How retirement accounts factor in to estate planning

This content is sponsored by The Collins Firm

WASHINGTON – When estate planning, it’s important to consider the treatment of retirement accounts, said Attorney Mike Collins with the Collins Firm.

The first step to take in deciding what comes of retirement accounts is a familiar one – designate a beneficiary. It’s an essential step, because if one isn’t appointed, the estate becomes the beneficiary of the retirement account.

“The problem with that is that means the retirement plan is going to have to go through the probate process, which again is time-consuming and expensive,” Collins said.

Also, certain rights regarding how much money beneficiaries can withdraw from the retirement account are forfeited if the estate is the beneficiary, he added. When somebody inherits a retirement account, they have to start taking required minimum distributions from that account the year after the account’s original owner dies, Collins explained.

It behooves the inheritor to leave as much money as possible in the account so “the account can continue to grow, tax deferred,” he said.

“The IRS doesn’t like that because they don’t get their income tax bite – so the law requires that after the original owner dies, the beneficiary of the plan must start taking some withdraws from the plan each year.”

However, if a beneficiary is named, that person’s life expectancy can be used as the period over which they can withdraw amounts from the retirement account. If a beneficiary is not named properly, the person who gets the account, has to take the entire account’s worth within five years of the original owner’s death, he added.

Another option is to name a trust as a beneficiary of the retirement account.

The choice of whom should be designated is one not to be taken lightly, Collins said.

“Your estate planning attorney should be counseling you on whom to designate as the beneficiaries of your retirement accounts from a legal and tax-planning standpoint.”


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