Estate Planning with IRA’s and Retirement Plans: Pitfalls and Opportunities

Hook Law News | Nov 29, 2018 | Jennifer S. Rossettini

If your annual income falls somewhere between $50,000 and $200,000, chances are that more than half of your assets consist of 401(k), 403(b), IRA and/or other retirement plan assets (for purposes of this article, all non-pension retirement plans will be referred to as “IRA’s”). If this statistic is true for you, it is critically important to make sure that the beneficiary designations on your IRA’s are consistent with your overall estate plan. Moreover, as the federal estate tax exemption continues to increase, income tax planning for future generations becomes even more relevant. This article will discuss some of the estate planning pitfalls that go along with estate planning with IRA’s as well as some of the planning opportunities.

As you may be aware, the IRA is an investment vehicle that allows for tax-deferral during your earning years.  In exchange for allowing you to defer the taxes during your earning years, the IRS requires that you begin withdrawing from your IRA when you turn 70 ½. This is the Required Beginning Date (“RBD”). At that time, these Required Minimum Distributions (“RMD’s”) are taxed as ordinary income. When you designate a beneficiary to receive your IRA at your death, that beneficiary can generally choose among three options for taking the distribution: (1) take the whole IRA in a lump sum, in which case the entire lump sum will be taxed as ordinary income to the beneficiary; (2) withdraw from the IRA over a 5-year period, in which case, each withdrawal will be subject to income tax; or (3) take withdrawals from the IRA over the beneficiary’s life expectancy. For greatest tax deferral, the IRA owner should want their beneficiaries to choose the third option. Despite the owner’s wishes, however, improper beneficiary designations could thwart their best-laid plans.

Pitfall Number 1: Failing to Name a Beneficiary or Naming a “Non-Qualified Beneficiary”:

This can happen if the IRA owner fails to name a beneficiary and the plan does not have default beneficiaries, or when the owner names their estate, a charity, a non-qualified trust, or other entity.  In this case, the beneficiary only has limited options. If the IRA owner died before his/her RBD, the beneficiary must take the IRA assets out over a five-year period. If the IRA owner died after his/her RBD, the beneficiary can choose to take distributions over a five-year period or over the remaining life expectancy of the IRA owner.

Potential Solution: Be sure to name individual beneficiaries consistent with your estate plan. For example, if your estate plan requires that your assets be distributed equally to your two children, be sure to name those two children as equal beneficiaries of your IRA.

Pitfall Number 2: Naming your Revocable Living Trust as Beneficiary:

If your estate plan involves the use of a Revocable Living Trust so that assets remain in Trust for your spouse and/or your children after you pass away, many people make the mistake of just naming their Trust as the beneficiary of their IRA.  There are two problems that arise when you name your Trust as beneficiary. First, if the Trust is not a “Qualified Designated Beneficiary Trust,” the Trust will be subject to the less desirable payout options discussed above. Second, even if you have named beneficiaries of various ages, the IRS will use the life expectancy of the oldest beneficiary to determine the proper RMD.

Potential Solution Number 1: Make sure your Trust is a Qualified Designated Beneficiary Trust, which means (1) the Trust is valid under state law; (2) the Trust is irrevocable or becomes irrevocable at the death of the IRA owner; (3) the beneficiaries of the Trust can be identified in the Trust document; and (4) the Trust document is provided to the account administrator by October 31st of the year after the IRA owner’s death.

Potential Solution Number 2: Instead of naming your Trust as beneficiary of your IRA, you could name the individual sub-trusts created therein as the beneficiaries. For example, instead of naming “The John Doe Revocable Trust” as the beneficiary, you could name “The Marital Trust f/b/o Jane Doe under the John Doe Revocable Trust.”

Please keep in mind that estate planning with IRA’s can be complicated and that this article only scratches the surface. As such, we highly recommend that you seek the advice of an experienced estate planning attorney to walk you through your unique situation.

Ask Kit Kat – Magic in Cat’s Tongue

Hook Law Center: Kit Kat, what can you tell us about the uniqueness of a cat’s tongue?

Kit Kat: Well, first of all look at this cute little girl, daughter of one of our staff, who just got her very own kitty from a local shelter. The little girl, Allison, has named her kitty, Elliott. It’s a girl kitty, but that’s what her name was, so the family kept it.

Anyway, back to the original subject for this week—the magic in a cat’s tongue. We all know that cat tongues are rough and not smooth like other animals’. However, under a microscope, what the surface of a cat’s tongue is like is revealed by looking at it under a microscope. It may look just a bit scratchy or rough to the unaided eye, but under the microscope it is shown to have tiny, claw-shaped hooks which lay flat, until they come to life in the grooming  process. These tiny hooks are also hollow, so they can carry saliva from the cat’s mouth to reach deep down into the cat’s fur when it is grooming.  The average cat has 300 hooks or papillae, which is the technical name. Interestingly, the length of each papillae is roughly the length of each strand of the cat’s fur, except for Persian cats, which have extremely long hair strands.  All kinds of cats—tigers, lions, cougars, bobcats, leopards, etc. have the same kind of tongue. And it is a virtual cleaning machine!

This discovery was made by Alexis Noel, the lead researcher on a team of   mechanical engineers from Georgia Tech. She thinks the knowledge could lead to inventions for both pets and humans. (Lauran Neergaard,  “The scoop on your feline’s tongue,” The Virginian-Pilot, November 20, 2018, p.1 & 4)

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Jennifer S. Rossettini

Attorney, Shareholder, CFP®
757-399-7506 | 252-722-2890
[email protected]

Jennifer Rossettini is a Shareholder of Hook Law where she focuses her practice in the areas of elder law, estate planning, estate and trust administration, and financial planning. Her practice includes complex estate planning for clients with a net worth over $5 million as well as simple plans for individuals with very limited assets. Ms. Rossettini rejoined the firm in 2018 after spending ten years as a CERTIFIED FINANCIAL PLANNER™ professional with the wealth management divisions of two regional financial institutions. She is a member of the Financial Planning Association, serving as Secretary for the Hampton Roads chapter and serves on the Board of Directors of the non-profit organization, PrimePlus Senior Centers. Jennifer lives in Virginia Beach with her husband and two daughters. She is active in the Girl Scout organization, serving as both a troop leader and as the treasurer for the local Service Unit.

Practice Areas

  • Elder Law
  • Estate & Trust Administration
  • Estate Planning
  • Financial Planning
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