Retirement plan accounts such as IRA’s, 401(k)’s, and 403(b)’s are assets that many Americans will own at the time of their death. These retirement savings are often the largest part of an individual’s assets, exceeding the value of their home and life insurance benefits. Retirement plan assets require special attention during estate planning because of the various rules that apply to these types of accounts. If you follow the rules, your retirement plan assets will keep their value. If you fail to follow the rules, your retirement assets could suffer a devastating loss in value after you pass away.
One important thing to keep in mind is that your retirement accounts need their own “will,” separate from your other Last Will and Testament or revocable living trust. The terms of your original estate documents cannot dictate to whom your retirement account assets will pass. Your Last Will or irrevocable living trust also cannot designate when retirement assets will be distributed or in what manner. Through the use of a special will for retirement accounts, called a “beneficiary designation form,” you can control the distribution of your retirement plan assets after you die.
If you have more than one account (i.e. a private IRA account and a 401(k) through your employer) then you will need to complete and sign a separate beneficiary designation form for each account.
If you do not complete a beneficiary designation form for each retirement account you have, then a “custodian agreement” will dictate by default where and how your assets will be distributed. Typically these custodian agreements automatically send your retirement plan assets to your estate. The problem then, is that your retirement plan assets become subject to federal and state income taxes. Generally a retirement account without a beneficiary designation form will go to the estate and will lose at least 1/3 of its value.
A retirement plan account can be a substantial asset to your loved ones after you pass away. Seek the help of a qualified estate planning professional to assist you in preparing your beneficiary designation forms so that your retirement savings are not lost to taxes. Also, be sure to keep a copy of every beneficiary designation you have in a safe place and have each form reviewed by your estate planning attorney on a regular basis.