More Retirement Planning Basics

Last week I started a discussion about retirement planning. Coordinating retirement plans with wealth transfer planning can be challenging. This is primarily because retirement accounts are driven by income tax laws designed to encourage Americans to accumulate wealth for retirement, not for transferring wealth upon death.

We have been examining some of the fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death.

The third fundamental we need to look at is who is the plan’s beneficiary. We also need to examine what is a “designated beneficiary” as the government uses that term.

Who is the Participant’s Beneficiary? Is There a “Designated Beneficiary” (DB)?
Beneficiary means those who are entitled to the plan benefits upon the participant’s death. Retirement benefits generally pass as non-probate property, by contract, to the beneficiary named in the participant’s beneficiary designation form or, if there are none, as specified in the plan. The provisions in the participant’s will or revocable living trust are irrelevant as to who receives the benefits, unless the plan or the participant’s beneficiary designation provides otherwise.

“Designated beneficiary” does not mean the beneficiary designated by the participant. It is a legal term and understanding its meaning is crucial to planning and for compliance with post-death MRDs.

There is a Designated Beneficiary for an account if, on September 30 of the year following the year of the participant’s death, there is no beneficiary that has to be considered in making the analysis that is not a human being or a qualified “look-through” trust and the plan administrator or custodian can know, with certainty, the oldest person who has to be considered in making the analysis.

Planning Tip: Now is a good time to work with professionals to figure out what clean-up strategies can be used.  These include removing non-qualified beneficiaries and division into separate shares . Most IRAs and qualified retirement plans have printed beneficiary designation forms they expect the participant to use. Most, but not all, will accept attachments. Some will accept a separate instrument. Due to the limited space on most forms, it will probably be necessary to add an attachment. When drafting beneficiary designations, make sure the plan permits what you are trying to accomplish.

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look.

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.

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