One estate planning nuance is “beneficiary designation assets.” These are assets that are distributed at death to the person named on a beneficiary designation form, and do not follow the direction of the will. These assets may be life insurance, joint or pay-on-death bank accounts, joint or pay-on-death investment accounts and retirement accounts. During the initial meeting, it is important to discuss the client’s assets and these accounts in particular. If family dynamic has changed, be it from a divorce, death in the family or simply the fact that once small children are now adults, these beneficiary designations may need to be updated. These assets pass outside of probate. Essentially when the account holder dies, upon confirmation of death, the entity which holds the account simply distributes the assets to the named beneficiary.
Retirement accounts (IRAs, 401k plans and the like) are special, however, because they typically allow beneficiaries to prolong withdrawal if properly handled. If the plan allows, beneficiaries may elect to use their own life expectancy in calculating the minimum amount of money which must be distributed each year (this is also called “minimum required distributions”). This is beneficial because it allows a beneficiary to prolong to amount of time the money is in the retirement account, allowing additional potentially tax free growth.
While many individuals choose to leave their retirement accounts to an individual beneficiary, i.e. their spouse or children, there may be good reason to leave such assets in trust. Trusts offer many benefits, including asset protection, especially with the recent Supreme Court decision in Clark v. Rameker, 134 S. Ct. 2242 (2014), in which the Court found that a non-spouse beneficiary’s inherited IRA was not exempt from the beneficiary’s creditors in his bankruptcy estate.
In order to fully take advantage of both the protection a trust offers and the beneficiary’s life expectancy, the trust must be carefully drafted. Such trusts are referred to as “see-through” trusts because the language directs the retirement plan to look through the trust at the beneficiary individually to determine life expectancy. If the trust runs afoul of the rules, however, the consequences are harsh. The trust and its beneficiary’s life expectancy are disregarded and the “5-year rule” applies, requiring a full distribution of the retirement plan assets within 5 year.
This is one of the many reasons it is important to have an attorney who is familiar with these rules to assist you with carefully drafting your estate plan. We would be happy to work with you and your family to craft an estate plan which achieves your goals.