The most valuable asset an individual often has today is their employer sponsored 401k, Thrift Savings Account, or their individual retirement account (IRA). These accounts grow and accumulate on a tax-deferred basis. You pay no income taxes on your retirement savings account until you actually withdraw funds from the account. The IRS requires that you begin removing funds from these accounts in the year you reach the age of 70 ½ or at least by April 1st of the following year and continue taking a required minimum distribution (RMD) every year after reaching 70 ½. The IRS has published tables directing the Required Minimum Distribution you must take based on your age. You will owe income tax on each distribution, however, you normally control how the funds are invested. You can often roll funds from another retirement account directly into your self-directed IRA. For example, when you retire from a company that has a 401K qualified retirement plan you can roll the 401K into your IRA and begin to control the investment of those assets.
A spouse can roll over your IRA and make it their own. Any other beneficiary or beneficiaries that you name to receive the IRA upon your death have the option to extend the payments from the IRA account over their life expectancy. For example, an 18 year old has a life expectancy of 64 years according to the IRS withdrawal tables and may elect to spread out the payments over his or her lifetime, those payments can be spread out over the entire 64 year period and the beneficiary will only be required to withdraw 1/64th the first year.
Therefore, when reviewing your estate plan, it is critically important that you review your beneficiary designation forms for your IRA and other retirement plans. These forms are as important as a will or a trust to a good estate plan and must be correctly completed and, if necessary, modified. For example, some preprinted forms from IRA administrators will state that if you have named multiple beneficiaries and one of the beneficiaries dies, then the plan will be paid over to surviving beneficiaries. If the beneficiaries were your children, the premature death of a child could result in disinheriting your grandchildren, since that child’s share would pass to your other children. In this case, your attorney or financial advisor should make sure that the form is corrected to reflect your true intentions. Therefore, it is very important that you examine your beneficiary designation form thoroughly and understand exactly what it says about the distribution of your plan in the event of your death.
Another problem comes up when you name a minor or disabled beneficiary. In the case of a minor beneficiary, there is a question of who would make the election to stretch out the payments under an IRA over the beneficiary’s lifetime. A minor does not have the legal capacity to do so. Therefore, a court-appointed conservator may have to act unless your beneficiary designation form has clearly indicated how the minor’s share is to be treated. An option would be to create a trust and have the benefits of your IRA paid over the trustee and give the trustee specific instructions and authority to deal with all of the necessary elections possible for your plan. In most cases the trustee would elect to withdraw funds from an IRA on a minimum distribution basis, leaving the balance of the funds to grow over the lifetime of your designated beneficiary.
If IRA or other benefits are left to or for the benefit of a disabled or incapacitated beneficiary, then it is important that payment be made to a trustee and that the trustee have specific direction not to utilize the funds in any way that would disqualify the beneficiary from their public or private benefits. Otherwise, your beneficiary will lose their assistance until the IRA or other retirement plan is spent down.