Planning with Retirement Assets

For many people, their retirement assets, such as IRAs and 401(k) Plans are their most valuable assets.  Therefore, it is particularly important to plan carefully for what will happen to these assets at death.  Doing so is tricky because most of these plans, with the exception of Roth IRAs and Roth 401(k) Plans, are subject to income tax as withdrawals are made from them.  Also, the rules regarding distributions from these plans are rigid.  The following are a few examples of issues to consider:

Surviving Spouse: When retirement assets are left to a surviving spouse, the surviving spouse has a variety of options.  One option is to rollover the retirement plan into the spouse’s own IRA.  The surviving spouse then has all the opportunities that the spouse would have if the assets had originally been contributed to the IRA by the surviving spouse.  The surviving spouse can withdraw all of the assets and also can leave the assets to whomever he or she chooses.  This may be appropriate in many cases, but not always.  For example, if each spouse has children from a prior marriage, they may want to leave the retirement plans held by the first spouse to die in trust for the surviving spouse so that he or she receives distributions from the plan during life, but the balance is designated to pass upon the surviving spouse’s death to the children of the first spouse to die.  The trust needs to be carefully crafted with the retirement asset rules in mind.

Adult Beneficiaries:  Under prior law, when retirement plans were left to a non-spouse beneficiary, the beneficiary could withdraw from the retirement plan over the beneficiary’s life expectancy.  With a fairly young beneficiary, that could mean withdrawing over many decades.  However, due to the SECURE Act that was passed in late 2019, most non-spouse beneficiaries must withdraw all assets from a retirement plan within 10 years following the decedent’s death. 

Minor Children: It is problematic to leave retirement assets to anyone under the age of 18.  When assets are left to minor children, a conservator may need to be appointed by a court to manage those assets.  In general, a preferable option is to leave the assets to a trust for minor children.  The trust may be contained in a Last Will and Testament or a Trust Agreement.  It provides for who will be trustee to manage the trust assets, and it provides the terms for distributions to or for the benefit of the beneficiaries. 

Although a trust is generally the best option to hold retirement assets for a minor beneficiary, the trust needs to be carefully drafted.  The trust can be drafted to allow the retirement assets to be withdrawn over 10 years, and sometimes even longer in the case of trusts for the decedent’s own minor children (not grandchildren, or others). However, there are intricate requirements to comply with, and drafting the trusts in this manner is not always consistent with other planning goals. Depending upon how the trust is structured, the trust may need to withdraw the retirement assets within 5 years following the decedent’s death.  If the trust then keeps those assets in the trust, the trust will pay the tax on the amounts withdrawn, and trusts generally pay tax at the highest income tax rate.   

Disabled Individuals:  The SECURE Act allows for disabled and chronically ill individuals to withdraw from retirement plans left to them over their life expectancies, rather than having to withdraw all of the assets within 10 years.  Typically, assets should be left in trust for these individuals, particularly if they are receiving public assistance benefits, such as Medicaid.  Not all trusts will qualify to use the life expectancy method.

Charity:  Retirement assets, especially traditional IRAs and traditional 401(k) Plans can be ideal options to leave to charity.  100% of the value of the asset passes free of income tax when a qualifying charity is named directly as the beneficiary.  

The summary above is a general overview, and the options permitted by the retirement plan agreement may be more restrictive. The estate planning attorneys at Lyons Gaddis  can advise you as to the most appropriate approach for your retirement assets to coordinate with your overall estate plan.