New Jersey Law

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Stretching Retirement Benefits in Estate Planning

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It is important to give consideration to retirement benefits, such as IRAs and 401K’s when you develop an estate plan. There is more to consider than just naming an appropriate beneficiary. The plan should take into account the possibility of stretching the payments out to the beneficiary or beneficiaries as an early distribution of the full amount could result in significant tax liability. The goal in taking funds from an IRA is to allow the account holder to withdraw the minimum required amounts in any year, once it is required that minimum distributions be made and then, after the account holder dies, for the beneficiaries to be able to handle the account in a similar manner that minimizes the taxes. It is important to keep in mind that this is the minimum distribution; a person can take any amount from the IRA after the appropriate date, so long as the minimum is taken. The law requires that minimum required distributions from a retirement account are to begin on April 1 of the following the year that the account holder reached age 70 ½. Failure to take a minimum distribution wil lresult in a penalty that is equal to 50% of the amount that should have been distributed. In general, the minimum distribution is determined by dividing the account balance by the number set forth in the Uniform Lifetime Table contained in the Treasury Regulations that corresponds to the age of the owner on the distribution year. The only exception is if the beneficiary is a spouse that is 10 years younger; in that case the amount in the account is divided by the Joint Life and Last Survivor Expectancy Table, based upon the survivor’s birthday on the distribution year.

Designated beneficiaries for a retirement account are usually a person, and the actual designation is determined under IRS regulation s. The designation, of course, must be carefully considered in the same manner as is determined in creating a will, as well as the designation of possible contingent beneficiaries. If an account has multiple beneficiaries, care should be given to be sure that if the intent is that a beneficiary’s children should be contingent beneficiaries that it is clearly stated as it does not follow the terms of a will or other estate planning documents. If the account names beneficiaries of different ages, the minimum required distribution will be based upon the life expectancy of the oldest beneficiary, unless they are able to take advantage of rules for account splitting, which must be done by December 31 if the year after the account holder’s death.

In a retirement account where a beneficiary has not been designated, the beneficiary will become the individual’s estate unless the employer’s plan provides that it will be the spouse (if there is one). Most if not all plans created by employers default to the individual’s spouse, but if that individual is not married, the default will be to the estate. This is the least desirable result as it causes the higher minimum required distributions after death, thus defeating the goal of stretching retirement benefit payments. The retirement plan would also become subject to probate which may also cause plan assets subject to claims of creditors.

Another option is to name a trust as a beneficiary. While there are advantages to using trusts, this may also cause problems resulting in no designated beneficiary. It may also require that beneficiaries go through the expense of a proceeding to reform the trust and the expense of getting a private letter ruling from the IRS in order to determine who the designated beneficiary is. There is no guarantee, of course, that the IRS will in fact issue a favorable ruling. Further, since a trust has no life expectancy, a trust cannot itself be a designated beneficiary. If certain requirements are met, however, the trust’s beneficiary will be considered as the beneficiary under the retirement plan. For this to happen four requirements must be met: (1) the trust has to be valid under State law, or would be valid if it was funded (2) the trust has to either be irrevocable or will become irrevocable on the death of the holder, (3) the beneficiaries under the trust have to be identifiable, at least to the extent that the identity of the oldest beneficiary is known, and (4) a copy of the trust document, or summary of the trust document, has to be provided to the plan administrator or IRA custodian no later than October 31 of the year following the year that the account holder died. If these rules are followed, the trust beneficiary with the shortest life expectancy will be deemed to be the designated beneficiary of the retirement accounts. As a result, care must be taken to make sure that neither a charity nor a decedent’s estate is a beneficiary of the trust because these beneficiaries do not have any life expectancy.

It should be noted that even determining the oldest beneficiary of a trust can present some problems. This can often be avoided by use of what is known as a conduit trust, which is a trust that merely takes the minimum distribution from the retirement accounts each year and acts as a conduit to pass the distributions to the trust beneficiaries. In a conduit trust, only current beneficiaries need to be counted in determining the identity of the beneficiary with the shortest life expectancy.

This is a general overview of some of the provisions in dealing with the IRA stretch. There are many nuances that deal with retirement plans, and plan management, as well as specific issues relating to the particular form of retirement plan, tax situation of the family and the individual, as well as the interaction between these retirement plans and the entire estate which must be considered in utilizing retirement accounts as a component of a estate planning. As always, it is best to consult with investment advisors, accountants, and estate planning attorneys and order to best realize your intentions in reduced tax liabilities.




DiFrancesco, Bateman, Kunzman, Davis, Lehrer & Flaum PC (http://www.dbnjlawblog.com) is a full service law firm in New Jersey which provides a broad range of legal services.

The information contained in this blog is intended solely for informational purposes; it is a advertising publication of DiFrancesco, Bateman, Kunzman, Davis, Lehrer & Flaum P.C.This publication is intended to alert recipients of developments in the law and is not intended to provide legal counsel, advice or opinion on any specific facts or circumstances. The contents are intended as general information only. You are urged to consult a member of this firm or your own attorney concerning your particular situation and any specific legal questions you might have.