When thinking about estate planning, the assets that typically come to mind first are your bank accounts, your house and any other owned properties, and your most valued possessions. But an equally important asset — and arguably one of the most intricate when it comes to estate planning — is your retirement account(s).
Creating a carefully designed plan with the help of your financial advisor and estate attorney in advance is essential to ensuring that your assets are protected and transferred to your loved ones in an effective way that will maximize their inheritance and minimize taxes or red tape.
[See: 7 Reasons to Invest in an IRA.]
Here are a few of the most important steps to get started.
Understand how retirement accounts are treated differently. Do your research in advance in order to fully understand how different retirement vehicles will be treated. Pensions or 401(k)s will likely have more restrictions for beneficiaries than an individual retirement account. However, given that an IRA is a tax-deferred investment, it can be tricky when it comes to taxation for the beneficiary. The most seamless transition is when a spouse inherits the IRA, as they can essentially treat the account as their own and either take money out in the near term or wait until they reach the age of 70½, when they will be required to begin taking minimum distributions.
Designate a beneficiary and keep your forms up to date. Most people choose to designate their spouse as their beneficiary, and in fact many states require that a spouse is designated for a 401(k) or qualified account unless he or she signs off on the selection of another individual. For the most part, though, it is a matter of personal choice and circumstances. It is usually a good idea to also indicate a contingent beneficiary, such as your children, in case your spouse (or other chosen beneficiary) dies first. (Keep in mind however, that if your children are younger than 18, the money will be delegated to the state in which you live to act in the best interest of your children.) Just remember to make sure that who you select aligns with your broader estate planning strategy.
[See: 12 Steps to a Stronger 401k).]
Consider creating a trust. Leaving your assets to a trust can have a dramatic impact on the money your beneficiaries will ultimately receive. States have varying laws, but in many cases, if a trust is not established beneficiaries will need to go through probate, which is a title transferring process that can take months and result in major fees that will encompass a significant percentage of your estate. A trust can have many other benefits to your beneficiaries as well, such as enabling the inherited distributions of an IRA to be stretched out over the beneficiary’s life expectancy. (However, depending on how the trust is drafted, the entire amount may need to be paid out within five years, so make sure you work closely with your estate attorney to understand these complexities.) A trust can also protect your wishes, particularly by protecting the assets from your beneficiaries’ creditors. This can be especially helpful in the case of divorce. In the event you have any reservations or concerns about your beneficiaries’ spending patterns, a trust can ensure that payments are made on a particular schedule rather than in one lump sum so that he or she doesn’t spend everything you saved in the blink of an eye. You can also stipulate that the money be reserved for specific uses such as a college education.
Develop a retirement withdrawal strategy with your financial advisor. Although he or she isn’t an estate attorney, your advisor should have in-depth knowledge on how various retirement vehicles will be treated in estate planning. As early as one to two years pre-retirement, your advisor can help you decide what your annual withdrawal rate should be, and which accounts are best to withdraw from early on. In addition, your advisor will be more familiar with your overall circumstances and financial goals, and can help you diligently test out every possible scenario given there are so many various tax implications, beneficiary options and other family or financial considerations. Reputable advisors should always be on your side and seamlessly work with attorneys, accountants and other members of your holistic financial team to protect you, your assets and your family members throughout what can be a complex and sometimes intimidating process.
[See: 8 Things Not to Hide From Your Investment Professional.]
Once you have successfully aligned your retirement accounts with your broader estate planning strategy, you can feel more assured that your assets are protected and your loved ones can benefit in the most effective and efficient way.
More from U.S. News
8 of the Most Incredible Investments of the 21st Century
7 ETFs That Allow You to Invest in Space
The 9 Best Investors of All Time
Don’t Forget Retirement Accounts In Estate Planning originally appeared on usnews.com
