For most families, the largest retirement investment they have are the assets housed in IRAs and 401ks. As an estate and tax planner, I love these plans. They provide amazing asset protection and tax deferral. The assets in the IRA grow tax free and for traditional IRAs and 401ks, the assets are only taxed when they are taken out of the account. And, you don’t have to start taking it out until you reach 70 ½. Even better, because you don’t get a tax deduction when you contribute to a Roth IRA, the Roth IRA can be withdrawn tax fee. It’s no wonder estate planners love these qualified plans.
But, you have to be very careful when planning for how the qualified plan is going to move after death. In traditional families, the solution is usually to name the surviving spouse as the primary beneficiary after death, then the kids or even better your trust as the contingent beneficiary. The surviving spouse can roll the IRA into his or her own IRA and get all the same benefits as the original owner – asset protection and the ability to postpone recognition until 70 ½. If the kids end up being the beneficiary, they can stretch out tax recognition over their lifetimes.
A word of caution for blended families – you know – the Brady bunch families. If you make your surviving spouse the primary beneficiary, there is a very real possibility that you may have just disinherited your children. As time passes, and the surviving spouse has less and less contact with the deceased spouses children, it becomes more and more likely the surviving spouse will end up making his or her own children the beneficiary of the inherited IRA or 401k when they die. It’s only human nature.
A better solution would be to prepare a trust specifically designed to hold these qualified plans. The trust will allow the surviving spouse to benefit from the IRA or 401K for their lifetime, while ensuring that when the surviving spouse dies, the remaining assets go to the deceased grantor’s children. A better result for all.
This is James Kalicki with Kalicki law offices, remember for all your business and estate planning needs, its Kalicki Law offices.