Say your retirement account is or will be filled to the brim. Each year you’ve contributed the maximum allowed, and you’re comfortable in the knowledge that your children will inherit a sizable chunk of your wealth. That’s all you need to know, right?
Unfortunately, too many individual retirement accounts in Texas end up nearly drained by taxes or creditors, all because well-meaning people who paid into the account didn’t protect it with a comprehensive estate plan. So what measures can you take now to ensure that your heirs receive the wealth you’ve worked so hard to accumulate? Let’s consider some options.
Creating a trust for retirement funds is one way of limiting tax liabilities for the named beneficiaries. If the money passes directly to an heir, then he or she will have to pay the associated tax bill. With a trust, however, the funds are distributed over time, limiting the tax liability, and the money is protected from any creditors that might try to collect.
A trust may also be useful if your beneficiaries aren’t exactly known for their superb financial decisions. In a trust, an IRA inheritance will be distributed by a trustee to the named beneficiaries, and you can have a say in how the funds are doled out.
Some people make the mistake, though, of naming the same children as beneficiaries of a trust and of the IRA intended to go into the trust. This misstep could lead to the funds going directly to the children, rather than being distributed over time.
It is also important to update your estate planning documents if you have experienced a major life change such as divorce or a death in the family. Too often, people forget to change beneficiaries, and this can lead to serious family disputes down the line.
Source: The Wall Street Journal, “Minding Retirement Accounts in Estate Plans,” Arden Dale, July 30, 2013