May 18, 2015

In recent years, retirement accounts such as IRAs and 401(k)s have become one of the largest assets in a person’s estate.   Because of the tax-deferred status of these types of accounts, they offer unique planning opportunities to the owner compared to a standard savings or investment account.  The owner of a retirement account names who will receive the account upon their death by completing a beneficiary designation form.  That form will then control regardless of the terms of the owner’s Will or Trust.  Therefore, who or what is named as the beneficiary is very important and should be reviewed regularly.

One of the largest advantages of a retirement account is what is called a stretch IRA.  This term refers to the ability of the person you name as beneficiary to take the distributions out over his or her lifetime, allowing the remaining fund to continue to grow tax-deferred.  Alternatively, the beneficiary would have to pay income taxes on the entire lump sum amount immediately.  A stretch IRA can accumulate a substantial nest egg for your heirs without any contributions on their part.

However, to achieve this, the beneficiary must understand their choices and decide to take out the distributions over their lifetime.  On average, ninety-three (93%) percent of beneficiaries choose to take the lump-sum distribution, foregoing the tax benefits.  If it is your desire that a beneficiary take advantage of the opportunities that arise from stretching an IRA or 401(k), you may want to consider using a Trust to funnel the benefits of the retirement account through to your beneficiary.  If properly drafted, a Trust can ensure that you have provided your beneficiary with an effective tool to make the most of their inheritance. 

Trusts can also have additional benefits such as reduction in estate taxes, enhanced creditor protection for the beneficiary, and protection in the event the beneficiary gets divorced or is subject to some form of tort liability. 

Because an IRA or 401(k) may be one of the largest assets of an estate, good planning is important if you want your heirs to receive their maximum benefit. The combination of IRA planning and trust planning is very complex and should be done only with the assistance of an experienced estate planning attorney.  The attorneys at Clair Law Offices would be happy to answer any questions you may have regarding the planning options for your retirement accounts.