Families inherit
money and sometimes make the right moves investing and spending. Inheritances
can also ignite disruption, divorce, and a host of bad behavior – far from the
hopes and plans of the benefactor.
What happens when
you leave what’s probably one of your most significant investments: your individual
retirement plan?
Your Retirement Assets
Perhaps most
important, your estate plan must address potential disruptions: the U.S. tax
code will almost certainly change, your heirs will experience life’s normal
challenges and opportunities, and something you never considered may befall
those you leave behind. Early death, disability, and divorce all happen every
day.
You should probably
leave your retirement assets to an individual. Such accounts include your:
IRA or 401(k)403(b)
if you worked for a school or tax-exempt organization, a simplified employee
pension (SEP-IRA), or any of a number of other plans. The retirement plans must
go to your spouse unless he or she signed away control of them after you
married (prenuptial agreements do not apply here), permitting you to designate
a different beneficiary. You can leave your IRA to any person you choose.
Planning Ahead of Time
is Key
What if you leave
your retirement money to your estate instead of to a person? What if your
beneficiary dies before you?
In either case,
your savings must be liquidated and distributed over the next five years. You
also lose the ability to arrange stretched payouts over individuals’ life
expectancies – usually lowering future income taxes significantly. Plus it
creates a potential marital asset for many recipients, newfound wealth that can
evaporate in the wake of some future family tragedy or feud.
You can use
specialized trusts to help mitigate most risks, such as the danger of a family
beneficiary blowing the inheritance. Several vehicles exist to restrict a beneficiary’s (irresponsible) access to the money. For example:
- An incentive trust that pays out only if the beneficiary meets
certain conditions and goals - A spendthrift trust also allows for monthly allowances or periodic
payments for either the life of the beneficiary or until the funds are
gone
You worked hard to
save for your golden years. When the inevitable day comes and you no longer
need what money remains, make sure you leave it behind the best way.
