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Estate Planning for Your Retirement Accounts: Five Recommendations for Getting It Right

By: Frances Cronlund, CIMA®, CExP™, CTFA, CFP®
3 Minute Read

According to recent data from the National Association of Plan Advisors, the total value of all U.S. retirement assets has exceeded 29 trillion dollars, accounting for 33 percent of all household financial assets. A significant portion of these assets exist within retirement accounts, and yet, if history is any indication, many of those funds won’t be inherited by the assumed individuals following the account owners’ passing.

The key to ensuring your assets end up in the right hands is thorough and thoughtful estate planning. The problem is, when hearing the phrase “estate planning,” most people focus solely on their wills and trusts, not realizing that a will or trust doesn’t automatically dictate how retirement accounts are transferred to their heirs after their death. While these documents are important pieces of an estate plan, the plan is not complete until you take a close look at retirement accounts to identify the appropriate designated beneficiaries, take steps to instate additional protections, and proactively allocate charitable funds.

Just as you would plan how your business, beach house, or taxable investment accounts pass to your heirs, it’s equally important to protect retirement accounts (usually one’s largest asset) against unnecessary taxes, creditors, and probate.

Here are five recommendations for getting this important piece of estate planning right.

    1. Always name a secondary beneficiary.Most retirement account owners name a primary beneficiary (usually their spouse) within their retirement account documents but not a secondary beneficiary. However, should the primary beneficiary predecease you (or disclaim the retirement plan), if you haven’t named a secondary beneficiary, then the retirement plan document itself dictates who is entitled to the benefits. For example, the retirement plan might say that if your primary beneficiary is deceased, then the plan goes to his/her legal heirs. This might be your in-laws or your spouse’s minor children from a prior marriage; the point is—you don’t know. Naming a secondary beneficiary is your opportunity to determine who you want to receive your retirement assets if your primary beneficiary cannot or will not.
    2. Almost never name your “estate” as a beneficiary.When account owners don’t know who to designate as their secondary beneficiary, they sometimes fall back to naming their “estate” as the beneficiary. Unfortunately, this choice necessitates having your retirement account controlled by the executor of your will and thus included in the probate process.  Generally, the probate process isn’t to be entirely avoided. However, the probate process does subject assets to your creditors, time delays, and public scrutiny.  The retirement plan document may also require distribution under the five-year rule, possibly subjecting it to income taxes sooner than necessary. Including retirement accounts in probate presents several issues:- Additional attorney and administration fees may be incurred.
      – Creditors can make claim to the retirement assets during the probate process.
      – Before heirs can access the funds, your estate beneficiaries may have to wait for the administration of the estate to be finalized.
    3. Consider coordinating with a retirement plan trust to provide additional asset protection.Some retirement account owners may prefer to use a retirement plan trust to allocate funds after their death. With a retirement plan trust, asset protection measures help account owners maintain control over how assets may be used following his/her death. Furthermore, coordinating with a retirement plan trust can ensure that leftover assets will not become part of a surviving spouse’s estate. This would provide multi-generational control over how the assets flow and protect those assets for the account’s named beneficiaries.Two common reasons retirement account owners prefer to use a retirement plan trust include:- To protect young, special needs, or spendthrift beneficiaries from themselves. If you feel that your beneficiaries are not able to navigate the tax rules and investment choices of the accounts that they inherit, then using a Retirement Plan Trust can address that concern.

      – To protect beneficiaries from others. If you feel that your beneficiaries would benefit from some asset protection, then using a Retirement Plan Trust could ensure that protection. Examples of situations that may warrant additional asset protection include divorce, high-litigation risk professions, and business ownership.

    4. Consider using retirement assets to make charitable gifts. If you would like to use retirement account assets to make a financial gift to a qualified charity at your death, you may do so by designating the charity as a partial or full beneficiary. When a charity receives a distribution from a retirement plan, it does not pay income taxes on retirement plan distributions. By contrast, a non-charitable beneficiary such as your children or spouse will pay income taxes when receiving distributions from a non-Roth retirement plan.
    5. Retain copies of your signed beneficiary designation forms and keep them safe with other estate documents.Before you submit your signed beneficiary designation to the retirement plan administrator, make a copy for your personal files. In the event that the retirement plan administrator later misplaces the forms or an older version surfaces, your heirs will have backup documentation.

Following these recommendations can help ensure your retirement assets are appropriately distributed following your death. If you have questions about estate planning or would like to review your current plan, please reach out to our Curi Capital’s Wealth Management team at 984-202-2800.

Please note:  This is for educational and general information only and is not intended to provide specific investment advice or recommendations for any individual. You should consult your financial advisor, attorney, or tax advisor with regard to your individual situation.

Frances Cronlund, CIMA®, CExP™, CTFA, CFP®

Frances Cronlund is Curi Capital’s Senior Director of Wealth Planning, based in Raleigh, NC.

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