Planning for the disposition of retirement benefits is an often overlooked and misunderstood aspect of estate planning. Increasingly, retirement benefits (IRA’s, 401(k), 403(b), pensions, etc.) comprise a large portion of a person’s estate. Proper retirement benefit planning requires that you consider both income and estate tax issues, along with asset disposition, beneficiary and management issues.
Income Tax Planning
Income tax planning for retirement benefits generally focuses on delaying and stretching out distributions for as long as possible to maximize income tax deferral opportunities for your beneficiaries (i.e. “stretch IRA”). How you structure your beneficiary designations will have important income tax ramifications for your beneficiaries. The decisions are very individual-based and will depend on your family, your other estate planning documents and your overall estate planning goals.
Designation Form Considerations
Attention should always be paid to the careful coordination of beneficiary designations, other estate planning documents and your goals. It is not uncommon for beneficiary designations to not match a client’s goals because they were either drafted improperly or have not been updated. Attention should also be paid when a potential beneficiary is a minor. If not properly structured, such designations can force the necessity of a guardianship estate for the minor, which can be costly and cumbersome.
Retirement benefits are an integral part of many estate plans that should not be overlooked. The unfortunate myriad of technical rules and regulations, especially those relating to post-death rollovers and distributions, makes it essential to seek out qualified professional help regarding your options from an attorney and/or a CPA.
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