Recently I had the sorrow of losing a wonderful client to cancer. We met in March, and reviewed her accounts and beneficiaries as we always do. She was working on revising her will and trust, but felt the IRA beneficiaries were fine as they were “for now.” We planned to meet again in six months to follow up. She looked well, and gave me no hint of her difficult prognosis. By September she had passed away. We learned then that she had revised her will and trust substantially, and left written instructions with her attorney as to how her IRA should be distributed. Unfortunately, nobody contacted us to change the beneficiary on her IRA, and now there is very little we can do to honor her last wishes.
As financial advisors, we help our clients ensure that their financial assets will pass according to their wishes if anything should happen to them. Toward that end, we often recommend that clients work with an estate attorney to create a living trust and a will, and keep them current. However, it’s important to know that not all your assets pass through your will or your trust, including IRA’s, 401(k) and 403(b) plans, and other employer-sponsored retirement plans, as well as annuities and life insurance policies. These assets may represent a significant share of your net worth, so it’s important that you understand how they are transferred.
Like annuities, retirement plans pass to their named beneficiaries, outside the scope of your will and trust. When a spousal beneficiary inherits an IRA, it can be treated as their own IRA. For non-spouse beneficiaries, the rules are different. The account becomes a “beneficiary IRA,” or IRA’s in the case of multiple beneficiaries. A beneficiary IRA is an account that will pay out taxable distributions (Required Minimum Distributions, or RMD) to the beneficiary over their lifetime. They can’t add funds to it or treat it as their own IRA, as the distribution schedule is governed by the unique combination of the beneficiary’s age, and the age at which they inherit the account.
It is not possible for an IRA or 401(k) plan to be owned by your trust, nor can they be jointly owned. Such accounts must be owned by an individual taxpayer. It is possible to name your trust as the beneficiary of your IRA or 401(k), but in general it is best for tax reasons to have specific named beneficiaries on these accounts. When a named beneficiary inherits, the account pays RMD over their life as described above. This minimizes the required distribution in any one year, and continues the tax deferral over the beneficiary’s lifetime. If the beneficiary is the estate, or some types of trusts, there is no designated individual for the required distributions. As a result, the entire account must be distributed within five years, and all taxes paid in that time. Before making your trust the beneficiary on your IRA, check with your estate planning attorney to confirm that your trust conforms to the “see-through” or conduit trust rules that allow funds to pass through it to a designated beneficiary.
When you experience a change in your life or your family, such as a birth, illness, marriage, divorce, etc., consider revising your will and trust, as well as updating beneficiaries on IRA’s, employer retirement plans and life insurance policies. You never know if there will be time to get back to it later.
If you have any comments or concerns, please don’t hesitate to call us at 408-551-6100 or toll free 800-927-8314 and ask to speak with one of our financial advisors.
Margaret (Peggy) Stephan, CFP®
LPL Financial Advisor
Retirement Capital Strategies
1190 Saratoga Ave, Ste. 140
San Jose, CA 95129
Tel (408) 551-6100
Source: This article was written by Margaret (Peggy) Stephan, CFP® – LPL Financial Advisor at Retirement Capital Strategies.