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Retirement Plans
In General
Changing the Beneficiary Designation
Available Forms
Additional Documents Required
Should the Trust or the Spouse
be the Primary Beneficiary?
Naming the Spouse as
the Primary Beneficiary
Disadvantages
of Naming Spouse as Primary Beneficiary
Naming the Trust as
Primary Beneficiary
Benefits of
Naming the Trust as Primary Beneficiary
Caution When
Naming the Trust as Primary Beneficiary
Designated Beneficiary
Long Form Beneficiary Designations
Use of Durable Limited
Power of Attorney
IMPORTANT NOTICE TO USERS:
The information contained in this legal bulletin is general in nature and
does
not constitute legal advice. Non-attorneys should consult
with a qualified estate planning attorney regarding any trust funding matter.
Issues of state law may contradict any information contained herein.
Accordingly, the information contained in this legal bulletin and on our web
site should not be relied upon without first confirming with a qualified
attorney that the legal requirements in a particular state are satisfied.
This web site, our products and services, and any accompanying resources
are
not intended to be a substitute for research, continuing legal education, or a
thorough knowledge of the law. In using any aspect of this
web site, the user, whether attorney or non-attorney, agrees to assume all
responsibility for the validity of the information contained herein.
In General: Qualified
retirement plans ("Plans") and IRAs are special types of investment accounts
that grow income tax deferred, until the plan proceeds are withdrawn. Over time this
special tax deferred treatment yields tremendous growth in the plan. Special care should
be taken when funding Plans and IRAs to ensure that ownership of the Plan is not
transferred to a Revocable Living Trust. CAUTION:
The IRS will treat the transfer of the ownership of a Plan or IRA to
a Revocable Living Trust as a distribution, and the full value of the plan will be treated
as ordinary income. Therefore, the preferred method of funding Plans and IRAs is to name
the trust as either the primary or contingent beneficiary of the plan.
Because of the special tax considerations of Qualified retirement plans, we
recommend that you consult with your estate planning attorney before funding the
plan to your living trust.
Changing
the Beneficiary Designation: Typically, when changing beneficiary
designation on qualified retirement plans, the following steps should be
followed:
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Sending an instruction letter to the plan administrator
(for Plans) or custodian (for IRAs) signed by the participant/owner. (The instruction letter should
have a statement indicating that the change is not a change of
ownership);
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Completing any required Change of Beneficiary Designation form
signed by the participant/owner and sending it to the administrator or custodian;
typically, these forms can be obtained from the company directly;
-
If the Change of Beneficiary Designation form requires a
witness or notary, make certain that the appropriate formalities are followed;
-
In some instances, spousal consent may be required in
order to change beneficiaries of the Plan; any questions regarding spousal
consent should be directed to the plan administrator and your estate
planning attorney.
-
Sending the required documentation evidencing the
existence of the trust; your estate planning attorney can help you determine
what documentation is required for funding the qualified plan.
IMPORTANT NOTE:
When changing beneficiary designations, we recommend that you
verify the change with the plan administrator or custodian within 30 days from your
request being sent. Despite language in your funding instructions indicating that the
change of beneficiary is not a change in ownership, some administrators or custodians may
nevertheless change ownership inadvertently. Should ownership of a Plan or IRA be changed,
the Internal Revenue Code allows a 60-day period where the change of ownership can be
reversed. Therefore, the sooner the verification process begins, the more time you will
have to correct any mistakes made by the administrator or custodian.
Because of the complexities and tax
considerations when funding a qualified retirement plan to a trust, we
strongly recommend that you consult with an estate planning attorney with
experience in trust funding.
Additional
Documents Required: Many institutions may request verification that the trust is
actually in existence. Your estate planning attorney can assist you in
identifying what additional documents are required by a given institution.
Should
the Trust or the Spouse be the Primary Beneficiary?: For years, legal commentaries have
been debating the merits of naming the spouse or naming the trust as the primary
beneficiary of the Plan or IRA. There are several schools of thought on the issue.
In
either case, the primary beneficiary can disclaim the Plan or IRA benefits to the
contingent beneficiary on the death of the participant.
NOTE:
There are both advantages and
disadvantages to each funding method. Consequently, every individual client situation should be
considered on a case by case basis. A
proper decision can only be made after the attorney has ascertained the client's goals and
objectives and after the attorney has reviewed the Plan or IRA to ascertain what
options are available to the client. Because of the complex variables to
consider with naming the spouse or the trust, we strongly recommend that you
consult with your estate planning attorney to determine which funding strategy
is most advisable.
Naming
the Spouse as the Primary Beneficiary: The first school of thought is to name the
spouse as the primary beneficiary and the trust as the contingent beneficiary of the
retirement plan. On the death of the participant, the surviving spouse has the ability to
rollover the qualified plan or IRA to an IRA for him/herself without any acceleration of
income tax. When the spouse is named as the primary beneficiary, the spousal rollover is
easy to do and qualifies for the unlimited martial deduction, resulting in no adverse
estate tax consequences on the death of the first spouse. However,
naming the spouse as the primary beneficiary may not be the best strategy for
all planning situations. (See disadvantages below)
Disadvantages
of Naming Spouse as Primary Beneficiary: There are some disadvantages to naming
the spouse as the primary beneficiary of the Plan or IRA. Because the spousal rollover is
convenient and easy, often a rollover will occur prior to the spouse receiving any
counseling from an estate planning attorney as to what other tax-planning strategies are
available. In some circumstances, the appropriate tax planning strategy is for the spouse
to disclaim the retirement plan proceeds and allow the trust to receive the assets in
order to ensure that the Family Trust is fully funded.
CAUTION:
Because disadvantages exist to this approach and because each client situation
is different, it is important to consult your estate planning attorney
before you change beneficiary designation on your qualified retirement
plan. Your estate planning attorney can counsel you as to which tax and
estate planning strategies are the best for you and your estate.
Naming
the Trust as Primary Beneficiary: Typically, when a trust is named as a primary
beneficiary, the surviving spouse, and the surviving spouse's advisors, will contact the
estate-planning attorney prior to making any decisions in relation to the Plan or IRA.
This gives the attorney the opportunity to counsel the surviving spouse on appropriate
decisions in order to attain the client's goals.
Benefits
of Naming the Trust as Primary Beneficiary: Not only does naming the trust as the
primary beneficiary help ensure that the surviving spouse will obtain legal advice before
electing a spousal rollover, it also allows for bloodline protection, creditor protection,
catastrophic illness protection, and ensuring that participant's beneficiaries inherit
pursuant to detailed instructions contained in the trust.
In addition, if the spouse is named as the primary
beneficiary of the retirement plan, they may be reluctant to disclaim the asset to the
trust, or they may be unable to disclaim because of a disability. Naming the trust as a
beneficiary allows the trustee to disclaim, (which is typically the spouse and a helper)
and eliminates the problem of a disabled spouse not being able to disclaim because there
is always a successor trustee able to elect the disclaimer.
CAUTION:
When Naming the Trust as Primary Beneficiary: Although there are numerous
advantages to naming a trust as the primary beneficiary of the retirement plan, there may
be adverse income tax consequences unless care is taken to ensure that the trust qualifies
as a designated beneficiary. A "designated beneficiary" is an Internal Revenue Service
designation given to beneficiaries of Plans or IRAs who receive special income tax
treatment. Normally, if the beneficiary of the plan does not qualify as
a "designated beneficiary", then all account
proceeds must be distributed (and therefore subject to income tax) within 5 years of the
participant's death (if he or she dies before the required beginning date) or by December
31st of the year following death (if he or she dies after the required beginning date).
Due to the complexities of beneficiary designations, we strongly recommend
that you consult your estate planning attorney for guidance.
Designated
Beneficiary: If the trust is a designated beneficiary, then distributions after
death can generally be made over the life expectancy of the oldest beneficiary of the
trust. These rules are always subject to the express terms of the Plan or IRA.
CAUTION: No decision should be made prior to
your estate planning attorney reviewing the Plan or IRA. Charities,
estates, and corporations do not qualify as designated beneficiaries. Trusts can qualify
as a designated beneficiary as long as the certain requirements are met.
We strongly recommend that you consult with your estate planning attorney to determine
if your trust qualifies as a "designated beneficiary".
Long Form Beneficiary Designations: Some attorneys have taken the approach of
naming multiple beneficiaries of Plans or IRAs in order to allow flexibility during the
settlement process. By naming multiple beneficiaries, each beneficiary can disclaim the
Plan or IRA proceeds in order to distribute the proceeds to the desired beneficiary.
All
disclaimers must be made within 6 months of the date of death. See
your estate planning attorney for assistance with multiple
beneficiaries.
.Use
of Durable Limited Power of Attorney: A Durable Limited Power of Attorney should
be used when planning with Plans and IRAs in the event that the participant becomes
disabled and is unable to make elections. If a power of attorney is utilized, consider
sending a copy of the power of attorney to the administrator or custodian asking them to
agree in writing that they will honor the power of attorney. Often powers of attorneys are
never submitted to a plan administrator or custodian until after the maker is
incapacitated. Once incapacitated, there is little that can be done short of initiating a
probate proceeding. For assistance with a Durable Limited Power of
Attorney, we recommend that you consult with your estate planning attorney.
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