Devising Retirement Accounts when Estate Planning
Walker Heye Meehan & Eisinger, PLLC is a premier firm in the areas of probate and trust and estate litigation. If people are not fighting over assets or the validity of an estate plan, it is important they understand that probate can be accomplished efficiently and relatively inexpensively. On the other hand, the firm is a fierce advocate for aggrieved parties when a dispute arises over the provisions or validity of a trust or will. Walker Heye Meehan & Eisinger advocates both for trustees and other fiduciaries as well as for beneficiaries and creditors of estates and trusts.
Beneficiary Designation Form
Generally, your will does not control disposition of your retirement account. A retirement account is a non-probate asset, like a bank account, or life insurance. This means that the disposition of your retirement account is generally not controlled by your will, but instead by the beneficiary designation filed with the plan administrator. Your beneficiaries will be those named as of your death, who remain beneficiaries by September 30 of the year following your death.i When you make your estate plan, be sure that your beneficiary designation is accurately updated to reflect your intentions.
Spousal Beneficiary
You may leave your retirement account to your spouse in trust or outright. You may wish to leave your spouse your entire retirement account. If your family situation is relatively simple, an outright gift may be the best option. Your spouse may elect to treat the account as his or her own (spousal rollover) so long as your spouse is the sole beneficiary and he or she has an unlimited right to withdraw from the account.ii This allows your spouse to defer distributions until after 70, an option unavailable to other beneficiaries.
You may wish to leave the account to your spouse in trust if you have a more complicated plan for your retirement account such as directing it to children from your first marriage after your surviving spouse dies or if your plan otherwise requires trust planning. Trust planning for retirement accounts is a particular undertaking which must satisfy specific requirements. If a trust is used, the spousal rollover is unavailable.iii
The trust must qualify for “look through” treatment. The IRS will treat the beneficiaries under a trust as the retirement accounts designated beneficiaries even though the trust was named on the form filed with the plan administrator.iv To receive this treatment, the following requirements must be met.
1. A Valid Trust.
The trust must be valid under state law, or it would be valid if it had assets.v This means the state requirements for trusts are met, but there might be no property in trust. Generally, this would disqualify the trust, as there would be no property entrusted. However, the trust will direct the retirement account distributions when made, so the IRS is satisfied.
2. Irrevocable.
The trust must be irrevocable by its terms, or will be irrevocable upon your death.vi
3. Have Identifiable Beneficiaries.
The beneficiaries you name must be identifiable, meaning their identity is certain rather than speculative.vii A class can be used, such as your children, so long as the member with the shortest life expectancy can be identified.viii This should not be a problem with your spouse, but this requirement may be more relevant when considering non-spousal beneficiaries. An identifiable beneficiary must also be a human, which means your favorite charity cannot qualify.ix
4. You Must Provide Proper Documentation.
The regulations specify how and when you must provide certain documents to your plan administrator. You must provide the administrator the trust document or a list of beneficiaries with certification that the list is accurate, complete and otherwise the trust complies with the above requirements, and promise to update any changes.x Your trustee should be made aware that they will provide documents to the administrator after your death as well.xi
Remainder and Non-Spousal Beneficiaries
If you chose a spousal trust, you may also name a second trust to receive your account after the death of your spouse. A proper trust which provides your retirement income to your surviving spouse may name another trust as a remainder beneficiary. Keep in mind, income accumulation in your spousal trust will cause your remainder beneficiaries to be taken into account when the required minimum distributions are made. Care should be taken when determining who should receive the account after your spouse dies.
You may direct the remainder of a spousal trust to another trust, and the beneficiaries under that trust can also qualify for look-through treatment by satisfying the same requirements applicable to the first trust.xii But keep in mind the requirement for identifiable beneficiaries. This applies to beneficiaries who receive a distribution upon trust’s termination as well.
Alternatively, you might direct your retirement account to someone other than your spouse. You may name your children, or a trust for their benefit, as the designated beneficiary. There is even the potential to split the account into separate shares so that the distributions to each beneficiary can be determined based on each’s individual life expectancy as opposed to that of the oldest amongst them.xiii
The Choice is Yours
Determine what your objectives are. Once you know where you want your money to go, a strategy can be implemented to achieve your objectives. The tax consequences of some choices may be less desirable than others, but ultimately you should decide where you want your retirement account to go and then achieve the best tax result possible while achieving that objective. Many times, the administrative headache (and expense) of a trust may make an outright distribution desirable. If the beneficiary is your spouse, he or she can even elect rollover treatment. However, trust control is available if you wish to provide that extra layer of protection from your surviving spouse’s creditors, or your children’s, when you devise your retirement account.
i 26 C.F.R. § 1.401(a)(9)-4 A-4(a).
ii 26 C.F.R. § 1.408-8 A-5(a).
iii 26 C.F.R. § 1.408-8 A-5(a).
iv 26 C.F.R. §1.401(a)(9)-4 A-4(a).
v 26 C.F.R. §1.401(a)(9)-4 A-5(b)(1).
vi 26 C.F.R. §1.401(a)(9)-4 A-5(b)(2).
vii 26 C.F.R. §1.401(a)(9)-4 A-5(b)(3).
viii 26 C.F.R. §1.401(a)(9)-4 A-1.
ix 26 C.F.R. §1.401(a)(9)-4 A-3.
x 26 C.F.R. §1.401(a)(9)-4 A-6(a).
xi 26 C.F.R. §1.401(a)(9)-4 A-6(b).
xii 26 C.F.R. §1.401(a)(9)-4 A-5(d).
xiii 26 C.F.R. § 1.401(a)(9)-8 A-2(a)(2).
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