Preparing and executing a proper estate plan is only part of a larger picture. After the client has worked with an attorney to formulate a specifically tailored estate plan for the client, the attorney and client must continue to work together to properly fund the client’s trust.
The client’s specific situation may warrant a different plan for funding, but for the most part the following guidelines should be followed.
Deeds for the client’s real property should be prepared and executed to place the property into the name of the trust agreement.
Bank accounts and investment accounts should be titled in the name of the trust or at a minimum made payable on death to the trust agreement.
Life insurance beneficiary designation forms should be updated to name the trust agreement as the beneficiary.
Business interests and LLCs should be properly assigned to the client’s trust and need to be in accordance with the provisions of the governing documents of the business.
Keep in mind that joint accounts and accounts with living beneficiaries avoid probate.
Naming beneficiaries for a client’s IRA and 401(k) is more complicated. IRA and 401(k) retirement plans benefit from deferred taxation, meaning that the income deposited into them as well as the earnings on the investments are not taxed until the funds are withdrawn. Surviving spouses may rollover retirement plans inherited from their deceased spouses into their own plans. The surviving spouse can defer withdrawals until after they reach age 70½ and take minimum distributions based on their age. Non-spouse beneficiaries of retirement plans must begin taking distributions immediately and they can base the distributions on their own (usually younger) ages or on the age of the deceased IRA owner.
Sometimes we need to name the client’s trust as contingent beneficiary after the spouse is named as primary beneficiary. We often do this when clients have minor children or children that may not be able to handle the large funds in a retirement account. The trust must include special language that cues the IRS to see through the trust to the intended designated beneficiaries.
Be careful when naming a charity as a partial beneficiary of a retirement account or as a beneficiary of a trust that is funded by a retirement account. The other specific named beneficiaries who are living people may not be able to stretch the distributions during their life expectancies. The other named beneficiaries will have to withdraw the funds from the retirement account and pay the taxes within five years of the IRA owner’s death.
Another situation to avoid is naming a special needs individual or his third party special needs trust as a beneficiary of a retirement account. Often I have counseled clients to make certain beneficiary designations in order to avoid qualified funds from being funded into the special needs trust by designation non-special needs children as beneficiaries of qualified money. Thus, funding the special needs trust with other assets besides the IRAs and 401(k)s. If there is still a discrepancy then life insurance should be considered.
The bottom line is that naming beneficiaries of retirement accounts is very complicated and we strongly suggest you consult your tax advisor, financial planner and attorney when making these complicated decisions.
I often urge clients to annually prepare a list of assets owned, so in the event of incapacity or death, the successor agents have a clear outline of the client’s assets and are not left scrambling in the dark. If the client is comfortable sharing his or her finances with his or her children then I suggest a meeting to share the relevant information with the next generation.
If new land is purchased or a new account is opened then these new assets need to be properly funded into the trust agreement.
Estate planning documents and beneficiary designations should be reviewed every three to five years and updated accordingly. Too often we have to open a probate estate because of a lack of trust funding or there is no contingent beneficiary on a retirement account where the spouse has predeceased the retirement account owner. I also recommend that clients keep a copy of their beneficiary designation forms and often make a copy for my file.