When you think about your estate plan, the most common document that comes to mind is your will. It's the traditional core document and the one most people think of when they hear the term estate planning. But there are a variety of other documents you may also draft (powers of attorney, a trust, HIPAA authorizations, living wills) and there are also other considerations for you to think of.
Your retirement accounts are a good example of parts of your "estate plan" that don't involve the drafting of separate documents. Retirement accounts don't need to be distributed under the terms of your will and can be easily planned for to avoid your local probate court. Unlike some other assets, your retirement accounts can utilize a beneficiary designation to pass on the money in your account at the time of your death.
However, if you don't utilize the beneficiary designation, then all of that money that you've accumulated in your retirement account may end up getting distributed by a probate court, which may cause your family members to lose some tax benefits. Also, if you're in a state with an estate or inheritance tax, adding your hard-earned retirement earnings to your estate may leave an estate tax problem as well. You should be sure to work with your financial advisor to properly set up your retirement accounts for distribution after you pass away. It's one of the primary ways that you can bring professionals together from a variety of fields to protect your legacy.
To get you started, when it comes to retirement accounts, I've encountered 6 common mistakes made by clients that you want to make sure you're not making.
6 Retirement Account Mistakes
All of these mistakes come with the caveat that, if you've worked with your lawyer and financial advisor and they recommend that you craft your estate plan in this manner, I'm not here to override their advice. They know your situation better than I do (since I don't know it at all and am writing a blog about it) and you should make sure to understand their reasons for suggesting you set up your estate plan in that manner.
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Inconsistent Beneficiary Designations: Your retirement accounts should align with your estate planning documents. If your will and IRA beneficiary designations contradict each other, the named beneficiary on the IRA form prevails, potentially bypassing your true intentions - which is how these accounts pass outside of probate court.
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Not Naming a Trust for Minor or Financially Irresponsible Beneficiaries: Directly naming minors or financially irresponsible individuals as beneficiaries can lead to complications and unintended consequences. Instead, consider naming a trust to manage and distribute the assets over time.
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Overlooking the Impact of Naming a Spouse as the Sole Primary Beneficiary: This can unintentionally disinherit your children, especially in blended families. Consider the broader implications and make an informed decision that reflects your wishes.
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Missing Tax Advantages with Charitable Donations: Donating part of your retirement account to charity can be tax-efficient, as charities are not subject to income tax on the distributions they receive.
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Failing to Inform Family About Retirement Accounts: Unawareness can lead to oversight and complications in estate settlement. Ensure your family is informed about all your retirement accounts.
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Neglecting Tax Withholdings from Distributions: While optional, not withholding taxes from IRA distributions can lead to tax liabilities and penalties at tax time.
Many of these mistakes are easy for you to fix on your own, without needing a lawyer, financial advisor, or accountant. In many cases, it's nothing more than a call to your financial institution to
Do You Need an Estate Plan?
If you don't already have an estate plan, or if you have one that needs to be updated, let's schedule a Legal Strategy Session online or by calling my Edina, Minnesota office at (612) 294-6982 or my New York City office at (646) 847-3560. My office will be happy to find a convenient time for us to have a phone call to review the best options and next steps for you to work with an estate planning attorney to get your estate plan prepared.
