Retirement Plans and Estate Planning


Pension plans (i.e. pension plans, 401 (k) plans, employer-established IRA plans, etc.) make up the majority of assets held by most Americans. Plans that meet certain legal requirements set out in the Federal ERISA Law are given favorable tax treatment in order to promote growth and provide a comfortable retirement for the account holder. For example, the account holder is allowed to defer the withdrawal of distributions from his retirement account until the calendar year in which he turns 70 and a half, thereby allowing account to grow tax-sheltered during this period. period. Once the account holder reaches 70-1 / 2 years of age, he / she is required to start receiving the Minimum Required Distributions (MRDs) and these distributions are subject to income tax.

However, the tax benefits of retirement accounts are not intended to benefit heirs or beneficiaries named after the account holder has passed away, with one exception. If the account holder has designated their spouse as beneficiary of the retirement account, on the death of the account holder, the surviving spouse may Is roll over the deceased's account to their own account or remain beneficiary of the deceased's account and postpone taking distributions until the calendar year in which the deceased spouse would have reached 70 and a half.

Estate planning, however, becomes more complex when the beneficiaries of the pension plan are people other than the surviving spouse. In this case, the beneficiary is required to take MRD over a period of five years or over the life expectancy of the beneficiary, sometimes referred to as an "extension 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 based on the beneficiary with the shortest life expectancy (i.e. -d. The oldest beneficiary).

The whole subject of retirement plans is extremely technical, considering the requirements of ERISA and regulations issued by the Internal Revenue Service. Likewise, incorporating an individual's pension plan assets into their estate plan can be a complex exercise. Some of the questions to consider include the following:

1. How to maximize the extension period so that the retirement account assets can continue to grow tax free for the maximum term;

2. Ensure that the assets are protected from the beneficiary's creditors; and,

3. Provide a structure for the distribution of pension funds (eg limiting disbursements to prevent a spendthrift beneficiary from wasting their share of funds all at once).

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

© 12/06/2017 Hunt & Associates, P.C. All rights reserved.

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