By Bernard A. Krooks, Certified Elder Law Attorney

Estate planning requires a lot of thought and involves so much more than drafting and executing a few documents. One thing you need to ensure is that your overall estate plan is coordinated with your retirement and other accounts so that your beneficiary designations do not upset what you think is a perfectly drafted estate plan. For example, if your will leaves everything to your son and daughter equally, but your 401(k) plan at work lists your daughter as the beneficiary, then she will inherit all the money in the 401(k) notwithstanding what the will says. As a general rule, a specific beneficiary designation in an account, including a retirement account, will control where the funds go upon your demise, regardless of what your will says. 

Moreover, retirement account beneficiary designations present additional challenges due to the fact that, for many clients, this is where the bulk of their wealth is, and retirement plan custodians often have their own set of internal rules and policies that must be complied with; many of which don’t make sense or are frustrating to deal with. Thus, in many instances, it is difficult to figure out how to complete your retirement account beneficiary designation forms, especially if you have a living trust, would like to leave money to charity, or wish to minimize income taxes. We have heard multiple horror stories from clients about some institutions requiring medallion guarantees for signatures (which can be difficult to obtain), and others not allowing online beneficiary designation changes, among many others. Therefore, it is best to get your retirement account affairs in order before you become incapacitated or pass away so that your beneficiaries don’t get caught up in a morass of red tape, causing delay and confusion. 

If you are married, naming your spouse as the beneficiary of your retirement plan is usually (but not always, especially in a second marriage situation), the best option. This is due to the fact that a surviving spouse can “rollover” your retirement account into his/her own retirement account which typically leads to the best tax results. If you are re-married and have children from a prior marriage, there may be better options available to you that would involve the use of a trust to ensure that your children inherit the portion of your retirement account that you intend for them to have. However, this area of the law is fraught with traps for the unwary so please make sure you proceed with a competent estate planning attorney.

If you have charitable intentions, leaving money to a charity from a retirement account is often an excellent choice since the charity will not have to pay income taxes on the distributions from the retirement account after your death. Whereas, if you name an individual as the beneficiary of your retirement account, he/she will have to pay income taxes on the distributions. Thus, if you leave your $100,000 retirement account to your daughter, depending on her own personal tax situation, she may have to pay $35,000 in taxes and would net only $65,000 from your retirement account. If you left the $100,000 retirement account to a charity, the charity would net the entire $100,000, a much better result.  You could leave your daughter $100,000 from a non-retirement account and she would receive the entire $100,000 since income taxes would not be owed on a non-retirement bequest.

The recently enacted SECURE Act made significant changes to retirement plan distributions, including eliminating the stretch IRA, except in the case of eligible designated beneficiaries (EDB). An EDB is a spouse, a disabled or chronically ill individual, an individual who is not more than 10 years younger than you, or a minor child. For EDBs, the stretch IRA still lives and can result in significant financial and tax benefits to your family if all the relevant criteria are met. However, please note that the rules are complicated, especially if you want to leave your retirement accounts to a trust. A trust could be a good idea if you are concerned about protecting retirement assets from the cost of long-term care for a disabled or chronically ill beneficiary. 

Retirement account beneficiary designations can be challenging, and it is important that they be coordinated with the overall estate plan. When updating your estate plan, do not forget to include a review of all your beneficiary designations, including retirement plans. 

Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP. He was named 2021 “Lawyer of the Year” by Best Lawyers in America® for excellence in Elder Law and has been honored as one of the “Best Lawyers” in America since 2008. He was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils (NAEPC). Krooks is a past Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.littmankrooks.com.