Estate Planning With 401(k), SEP, and 401(B) Plans

Many of you have retirement plans. If you are reading this article and don’t have a beneficiary designated, stop reading and go designate a proper beneficiary right now! This designation trumps your estate planning documents.

Who Can be Named as a Beneficiary?

  • Individual- 

    Naming an individual as beneficiary of a retirement plan helps protect the account from divorce, creditors and, in some states, bankruptcy and benefits from being subject to favorable tax treatment.

  • Estate-

    Retirement plans payable to an estate are subject to probate which can:

         delay the receipt of such funds

         potentially expose them to creditor claims,

         and necessitate the listing of such assets on the probate inventory

  • Charity-

    Benefits can be distributed to a charitable organization,

    In this plan, the charity receives the benefits free of income tax, as opposed to an individual beneficiary who must pay income tax on the benefits that he receives from a traditional requirement plan.

    Further, any benefits left to charity qualify for an estate tax deduction in a decedent’s estate. This is a win-win.

  • Trusts-

    A trust may be named as the beneficiary of a retirement plan, but it cannot be a Designated Beneficiary.

    However, the beneficiaries of a trust may be treated as Designated Beneficiaries if the trust meets certain criteria.

    The criteria are as follows:

    (i) the trust must be valid under state law;

    (ii) the trust must be irrevocable (either upon creation or upon the death of the owner);

    (iii) the beneficiaries must be identifiable from the trust instrument (essentially, the Internal Revenue Service needs to be able to identify the beneficiary with the shortest life expectancy); and

    (iv) proper documentation (a list of all of the beneficiaries of the trust or a copy of the trust instrument itself) must be provided to the plan custodian by October 31 of the calendar year immediately following the calendar year in which the plan owner died

    If you need help designating a beneficiary or drafting Wills and Trusts, please contact us today! Proper beneficiary designation can save you thousands in inheritance related investment losses.

    817.638.9016

Posted in Legal Tips Today - Travis Weaver and tagged , , , , .