen to them. This is especially crucial in cases involving remarriage and blended families. Your beneficiary has no obligation to follow your instructions.
Naming A Retirement Trust as Beneficiary
When creating a trust to serve as the beneficiary, it's preferable to create it as a separate trust dedicated only for this purpose since it must follow strict IRS rules. As a result, these trusts are frequently referred to as "stand-alone retirement trusts." Once the trust is created and upon your passing, the minimum required distributions will be paid into the trust on behalf of your beneficiary.
Naming a standalone retirement trust as beneficiary has several benefits:
-
As the creator of the trust, your can determine how much of the trust assets are distributed to the trust beneficiary each year. You may elect to stretch out assets with the smallest required minimum distribution possible, taking advantage of tax-deferred growth and providing your loved ones with the maximum tax deferral.
-
Because the Retirement Account beneficiary is a trust, the assets are protected from beneficiaries’ creditors. This feature can protect your loved ones from divorce, bankruptcy, lawsuits, medical bills, and the like.
-
In the case of a beneficiary having a drug, alcohol, gambling, or overspending problem, the retirement trust can protect those assets from being wasted.
-
Should you have a loved one with special needs, a standalone retirement will allow the trustee to pay out the required amounts while still providing for a special needs beneficiary without jeopardizing government benefits.
-
Because a trust is named as the beneficiary rather than the person, there is no need for a guardian for minor children and no danger of court interference in the event of the beneficiary's disability.
-
A retirement trust document will include a list of successor beneficiaries, allowing you to maintain control over who will get the money should your original beneficiary pass away before the account is entirely paid out.
Choosing the right beneficiary designation can be a difficult decision that requires careful consideration. Even if you have already designated your spouse or children as beneficiaries of an IRA or other retirement account, it's important to remember that this is not necessarily the only option available for estate planning purposes. It’s worth exploring a “stand-alone retirement trust” for more flexibility in terms of who receives distributions from these investments upon death. To explore all your options with respect to beneficiary designations, please contact Roth Elder Law, PLLC at 607-962-9162 today!
|
