Whether you have a will or a living trust it does not directly affect your estate-planning for your retirement-plan assets. That is because retirement-plan benefits (generally referred herein as IRAs) are not governed by your will or living trust. Instead, benefits are passed to the beneficiary named on your plan custodian’s beneficiary-designation form.
If you feel confident about your family’s ability to carry out your wishes, you may be able to accomplish what you want with your beneficiary-designation forms alone. Ideally, the two spouses simply would leave their retirement benefits to each other. That way, the surviving spouse could roll over the inherited retirement plan into his or her own individual retirement account.
Next, the surviving spouse would name the children and grandchildren as the beneficiaries of that IRA on a standard IRA-beneficiary form. With that approach, the surviving spouse would get the maximum income-tax deferral from the assets, by creating what is called a Stretched-Out-IRA. By using separate accounts, the children and grandchildren could split up the account and stretch out their withdrawals across their life expectancies.
If the children are from a prior marriage, this approach may not work, since the surviving spouse can leave the IRA to whomever they want. One other note: If assets are held in a 401(k) plan and both spouses were to die simultaneously, the plan would have to be terminated and the children and grandchildren, as heirs, would need to transfer the inherited assets into an inherited IRA to preserve the stretch-out of the withdrawals.
The IRA owner needs to consider whether the children and grandchildren are capable of carrying out their desire to create a Stretched-Out IRA. To help the heirs, the IRA owner could name a trust as the beneficiary to assure that their plan for a Stretched-Out IRA is carried out. The trust can prevent the beneficiary from cashing out the IRA thereby losing the benefit of a Stretched-Out IRA and provide asset protection for the heir.
If the parents are concerned that their assets are large enough to be subject to estate tax, they might want to consider leaving the retirement benefits to a trust for the surviving spouse — sacrificing some income-tax deferral on the assets’ growth, but possibly saving money on estate taxes. (In 2017, individuals can leave as much as $5.49 million to heirs free of estate tax, and couples can leave as much as $10.98 million with careful planning.)
What if one spouse dies and at the same time, the other becomes disabled, or incapacitated? Both spouses should have in place a durable power of attorney, a legal document that allows another competent adult to take action to protect the IRA in case a spouse becomes disabled and unable to do so. That way, if one spouse dies and the other is disabled at the same time, the holder of the power of attorney could carry out the rollover of the retirement-plan assets to an IRA, and also get the proper beneficiary forms in place.
As a general rule, leaving the IRA to the surviving spouse is the preferred estate planning choice. When the children and grandchildren are from a prior marriage, more planning is required to insure that they will receive the IRA death proceeds remaining after the death of the surviving spouse. Or, the IRA can be left directly to them. Typically, a trust or irrevocable beneficiary designation will be used to insure the desired result when the surviving spouse dies.
With IRAs often being one of the larger assets in many estates, how this asset is disposed of upon death needs to be part of the IRA owner’s over all estate plan. Otherwise, tax benefits may be lost, such as creating a Stretched-Out IRA, or worst, the death proceeds could go to the wrong person
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Author’s email: wolff2000@earthlink.net
