More and more clients have a majority of their wealth in qualified retirement plans, such as IRAs or 401ks. With proper estate planning these assets can pass down to the next generation in a tax efficient, asset protected way.
Unfortunately, many Michigan estate planning lawyers and financial planners do not fully grasp how retirement plan assets and trusts work together and are afraid to name a trust as a beneficiary of a retirement account.
As a Certified Elder Law Attorney (CELA), Adjunct Professor of Law, Published Author, Continued Education Instructor for other lawyers and financial planners, let me try to break down some of the planning options for, what often is, your largest asset.
Basic Michigan Estate Planning and Retirement Planning Issues
Planning for retirement assets begins with understanding that often they are pre-tax accounts (other than obvious exceptions like the Roth IRA or Roth 401k). Meaning distributions from the retirement accounts are subject to income tax and when the owner passes away, the beneficiaries will have to pick-up the tax burden.
Many individuals, whether right or wrong, try to defer paying taxes as long as possible, with the idea that the assets continue to grow on a tax-deferred basis. However, may experts (Ed Slott), think that this is a mistake, and that there should be an intelligent difusion of the tax bomb, by taking money out of the deferred accounts in a strategic way...but this is the topic of another blog posts.
Understanding Minimum Required Distributions
All retirement plans require the owner of the account to begin taking out minimum required distributions at age 70 1/2. The amount that needs to be taken out is based on the owner's life expectancy. However, when the IRA or retirement account becomes an inherited account, the new owner must take out MRD's even if they are younger than 70 1/2.
Naming Beneficiaries of your Retirement Accounts (IRAs and 401ks)
If you are the owner of a retirement account like a 401k or IRA, you should name a primary beneficiary (spouse?) as well as contingent beneficiary (kids or trust). Now this is where there is some confusion. Many "professionals," including lawyers and financial planners do not think you should typically name a trust a beneficiary of a retirement account. They think this because of the general rule that you can only stretch-out the tax deferred nature of the inherited IRA up to 5 years because the trust does not qualify as a "designated beneficiary." However, they are plain wrong. If the trust is set up in the proper way, not only can you stretch our the MRDs for the inherited IRA, but also you can build in a lifetime of asset protection for the beneficiaries.
To Qualify as a Stretch IRA Trust
There are a few requirements to satisfy the "designated beneficiary" test for a trust. Those requirements are:
- The trust must be valid under state law;
- The trust must be irrevocable;
- The trust beneficiaries and ages must be identifiable; and
- The trust documentation is provided to the plan administrator by October 31st of the year following the participant's death.
As you see, not very restrictive rules. So, if the trust is set up correctly, it can easily qualify and you can stretch out the tax deferment of the retirement accounts. So, in our office, we will typically name the trust as a contingent beneficiary.
Learn More about Estate Planning and Retirement Planning in Michigan
This is just the tip of the iceberg when it comes to planning for retirement accounts. The next step is to attend one of our upcoming free estate planning workshops to learn how we can stretch IRAs, protect retirement accounts from long-term care costs and more. These workshops are offered almost weekly in our Brighton, Livonia, Novi or Bloomfield Hills estate and retirement planning offices.
To register for an upcoming workshop, call our office at (888) 390-4360 or click the box that says "register now"
The workshops cover things such as:
- How to leverage your retirement accounts for long-term care;
- Learn how to protect your assets from long-term care, probate, and unnessary taxes;
- Little known ways to bring in tax-free money for long-term care;
- Why having large tax deferred accounts may be a mistake in retirement; and more.
About Christopher Berry, Estate Planning Lawyer
- Graduate of Grand Valley State University and Michigan State University College of Law
- One of a handful of Certified Elder Law Attorneys (CELA) in Michigan, which is the gold standard for estate planning and elder law.
- Adjunct Professor of Law at WMU Cooley Law School where he teaches 2nd and 3rd year lawstudents estate planning and elder law.
- Instructor to lawyers, financial planners, insurance professionals and social workers on estate and retirement planning.
- Published Author of Caregiver's Legal Guide to Planning for Chronic Illness
- Creator of the Castle Trust (tm)