Things to Consider When Planning for Retirement: Coordinating Retirement and Estate Planning
Have a Will or a Trust and Name Beneficiaries
The first step in estate planning is creating a will or trust to distribute your wealth. Without a will or a trust, your estate will be divided in probate court, which is often a long and expensive process. Not all assets, however, have to be disbursed through a will. Specifically, retirement accounts allow the retiree to name the beneficiaries for the account, who will automatically receive access to the accounts upon the retiree’s death. Without naming a beneficiary to your retirement accounts, the accounts will go to probate court. Many people name their spouse as their primary beneficiary and then designate their children or other individuals as contingent beneficiaries. Another option is to leave your retirement accounts to a beneficiary via a trust. This option may provide an increased level of protection and flexibility for your accounts, and ensure your assets are disseminated in a way that matches your overall estate planning objectives. This option, however, can have serious and complex tax implications, so it is important that you consult an attorney when drafting a trust.Taxes on Retirement Accounts
In general, the receipt of inherited property is not usually subject to income tax. Retirement accounts are the major exception to this rule because those funds were income of the decedent that were not previously taxed by the government. To that end, any amounts withdrawn from a 401(k) retirement plan or a traditional IRA are subject to income tax at the beneficiary’s ordinary income tax rate.Not all retirement accounts are created equal when it comes to taxes. Funds withdrawn from a Roth IRA generally are not taxed. Since contributions were not tax-deductible, income accumulates tax-free as long as the contributions stay in the account at least five years. Qualified withdrawals are not taxed and there are no mandatory lifetime withdrawals. Until recent changes were made, pensions, although not subject to income taxes, were subject to a 55% pension death tax. Beneficiaries of inheritances either pay no tax if a pension holder dies before age 75, or their normal income tax rate if they are 75 or over.
The Internal Revenue Service’s rules on retirement plans seem inexhaustible, are difficult to comprehend, and can change at any time. An estate planning attorney can review your retirement plan and work with you to make sure the accounts are distributed in a way that is consistent with your overall estate planning objectives. To find an estate planning lawyer, quickly post a short summary of your legal needs on www.legalserviceslink.com for free, and let the perfect attorney come to you!
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Posted - 09/08/2016
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