In life's drama, accidents often occur because the left hand did not know what the right hand was doing.
With alarming frequency, we see that the left hand of retirement planning is not coordinated with the right hand of estate planning, and regrettable consequences result.To help you coordinate your retirement nest egg with your estate planning legacy, here are some ideas.
The surviving spouse and remarriage
Do you realize that by naming your spouse as primary beneficiary of your retirement account, you could disinherit your children? That is happening every day because people do not know the risks and options when naming death beneficiaries. It is very easy to name the spouse as primary beneficiary and the children as contingent beneficiary. However, that "easy" solution could prove disastrous.
If the husband, for example, leaves his retirement account to his spouse and then dies, the surviving spouse controls it. In many cases that may be OK. However, what if the surviving spouse remarries and names her new husband as beneficiary of her assets? She thinks: "For now that's OK. In a few years when the children are older, I will get it all adjusted to take them into account."
However, as fate would have it, she dies unexpectedly, and the new husband walks away with the inheritance and the children are left empty-handed. I recently saw that happen to a family, and the children were, effectively, disinherited from several million dollars.
The result is nearly as bad if she remarries and forgets to name a beneficiary. By law, the children will get some of the inheritance, but so will the new husband.
"Spendthrift" protections
What if -- down the road -- your child develops creditor problems, alcohol or drug problems, or marital problems? The portion of your nest egg left to that child may vaporize, and you never thought it would.
With trusts and other planning, you have the ability to put controls on the child's inheritance. Those controls do not necessarily have to shackle the child's financial freedom but can be tailored to be fairly restrictive or not very restrictive at all. It's up to you. With no controls, you may be throwing family fortunes to the wind.
"Special needs" protections
What if your child currently -- or in the future -- is disabled and qualifies for government financial assistance? If you do not utilize "special needs" provisions in your estate planning, your child could become ineligible for government assistance. This is another area where it is dangerous, even foolish, to take your neighbor's advice of "just name your child as beneficiary of your retirement," or "just name your child as co-owner of your real estate or bank accounts."
Rather, make sure your retirement accounts and other assets have "special needs" provisions attached.
Death taxes
As you've read here and in other places, there is a death tax (sometimes called "inheritance" tax) imposed on your heirs if you leave them a combined amount exceeding $650,000. If a spouse leaves all of his or her retirement funds directly to the other spouse, the survivor may end up with more than $650,000 worth of assets. If the survivor dies unexpectedly, the heirs will pay up to 55 percent tax on the assets that exceed the $650,000 limit.
Spouses can double the exempt amount from $650,000 to $1.3 million with proper trust planning. However, the time to act is now. The risks of paying 55 percent taxes just simply outweigh the benefits of putting the planning off. Retirement account beneficiary designations have to be carefully reviewed and, where necessary, changed, or this tax may hit your children and other loved ones.
One last tax tip
Many employees accumulate money in company retirement plans. When the employee leaves the company (at retirement or before), the plan may provide him or her the option to leave the money there or take it out. Once the money is withdrawn, income taxes become due on the entire balance.
To avoid triggering the income tax, the employee should consider "rolling over" the funds into an IRA account. That will prevent the funds from becoming immediately taxable. However, if you do withdraw your funds from an employer-sponsored plan, make sure you do the "rollover" within 60 days after the withdrawal. If you don't comply with that time limit, the IRS has been very strict in imposing the income taxes. In fact, in cases where failing to meet the 60-day limit was not even the employee's fault, the government has strictly enforced the 60-day rule.
Randall J Holmgren is an attorney in the Salt Lake law firm of Holmgren & Mitton, L.C. He may be contacted at 801-366-9966 or by e-mail at rholmg@burgoyne.com or visit his firm's Web site at http://www.holmgren-mitton.com. Also contact Holmgren if you have a question or issue you would like to see addressed in an upcoming column. Any statement made in this article is intended for general information purposes only and should not be relied upon as a legal opinion or advice. For legal advice or an opinion, discuss the facts of your specific circumstances with a qualified legal professional.