Adding Retirement Assets Into Your Estate

Retirement Plans and Their Effects on Estate Planning 

Estate planning is an area of law that involves disposition of an owner's property to beneficiaries upon death.  

This is done through last will and testament, life insurance, a trust, beneficiary designations or lifetime gifts.  

Each option comes with its own set of values and regulations to be navigated in order to achieve the outcome you desire. 

The most popular form of transfer is a last will and testament.  However, recently, estate planning attorneys are seeing more trust planning to pass on property to beneficiaries.   With the use of a trust, a client has the option of adding their retirement assets into their estate by using a beneficiary designation.  This, with a last will and testament, creates a strong estate plan that helps minimize tax consequences and estate administration costs.  

Probate v. Non-Probate Assets 

Estate planning involves both probate and non-probate assets.  

What are probate assets?  Assets that are transferred under the decedent's last will and testament or where the decedent does not leave a will, according to the laws (in Wyoming, statutes) of "intestacy" or person without a will.  Both situations involve property that is owned by the decedent in his or her individual name at the time of death.  

What are non-probate assets?  A non-probate asset is the decedent's asset that pass outside of the will or statutes of intestacy.  It includes trusts where the decedent had a general power of appointment in favor of his estate.  

Examples of non probate assets: 

  1. Life insurance proceeds paid to a designated beneficiary; 
  2. Bank accounts; 
  3. Real estate;
  4. Securities held jointly with right of survivorship; 
  5. Bank accounts held in trust for someone living; 
  6. Retirement benefits payable to a designated beneficiary; 
  7. Property which decedent gave away outright or in trust, during his or her lifetime.  

Retirement plans can be probate or non-probate assets.  Any plan maintained individually by you, an employer, a past employer, self-employment plans are included in "retirement plans".  Retirement plan distributions can be a taxable event depending on how it is structured.  Each plan has a specific set of rules that govern distribution and possible restrictions.  In some cases the retirement assets are not directly held by the decedent but instead can be held by a trustee for the organization that the decedent works for.  In self-directed retirement accounts, the holder of the account can utilize the funds in any manner.  Each plan has its own set of rules that determined beneficiary designations, contractual obligations and income tax.  

There are two types of plans--qualified and non-qualified. 

Qualified Retirement Plans:

Contributions by employers are deductible in the tax year for which the contribution is made.  The participant is not taxed on the receipt of the funds until a distribution is made and there is tax free accrual of income generated by the contributions.  

Defined Benefit Plan: A participant can choose the type of payout received on retirement.  The plan provides a set benefit paid on retirement or death. 

Defined Contribution Plan:This plan allows for a distribution on death with a remainder to beneficiaries.  Under this plan, the client's assets are held in an individual account and the employer determines when the assets have vested and now belong to participant.  

Other types of Qualified Plans:  Individual Retirement Arrangements (IRA), Roth IRAs, 401(k) plans, SIMPLE 401(k) plans, 403(b) plans, profit sharing plans, government plans. 

Non-Qualified Plans: The common non-qualified is the deferred compensation plan that allow an employee to contribute a portion of their salary into a workplace savings-like account that is held and invested tax deferred until distributed.  

Depending on the plan rules, a participant can have all distributions made to her during her lifetime in lump sum, a small amount during life with a remainder to her spouse, or a set amount for a specific period of time with the remainder to the beneficiaries or spouse.  

Impact on Estate Plans

If there is no designated beneficiary on the beneficiary designation forms, the SECURE Act rules still apply  Reg 1.401(a)(9)-3 

The retirement assets must be paid in full by the end of the fifth year after the decedent passes away.  

Nonpersons are not designated beneficiaries. 

Power of Attorney 

In the event of your incapacity your agent should have power over your retirement account as part of your estate plan. 

Spouse as Beneficiary:  Distributing plan benefits to a spouse or a trust with the spouse as beneficiary will allow the participant to qualify for the marital deduction (see linked article on portability).  It is important to note that this is not an evasion of tax--it is a deferral of tax.  The surviving spouse will be responsible for the tax.  The surviving spouse can utilize lifetime gifts up the annual exclusion amount for gift tax purposes.  

Beneficiaries Other than Spouses:  For divorcing clients qualified retirement plan usually require that a spouse is a primary beneficiary and any other designation requires the spouse to waive such a benefit in writing. 

Revocable Trust as the Beneficiary: You can designate a trust as the beneficiary of your retirement plan for the benefit of a spouse.  The surviving spouse will generally lose the ability to do a tax free rollover of the paid benefits.  The trust has no life expectancy and as a result the benefits are withdrawn over the life expectancy of the participant. 

Blended Families and IRAs

Usually you wish to leave your IRA to your surviving spouse.  Where one spouse has children from an earlier marriage the qualified terminable interest property trust may be used.  This trust will allow small distributions over a period of time for his life and postpone estate taxes until the surviving spouse passes away.  The minimum distribution rules apply to IRAs and the marital deduction requirements apply under Internal Revenue Code SEction 401(a)(9) and 408(a)(6). 

Income in Respect of a Decedent

Income that a decedent was entitled to receive but was not included in the final income tax return is income in respect of a decedent (IRD) and is considered income in the year received and it is the estate's responsibility to file the income tax return including this item in gross income.  If the proceeds are inherited by a beneficiary directly then the recipient must file.  See Internal Revenue Code Section 691.

If you would like assistance with your estate planning documents, including the correct language for your springing financial power of attorney, please contact me at 307.200.1914.