Retirement plans (eg, pension plans, 401(k) plans, employer-created IRA plans, etc.) account for the majority of assets held by most Americans. Plans that meet certain statutory requirements under federal ERISA enjoy 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 taking any distributions from his or her retirement account until the calendar year in which he or she turns 70-1/2, allowing the account to grow tax-free during that interim period. Once the account holder turns 70-1/2 years old, he or she must start taking minimum required distributions (MRDs) and these distributions are subject to income tax.
However, the tax benefits of retirement accounts are not intended to benefit the heirs or designated beneficiaries once the account holder dies, with one exception. If the account holder has designated his wife or husband as the beneficiary of the retirement account, then upon the death of the account holder, the surviving spouse can also Transferring the deceased’s account to his own account or Remain as the beneficiary of the deceased’s account and defer taking distributions until the calendar year in which the deceased spouse reached the age of 70-1/2.
However, estate planning becomes more complicated, when the beneficiaries of the retirement plan are people other than the surviving spouse. In this case, the beneficiary is required to take MRDs over five or more years of the beneficiary’s life expectancy, which is sometimes referred to as a “stretch period.” If the trust is the designated beneficiary of a decedent’s retirement account and all of the trust’s beneficiaries are individuals, the MRD is calculated according to the beneficiary with the shortest life expectancy (ie the oldest beneficiary).
The whole topic of retirement plans is very technical, given the requirements of ERISA and regulations from the Internal Revenue Service. Likewise, incorporating an individual’s retirement plan assets into their estate plan can be a complex exercise. Among the issues to be considered are:
1. How to maximize the rollover period so that the assets in the retirement account can continue their tax-free growth for the maximum length of time;
2- Ensure the protection of assets from the creditors of the beneficiaries. And the,
3. Provide a structure for distributing retirement funds (eg, limiting payments in order to prevent a spendthrift beneficiary from squandering his or her share of the funds in one fell swoop).
Make sure you consider the above issues before embarking on your estate plan.
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