Retirement Accounts and Estate Planning

Retirement accounts play a significant role in estate planning, and how they are handled upon your passing can have important implications for your heirs and beneficiaries. As a Folsom attorney who specializes in estate planning, I have found that for many of my clients, their retirement accounts make up a large portion of their net worth. Here are some key considerations when it comes to retirement accounts and estate planning:

1. Beneficiary Designations: Retirement accounts such as IRAs (Individual Retirement Accounts) and 401(k)s allow you to designate beneficiaries who will inherit the account assets upon your death. These beneficiary designations take precedence over any instructions in your will or living trust. It’s crucial to keep these designations up to date to ensure that your assets go to the intended individuals or entities.
2. Spousal Beneficiaries: If you are married, your spouse may have certain rights to your retirement accounts. In many cases, spouses are entitled to inherit the assets in these accounts, and they may have the option to roll over the funds into their own IRA.
3. Non-Spouse Beneficiaries: If you name non-spouse beneficiaries (such as children or other heirs), they can inherit the retirement account assets, but the rules governing withdrawals and taxation may vary depending on several factors, including whether the account owner had reached the required minimum distribution age.
4. Stretch IRAs: Under prior tax laws, non-spouse beneficiaries could take advantage of “stretch” IRAs, allowing them to spread required minimum distributions (RMDs) over their life expectancy, potentially providing tax-deferred growth over a longer period. However, recent tax law changes have limited the use of stretch IRAs for many non-spouse beneficiaries.
5. Tax Considerations: Different types of retirement accounts have different tax treatment upon inheritance. Traditional IRAs and 401(k)s are typically subject to income tax when distributions are made, whereas Roth IRAs are generally tax-free if the account has been open for at least five years. Consulting with a tax professional, in addition to estate planning counsel, is advisable.
6. Trusts: Some individuals use trusts in their estate plans to control the distribution of retirement account assets. Trusts can be named as beneficiaries, allowing for more control over how and when the funds are distributed to beneficiaries. However, the rules surrounding trusts and retirement accounts are quite complex and naming a trust as a beneficiary on a retirement account can lead to unintended taxes.  
7. Required Minimum Distributions (RMDs): It’s important to be aware of RMD rules, which require account owners to start taking minimum distributions from certain retirement accounts once they reach a certain age (currently 72 for most retirement accounts). Failure to take RMDs can result in substantial penalties.
8. Estate Taxes: Depending on the size of your estate and the applicable laws, retirement accounts may be subject to estate taxes. In California, there is no separate state estate tax, but the federal estate tax applies to an estate valued at over $13.61m (as of 2024). Estate tax laws can change, so it’s essential to stay informed and consider strategies to minimize estate tax liabilities, such as gifting or charitable planning.

Conclusion

In summary, retirement accounts are a critical component of estate planning, and they require careful consideration to ensure that your wishes are carried out efficiently and tax-effectively. Consulting with an experienced Folsom estate planning attorney can help you create a plan that aligns with your goals and minimizes potential complications for your heirs. Keep in mind that laws and regulations may change over time, so it’s advisable to periodically review and update your estate plan to reflect current laws and your evolving circumstances. If you have any questions about retirement accounts or estate planning, contact Thapar Law at 916-579-0605 or send us a message here.