Retirement plans (ie pension plans, 401(k) plans, employer IRA plans, etc.) account for the bulk of the assets of most Americans. Plans that meet certain legal requirements established by federal ERISA law enjoy favorable tax treatment to promote growth and provide a comfortable retirement for the account holder. For example, the account owner can defer taking distributions from his retirement account until the calendar year in which he turns age 70½, allowing the account to grow tax-free during that interim period. period. Once the account holder reaches age 70 1/2, he must begin receiving the minimum required distributions (MRD) and those distributions are subject to income tax.
However, the tax advantages of retirement accounts are not intended to benefit designated heirs or beneficiaries after the account holder’s death, with one exception. If the account owner has designated his or her spouse as the beneficiary of the retirement account, after the account owner’s death, the surviving spouse may either transfer the deceased’s account to your own account Prayed remain the beneficiary of the decedent’s account and defer receipt of distributions until the calendar year in which the deceased spouse would have reached age 70½.
However, estate planning becomes more complex when the beneficiaries of the retirement plan are people other than the surviving spouse. In that case, the beneficiary is required to take MRD for a period of five years or for the life expectancy of the beneficiary, sometimes referred to as “the extension period.” If a trust is the designated beneficiary of the decedent’s retirement account and all of the trust’s beneficiaries are individuals, MRDs are calculated based on the beneficiary with the shortest life expectancy (ie, the oldest beneficiary).
The whole subject of retirement plans is extremely technical, given the requirements of ERISA and the regulations issued by the Internal Revenue Service. Similarly, incorporating a person’s retirement plan assets into their estate plan can be a complex exercise. Among the issues to consider are the following:
1. How to maximize the extension period so that the assets in the retirement account can continue to grow tax-free for the maximum time;
2. Ensure that assets are protected from the beneficiary’s creditors; Y,
3. Provide a structure for the distribution of retirement funds (for example, limit payouts to prevent a spendthrift beneficiary from wasting his share of the funds all at once).
Be sure to consider the above issues before proceeding with your estate plan.
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