One of the more complicated aspects of estate planning is that while probate, or the process of transferring property upon a person’s death, is normally controlled by Wisconsin state law, most retirement plans are governed by federal law, specifically the Employee Retirement Security Act (ERISA). The ERISA “preempts” or overrides state law to the extent that there is a conflict between the two. Continue reading
Which Of These Powerful Secrets Could You Use To Build Your Ideal Estate Planning Legal Program
- Keep your estate settlement simple;
- Avoid the court-supervised Probate process when you die;
Let’s face it. many people HATE paying tax. And many people hate paying income tax when distributions are made from their IRA.
We recently were working with a gentleman from our area on his estate plan. He owned property in Dane County. He had never been married and he never had children.
He wanted to leave some things and some money to a family member of his, but he liked the idea of setting up some scholarship funds. So, after quite a bit of discussion, he decided to name his college as the beneficiary of part of his IRA when he died. But he did not want the funds from his IRA to go into the general funds of the college. So, we are restricting the IRA so that it can only be used in a certain curriculum of the university. Now, he knows that students in his prior field will benefit from scholarships that he establishes.
We recently had some discussions with a Madison family that was trying to make the most of their father’s IRA and had questions about naming the beneficiary of an IRA. The family wanted to make sure that after the father died, the IRA would benefit one of the children, and then after that child died, the family wanted the IRA to be shared among the other children.
The family kept asking: “Should we name the child as the beneficiary, or should we name a trust (for the benefit of the child) as the beneficiary.
One of the children was married to an accountant. His suggestion (whether it has merit or not is debatable) was, “Don’t name a trust as the beneficiary of an IRA because I hate trusts.”
One of the children stated, “Dad wants it left to a trust for the benefit of a child so that Dad has the assurance that when the child dies, the remaining IRA would go to the child’s siblings.”
What should they do?
What Types Of Trusts Are Useful In Protecting Retirement Plans?
There are a number of schools of thought here. In our practice, we feel a revocable living trust is not a good vehicle to handle retirement plans. Often these are not drafted with the appropriate language to comply with the IRS service regulations to be what’s called a “see-through trust”. A Retirement Plan Trust is specifically drafted to comply with the service regulations and meet all the criteria so that if this trust is designated as the beneficiary, you will be able to preserve the tax deferral for those named beneficiaries to get the stretch advantages.
No, it does not. It transfers by beneficiary designation. Much like life insurance that goes to the individual named in the policy, the retirement plan goes to the individual named on the beneficiary designation in the plan document. If you don’t have a beneficiary designated or the individual that you designated is deceased, the account value can wind up in your probate estate; and if this happens, the only choice is that all the taxes are due right away, and there is significant inflexibility. But in general, it will avoid probate.
Retirement plans, including IRAs, 401Ks, 403Bs, and 457As, are not controlled by common estate planning documents such as wills and revocable living trusts. They transfer to heirs by a beneficiary designation. So whoever is named as the beneficiary when you initially signed that plans document, is the person that will receive the value in the account when you pass away.
This lack of control sometimes can be problematic, especially when an individual retirement saver has designated a beneficiary and has forgotten to keep those designations up to date. The plan documents will control where the money goes and your last will and testament will have no effect because beneficiary designations avoid probate. Your retirement plans will also not be controlled by a revocable living trust because the plans are not trust property; they are individual property.
Is The Title of A Retirement Plan Going To Be Transferred To A Trust Upon Someone’s Death?
No, what happens is that beneficiary is contacted by the custodian. For example, you have an IRA in a brokerage account. You pass away, and hopefully, you have designated beneficiary’s, for example, your spouse as the primary beneficiary. The broker or your financial advisor calls up your spouse and says, “You are the designated beneficiary of this retirement account there is $100,000 in it and you have a few options for distribution. What would you like to do? Would you like to pay the income tax obligation now, cash it out and do whatever you wish with the money, or do you wish to inherit this IRA and stretch out the tax obligation over your lifetime keep it as your own retirement fund?” Now there are different rules as to whether spouses inherit or if children inherit, but that’s effectively what happens when a custodian handles the transfer to the designated beneficiary.
A lot of people do not understand the landscape of how retirement plans pass to beneficiaries. They do not necessarily understand the particularities and technicalities of how one inherits and their choices presented by fund custodians. IRAs have only been around since the mid-1970’s and we are only beginning to see multiple generations inheriting them. The lifetime distribution option (stretch IRA) is an even more recent addition to the mix so the idea of not just simply cashing it out is relatively new. Whenever you have these options and choices, people just aren’t savvy enough. Continue reading