Retirement accounts play an important role in estate planning, one of the main benefits being that retirement accounts avoid probate, as they pass to a named beneficiary using a beneficiary form that you complete when you open your account. IRAs, Individual Retirement Accounts, are not only powerful estate planning tools, but they, of course, are great vehicles for saving for retirement with tax benefits.
In fact, the income tax on an IRA is payable only when funds are withdrawn from the plan, normally in later retirement years when income is lower and you are assumed to be in a lower tax bracket.
While IRAs and other retirement plans are great for retirement savings; you need proper estate planning to pass the account on to your beneficiaries, since the assets in the plan are subject to federal estate and there may be other tax issues if you do not plan properly.
Without proper estate planning, in the hands of the beneficiary, the IRA or retirement plan may be worth less than one half of what it was to the original account owner. Since the IRA beneficiary can make withdrawals over his or her life expectancy, naming a young person or a minor child as beneficiaries is tempting, and it is allowed. But if it is not done properly, naming a minor child or a child with certain challenges such as disabilities, substance abuse problems, or financial immaturity can have disadvantages and result in fees that reduce the benefit of the accumulated IRA and numerous other problems.
In general, when it comes to IRA’s, taxes and estate planning, your spouse has the greatest flexibility as the beneficiary to your retirement account, and, if a timely election is made, he or she is able to roll over the IRA to his or her own IRA or decide to treat your IRA as his or her own IRA. This can provide more tax and planning options, but also may increase the size of the surviving spouse’s estate.
An experienced and qualified estate planning attorney can help you determine how your retirement plan fits into your overall estate plan, and offer guidance on the best way to pass your retirement account with the least amount of tax, problems and legal implications.