Over-Funding Your Retirement Plan: A Potential Estate Planning Problem

If you are like most Americans, you started saving for your retirement about the same time you started your career. The idea of saving for our golden years is firmly ingrained in the American psyche. While putting away money for retirement is certainly wise, putting away too much can result in over-funding of a retirement account. Unless one plans ahead, the excess funds in a retirement account could be taxed as both income and for estate tax purposes at the time of death. The end result of this could mean that one’s estate loses over half of the excess funds to tax obligations, meaning one’s estate has considerably less assets to pass on to intended beneficiaries.

There is no realistic method to calculate how much income you will need in order to meet your obligations after retirement and live comfortably. A serious illness can rapidly deplete resources or an early death can leave the bulk of your retirement resources untouched. Because of this uncertainty, most people attempt to over-fund for fear of not having enough funs to cover expenses.

If you are married at the time of death, you can leave any excess retirement funds to your spouse free of estate taxes pursuant to the unlimited marital deduction; however, this frequently results in over-funding your spouse’s accounts. Upon the death of your spouse, the same tax concerns arise again.

There are, however, estate planning tools that can be utilized to help avoid, or at least decrease, the risk of losing a substantial portion of your estate to income or estate taxes in the event you over-fund your retirement account. Just as the key to preparing for your retirement is to plan ahead, so is the key to your estate plan.

A good place to start to a discussion about this issue is with an experienced and qualified estate planning attorney.

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Timothy P. Murphy

Timothy P. Murphy is an estate planning and elder law attorney whose practice emphasizes helping people to build, preserve and pass on their wealth. He works with his clients to accomplish their goals while avoiding unnecessary court proceedings and minimizing or eliminating exposure to death taxes.

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