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Modern Estate Planning Blog

Elder Law & Special Needs Planning

Sacramento Wills and Trusts Attorney Urges: Don’t Forget to Name a Beneficiary on your Retirement Accounts

September 3, 2011

When it comes to estate planning, there are a wide variety of details to be considered. Fortunately, a qualified Sacramento wills and trusts attorney can help sort out the requirements and ensure that your estate planning best reflects your wishes. These may include money, real estate, family heirlooms, child custody, and many other issues such as retirement funds, all of which may be covered in a will or a living trust.

Perhaps surprisingly, retirement funds shouldn’t pass to your estate as it will trigger the probate of this account. Instead of naming the estate as the beneficiary, it is recommended to name an individual or trust for each retirement account in question. This helps reduce the tax consequences for the person receiving the funds and more importantly avoids probate and reduces the stress on your family due to lengthy court processes.

Because retirement accounts are something you invest in long-term, it is not unusual for the original institution holding the account to have been sold, possibly multiple times. This happens with frightening regularity when you leave a retirement account with your previous employer. With each year and each sale, the potential for lost documentation rises, so it is a good idea to either track down and keep a signed beneficiary form or to complete a new one. Your Sacramento wills and trusts attorney can help you find or recreate this document.

If you wonder why this could be so important, keep this in mind: It is the responsibility of a tax payer to prove that a beneficiary was actually named. If the original form has been lost, it is of little consequence to the institution, but it can have pretty big implications for the beneficiary. By taking care of this situation now, a host of difficulties and red tape (and potential lost benefits) can be avoided later. Whenever you send in a beneficiary designation form keep a copy for your records and seek confirmation that the company received your designation.

When retirement plans can be rolled over into an IRA, it is certainly worth considering. You will keep better control of your assets and who is administering them, and you will have more choices for investments, as you are in the driver’s seat and not your employer. Again, a wills and trusts lawyer can help determine the best course of action. It is important to understand that your beneficiary will have a choice of how to take the funds from an IRA that you leave. Human nature being what it is , most will take a lump sum, thus incurring the most amount of income taxes and the least payout. It pays to help them understand that they can reduce the income tax hit simply by selecting the option to stretch payments out over the course of their lifetime. The payout can be significantly higher and even act as a retirement plan for the younger beneficiary.

There are different requirements for collecting a retirement account, depending on who the beneficiary is. The age of a spouse, for example, can affect choices made for an IRA, as well as how it is distributed. The age of the IRA owner will also impact the payout choices. The time over which an IRA can be distributed also changes depending upon whether the beneficiary is your spouse, a non-spouse, a trust, or an estate.

If you have questions about how to handle your own retirement account or the options for an inherited one, contact your Sacramento wills and trusts attorney for guidance and suggestions.

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