For many people, retirement accounts make up their largest asset. They’ve diligently contributed to their retirement plan for much of their career. Now that they’ve managed to fund retirement, they might evaluate whether their estate plan safeguards their efforts should they die prior to enjoying their retirement funds.
There are several planning options for individual retirement accounts (IRAs). Married clients might consider listing their spouse as the primary beneficiary of their IRA. There are both tax and practical benefits to doing so. For example, a surviving spouse can roll over the deceased spouse’s IRA into his or her own IRA and defer withdrawals until age 70 1/2.
Unlike a spousal beneficiary, other individual beneficiaries will not be able to defer withdrawals until age 70 1/2. Non-spouse individual beneficiaries may withdraw all the proceeds of the retirement account or elect to create a “stretch IRA” which allow them to receive minimum required distributions calculated based on their life expectancy. Even if the beneficiary elects to create a stretch IRA, he or she may still withdraw all or a portion of the account at any time. Whether or not the individual withdraws all of the funds or elects to receive the minimum required distributions, he or she has to begin receiving distributions within five years from the accountholder’s death.
Alternatively, clients who are so inclined might consider listing a charity as the primary beneficiary. This would allow the account to pass to the charity free of any federal income tax.
One popular option for many clients is to list the spouse as primary beneficiary for these benefits and to list the client’s revocable trust as contingent beneficiary of the account. Under certain circumstances, if the trust is drafted properly, it will be considered a “look through” trust.
A “look through” trust allows required minimum distributions to be issued based on the lifespan of the eldest beneficiary of the trust. The “look through” trust gradually drains the IRA, allowing the account funds to get the benefit of continued growth over the eldest beneficiary’s lifetime.
The Internal Revenue Service (IRS) has strict standards that a trust must meet to qualify as a “look through” trust. If a trust intends to qualify as a “look through” trust but does not meet IRS standards, the consequences are dire. For example, the trust may be required to withdraw all retirement assets within five years from the date of the accountholder’s death. This could result in a significant income tax liability.
You should consult an experienced St. Louis and Clayton, MO, estate planning attorney at Paule, Camazine & Blumenthal, P.C. to discuss how to incorporate your retirement accounts into your estate plan.
Call Us! 
Contact Us