Retirement accounts might look complicated, but they aren’t usually difficult to put to bed when you’re busy planning your estate. Like anything else governed by overly complicated tax laws, you’ll want to read the fine print, and then reread it before deciding how best to approach these aspects of estate planning.
Before you do anything else, you’ll want to decide who will receive the funds when the time comes. When you fail to designate an heir, the money is instead funneled towards the estate itself. That might not sound like a problem, but if you want to avoid probate for your retirement monies, then you have to set the beneficiary before it’s too late.
In a retirement account, your money grows alongside the stock market. You can take payments once you decide to retire after a certain age. Legally, your heir will be forced to take a minimum payment annually due to tax law requirements. This occurs because the Internal Revenue Service would like nothing more than to keep taking bites out of that piece of pie.
The good news is this: if you designate specific beneficiaries instead of letting the account funds go directly to the estate, you grant the inheritor a set of rights they don’t have otherwise.
Although the law is still the law, and your heir will still be required to take some form of regular payment, life expectancy for a beneficiary can be used to determine how much can be withdrawn. Ideally that amount should be as little as possible so that the money can grow until he or she retires.
You don’t always have to name a human being as a beneficiary, either. You can name a trust (in someone else’s name) as a beneficiary to allow the money to keep growing. This also provides you with more options when deciding how and when an inheritor should receive the funds.
If the process was not completed correctly, whoever becomes the inheritor will have only five years to withdraw all the monies in the retirement account. This is why it’s so important to use the services of an estate planning attorney. An expert will help you decide on the right beneficiary, and put the plan into action only after all your options have been discussed.
