Why Are IRA Assets The Biggest Surprise People Get In Estate Planning?

Discussing a Document

A lot of people do not understand the landscape of how an IRA or retirement plans pass to beneficiaries. They do not necessarily understand the particularities and technicalities of how one inherits and their choices presented by fund custodians.

A lot of people do not understand the landscape of how retirement plans pass to beneficiaries. They do not necessarily understand the particularities and technicalities of how one inherits and their choices presented by fund custodians. IRAs have only been around since the mid-1970s and we are only beginning to see multiple generations inheriting them. The lifetime distribution option (stretch IRA) is an even more recent addition to the mix so the idea of not just simply cashing it out is relatively new. Whenever you have these options and choices, people just aren’t savvy enough.

Who has time to worry about what is going to happen to their IRA? And frankly, the goal of most people is to spend their entire IRA because that is their whole retirement plan. A lot of folks are often surprised that their will or their revocable living trust has nothing to do with their IRA. They might have all kinds of elaborate trusts created for kids, and then they realize that it does not really control much of their money because most of their money is in IRAs. All of these efforts that they went through to protect their children from themselves are foiled because they are just going to be handed the money right away by another source, from the custodian of those funds.

When they have a 401(k) from a couple of jobs and then a couple of IRAs and the spouse has the same, all these accounts can add up pretty quickly. We like to recommend employing a retirement plan trust when each beneficiary stands to receive about $150,000. With two kids, $300,000 in IRA funds, it starts to make sense to protect the beneficiaries from making the poor choice of cashing out the retirement accounts. One of the things that we do, as attorneys here, makes appropriate recommendations. We’ll often bring up a lot of considerations and strategies that might help solve certain problems.

Certainly, from a protective standpoint, when the dollar figures get north of $150,000 per beneficiary, it’s a strong argument to consider setting up the beneficiaries to inherit inside of a protective trust versus allowing them to make the potentially devastating decision to cash out the retirement accounts.

Do All Estate Planning Attorneys Have Experience In Handling Retirement Plans?

No, they certainly do not. Very few people even understand their own retirement plans. The financial expertise that goes with understanding retirement plans often is absent in the expertise an attorney brings to the table. We have a particular skillset here in that I used to be a financial advisor and have a body of knowledge that helps inform our practice in properly setting up these retirement plan trusts.

It’s not to say that they can’t do it, but there are a lot of technicalities in the IRS service regulations that have to be drafted into the trust. Beyond that, there’s the expertise of knowing how to draft the beneficiary designations correctly and further, to make sure that the document is such that that custodian knows what they’re dealing with. With that in mind, let’s think about the landscape of customer service these days. Often the first person that you get on the phone has a script, and they are just going to answer questions from that script; and if the situation does not follow the script, you may not get the right answer from the brokerage firm. So you have to have very clear and understandable guidance right upfront to know what is going on, and retirement plan trusts do that.

Rather than having language buried 80 or so pages into a dense document, it is right up front in bold language on the very first page to say the purpose desired outcome of the Retirement Plan Trust. This is important because there are time limits on these transfers. There are time limits on these decisions as far as stretching an IRA or cashing it out; and once those time limits pass, there is no choice when taxes are due, and penalties can incur after deadlines pass. It is not a casual process, and it is not something that I would expect somebody that does not focus on estate planning to understand. Even within the realm of practitioners that do focus on estate planning, they will not have the expertise coming from the financial services industry to understand this landscape and how to deal with inherited retirement funds properly.

What Sets Your Firm Apart In Handling Retirement Plans?

Software and expertise are what set us apart. We have the software and the expertise to understand the particularities of the IRS service regulations and the Treasury Regulations, and we understand the particularities of estate planning to bring that all together and provide protection and some guidance from mom and dad as to how their unspent retirement funds will be handled by the next generation. We have the checklists and procedures in place to effectively administer the transfers of these accounts after passing according to the IRS and Treasury guidelines.

Additional Information Regarding Retirement Plans In Wisconsin

When it comes to retirement plan trusts, there are a lot of considerations for surviving spouses. There are considerations for non-spouse beneficiaries. There are some spend-thrift and trust protection considerations where there are a lot of features within a retirement plan trust. Is it going to be a conduit trust where those distributions are going to come out each year? Is it going to be an accumulation trust, which is much more complex but possibly more protective? Maybe we need that protection if we’re worrying about bankruptcy or a reckless beneficiary.

There are a lot of factors that go into informing the result after the yes or no question of do we do this or not. It can be further complicated if there are special needs issues or minor beneficiaries that factor in the decision of does this makes sense and is something that I need. Ultimately, the question is most people seem to think that a) they are never going to die, and b) they are going to spend all their retirement funds themselves. The fact is that is not true. We work with our clients to get them to face the reality that protection is important and a useful part of an estate plan.

For more information on Surprises In Estate Planning, an initial consultation is your next best step. The estate lawyers of Krause Donovan Estate Law Partners, LLC practice law in the areas of Probate, Wills, Estate Planning, and Trusts. We assist clients in and around Madison, Wisconsin with all matters related to estate planning, trusts, and probate matters. Our dedicated attorneys will even make house calls if you are unable to come to our office.

Contact our office by calling (608) 344-5491 to schedule a consultation or use our online contact form.

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