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Estate Planning and Retirement Accounts

When planning your Estate, it is important to recognize that certain assets will be distributed to a designated beneficiary at death, rather than according to your Will. A common example of this is a joint bank account. Say a mother and her daughter have a bank account held jointly, with right of survivorship. If the mother dies, the bank account automatically passes in full to the daughter, or vice versa, even if the mother (or the daughter) left the account to someone else in her Will. In this instance, banking law supersedes the authority of the Will in determining the distribution of the decedent’s assets.

Another example of this type of asset is a retirement account, such as a 401(k) or an IRA. When you die, your retirement accounts will pass to whomever you named as the beneficiary/beneficiaries on those accounts. If you do not name a beneficiary for your 401(k), it will automatically pass to your spouse, if you have one. If you do not, the 401(k) will pass directly to your Estate, and be distributed as part of the Remainder in accordance with your Will. An IRA is somewhat different; if no beneficiary is named for an IRA, it will pass to your Estate even if your spouse survives you.

If a retirement account goes to a named beneficiary, they can roll the account over to their preexisting retirement account and will not have to pay income taxes until later. If the account goes to the Estate, however, the eventual recipient will have to pay taxes on the monies received.

This is why it is so important to ensure that you have designated beneficiaries for all of your retirement accounts. In addition to naming primary beneficiaries, it is advisable to name contingent beneficiaries in the event a primary beneficiary predeceases you.

When there are multiple non-spouse beneficiaries of an inherited IRA, distributions must be taken over the oldest beneficiary’s lifetime. Rather than naming multiple beneficiaries on a single IRA, the best tax result is accomplished by splitting the IRA into separate accounts and name one beneficiary (and one contingent beneficiary) for each. This allows each beneficiary to take distributions over his or her own lifetime.

There are also special rules to be considered when rolling over a spousal IRA. Spouses younger than 59.5 can make withdrawals from their deceased spouse’s IRA without paying a penalty. Once the IRA is rolled over, however, withdrawals before age 59.5 incur a 10% tax penalty. Spouses older than the deceased spouse can delay the distribution of the IRA by retaining it and waiting until the time the deceased spouse would have been 70.5. Further, if a spouse wishes to disclaim a portion of the IRA, this must be done within 9 months of death, and before rolling over the account.


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