Devising Retirement Accounts when Estate Planning

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.

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.

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.

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.

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.

References

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).