Retirement accounts, such as 401(k)s and IRAs, are often significant components of your financial portfolio. But do you know who will inherit these funds when you pass away or whether they will need to immediately pay tax on the inheritance? It’s a crucial aspect of estate planning that deserves attention. Here, a San Diego inheritance lawyer offers expert insight into how retirement accounts are handled after your death.
Designating Beneficiaries: Your First Step
The most critical factor in determining who receives the money from your retirement account is your beneficiary designation. This is a decision you make when you open the account and can update at any time.
Beneficiary Designations Override Wills
Unlike other assets that may be governed by your will, retirement accounts can pass directly to the named beneficiaries, bypassing the probate process. But, if you want the rules in your trust to manage the account after you and your spouse (if you are married) pass then you will want to designate your living trust as your successor retirement account beneficiary. Likewise if your chosen beneficiary is a person who is disabled or has special needs, a third party special needs trust might be the right beneficiary of your retirement account.
Importance of Keeping Designations Updated
Life changes such as marriage, divorce, or the birth of a child can affect your intended beneficiaries. Regularly reviewing and updating your beneficiary designations ensures that your retirement funds go to the right people.
Types of Retirement Accounts and Their Implications
- 401(k)s and Similar Employer-Sponsored Plans: Typically, if you’re married, your spouse is the presumed beneficiary unless they waive this right in writing. But if your spouse was not your spouse when you were earning, this might not be true. You need to select your beneficiaries carefully to get the result you want.
- IRAs: Although spouses are given the greatest right to stretch out payments of an inherited IRA over time, you have near complete flexibility in naming beneficiaries, which can include non-spousal individuals, trusts, or charities.
What Happens When There Are No Designated Beneficiaries?
In cases where no beneficiary is named, or if all named beneficiaries predecease you, your retirement account may be distributed according to the plan’s default rules or become part of your probate estate, subject to the terms of your will.
Tax Considerations in Inheritance
Inheriting retirement accounts can have tax implications for beneficiaries. A San Diego inheritance lawyer can help navigate these complexities to ensure that both estate and income taxes are minimized.
The Role of an Inheritance Lawyer
Consulting with a San Diego inheritance lawyer is invaluable in estate planning involving retirement accounts. They can assist in: