For many of us, our retirement accounts are one of our most important assets for providing for our families.  However, complicated federal law can have unexpected and important implications for your estate planning. Naming your will/estate as the beneficiary of your retirement account (instead of a properly crafted trust or individual beneficiaries) can lead to both higher income taxes as well as fewer years in which assets in your account can grow income tax-free.  Why?

In order to extend the payout period for a retirement account, it is important to meet federal requirements for having named a “designated beneficiary.”  If an individual’s will/estate is named as the beneficiary of the individual’s retirement account, the individual will not be treated as having named a “designated beneficiary.”  If, for example, the individual dies before his or her required beginning date to begin receiving payments from his or her retirement account, and has no “designated beneficiary” (because the individual’s will/estate is the beneficiary of the retirement account), under federal law the retirement account must be paid out over 5-years instead of being paid out over a potentially longer period of the life expectancy of the individual(s) who will receive the funds from the retirement account under the will.  This can potentially reduce the period of time in which assets could continue to grow income tax-free, and potentially move the beneficiary into a higher income tax bracket if the income from the account is being paid out over a relatively short time period.

In Retirement Accounts and Wills vs. Trusts–Part 2, we will look at the implications of naming a trust instead of an individual’s will/estate as the beneficiary of a retirement account.  Stay tuned and Happy Friday!

[Legal advice not only involves an understanding of the law, but the application of the law to a particular set of circumstances or facts.  As a result, the information in this blog post does not represent legal advice.  If you are in a situation where you need legal advice, we would be happy to help.  Check out our Contact Us page, and feel free to set-up a no-charge initial consultation.]