Distributing 401k’s, IRA’s, and Qualified Retirement Plans as Part of Your Estate
401k’s, IRA’s, and Qualified Retirement Plans are generally considered non-probate assets. As such, individuals may specifically name a beneficiary of these accounts without having the assets go through their estates via a trust. For example, Scott and Kim are married. Scott has a 401k plan that names Kim as the primary beneficiary of the account. While out on the golf course, Scott is killed in a tragic golf cart accident. Upon proof of his death, his 401k is transferred to Kim, his named beneficiary.
What are the Benefits of Putting these Accounts into My Trust?
In most cases involving spouses you will want to keep the non-owner of the account as the primary beneficiary. As in our case, Kim is the beneficiary of Scott’s 401k. There are significant tax benefits by doing so. In this way, Kim, if under 68 years of age, can defer distributions from the 401k until she attains an age when she can take the money out without penalty.
After naming the spouse as the primary beneficiary it is advisable, however, to make the Trust the secondary beneficiary of the 401k. There are several reasons why you would want to funnel these assets into your Trust, even though the underlying assets are not subject to probate. Doing so gives you flexibility and allows you to avoid the problem of allowing your minor children to access their share of the 401k proceeds immediately when they turn 18.
Inherited IRA’s, 401k’s, and Qualified Retirement Plans are subject to income tax. As such, you may consider leaving these inherited assets to a charity while giving your other assets to your beneficiaries. Since charities do not pay taxes, and most of your other assets are exempt from taxation (unless you qualify as the 0.15% who have to pay estate taxes), by giving your accounts to a charity you may avoid subjecting your beneficiaries with additional tax.
For example, Scott and Kim have four children. Their children are extremely successful and are self-sufficient. As such, they decide that they want to leave some money to their church, which qualifies as a charity. Scott and Kim may want to leave their house, furniture, jewelry, cars, etc, equally to their children, thus avoiding taxes as their estate barely fell below the federal exemptions. Since they wanted to leave a significant amount of money to their church, they could leave the assets of their qualified accounts there. The church is not taxed on the distribution and Scott and Kim are able meet their objectives to leave money both to their children and church without any tax liability.
The second benefit for leaving your Qualified Retirement Accounts to a charity is the ability for those assets to maintain asset protection against potential creditors. The United States Supreme Court recently held that an inherited IRA is not exempt under federal bankruptcy exemptions. Clark v. Rameker, 134 S. CT. 2242, (2014). Generally an IRA is protected from almost all creditor liability including bankruptcy. An inherited 401k to a non-spouse beneficiary, however, is open to attack by the receiving beneficiary’s creditors. So in cases, where your beneficiaries have substantial debts, you could leave your IRA to a charity.
Understandably, not everyone will want to leave such a potentially large asset to a charity. But for those of you who are already looking to donate assets to a charity, this is a mechanism to allow you to avoid taxes and potential liability.
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