Naming a beneficiary for your IRAs and other tax-qualified retirement plans is a critical estate planning decision sometimes complicated by competing desires to minimize taxes and provide for your heirs as you wish.

For instance, if you decide to name your spouse as beneficiary on your IRA, on your death, the account can be “rolled over” into his or her IRA, permitting him or her to defer making taxable withdrawals until he or she reaches age 70-1/2.

If, however, you are in a second marriage and/or have other reasons for wanting your retirement savings ultimately to go to your children, you may well want to forego the benefits of a “roll-over” and design a plan to provide income for your spouse during his or her lifetime and then to pass on the assets to your children. This is usually done via a “QTIP” Marital Trust.

However, for many retirement benefits (although not IRAs), a spouse has an absolute legal right to be the primary (i.e., first) beneficiary. Even a well-written Pre-Nuptial Agreement cannot override that right. A spouse can waive this right but only after being fully informed, so if you want to select a non-spouse as your beneficiary, you must go through the waiver process and have it well documented.

You also need to plan for the possibility that a child will predecease you. In that case, it will take even more planning to ensure that your deceased child’s share of your retirement benefits will go to his or her children. This also has to be taken into account when using the “QTIP” Marital Trust, as a child may well survive you but predecease your spouse.

In addition to considering these scenarios when planning your estate, it may also be good to educate your heirs about the options they have when withdrawing money from your retirement accounts after your demise. Depending upon how the account is arranged, they can withdraw it all or in part and can also “stretch it out” over their own lifetimes. Each option has its own tax considerations and beneficiary requirements. Involving your children with your estate planner to discuss issues like withdrawal options can be a good way of introducing them to the idea of managing their own estates in the future.

An estate plan should be as individual as the person it is written for, and it is always important to remember that taxes are the “tail” and not the “dog.” If you would like to have us look at your plans to secure your legacy, please call for an appointment.

For further information regarding these matters, please contact Mr. Umphrey at 248.528.1111 or click here to send an email.