Estate Planning & Retirement Benefits

bigstock-Estate-planning-worksheet-15145028One of the principal tools used in estate planning today is the Revocable Living Trust. In fact, more than half of individuals now uses a Revocable Living Trust in lieu of a Will to provide for the transfer of their assets at death. In addition, married couples often use a Trust to shelter the husband’s and the wife’s individual $625,000 Unified Federal Estate Tax Credit equivalent in order that these assets will not be taxed in the estate of the survivor. Finally, a Trust is one of the best planning techniques used for disability planning. By naming an individual or corporate “successor” trustee, the trustee can manage the affairs of the individual in the event of disability or incapacity. But a Revocable Living Trust is a dangerous place for retirement benefits.

retirement-plans2Many estate planners mistakenly recommend that their clients name a Revocable Living Trust as a beneficiary or contingent beneficiary for their retirement benefits or individual retirement plans. However, a Revocable Trust is normally not a proper “designated beneficiary” for retirement plan benefits. The naming of a Trust as the recipient of IRA benefits or the benefits of a 401(k) plan can result in the rapid acceleration of payouts from the plan and cause substantial additional income tax liabilities to recipients. For that reason, when setting up or reviewing your family estate plan, you should pay particular attention to the designation of proper beneficiaries on your various retirement plans. Failure to do this can be extremely costly to your family. If you now have a Trust as a designated beneficiary, you should review this designation with your estate planning attorney, CPA, or plan administrator.

There are special IRS rules that apply to naming a Trust as a beneficiary of a retirement plan. These rules must be complied with and require particular attention when planning for distribution of your retirement plan benefits.

JOSEPH T. BUXTON III, J.D.

Senior Partner & Estate Planning Attorney

Buxton, Lasris & Vannan, P.C.

Yorktown & Urbanna, Virginia