handling retirement accounts in estate planningIf you are considering creating a revocable living trust as part of your estate plan, you will have to choose which assets you will transfer into the trust. As the assets in the trust will most likely avoid probate, you may be tempted to transfer everything you own into the care of the trust—including your retirement accounts. In this article, we explain why it might not be a good idea to retitle your retirement plans into the name of your revocable living trust—and what you should do instead to protect your beneficiaries.

How to List Your Retirement Accounts in Your Estate Plan

The first thing you should know is that your retirement accounts, including an IRA or 401k, typically do not go through probate. Inheritance in these accounts is done through beneficiary designations, not through probate or instructions left in a will. As long as you have listed a primary and secondary beneficiary on these accounts, the final balance should be passed directly to the beneficiaries you chose.

If probate is not your only concern, you should also consider the additional complications of leaving your retirement funds:

  • As a donation. Some people want to give a portion of the funds in their IRA to an individual, organization, or charity. In order to do this, you must first take a distribution from the account, pay the income tax and any applicable penalties on that portion, and then issue the donation. 
  • In a trust. When you change the name on a retirement account, the Internal Revenue Service considers it a 100% withdrawal from the account. This means you will have to report the entire value of the account on your tax return and pay any applicable income tax, plus pay a 10% penalty for early withdrawal if you are under age 59.​
  • As an inheritance. All ERISA-qualified retirement plans are subject to complicated regulations when they are passed as inheritances. Once you change certain aspects of the account they cannot be undone later, so it is extremely important to get advice from an estate planning attorney before you make any changes.

Whether you have already begun estate planning or need help from the very beginning, our legal team can walk you through the process and ensure your wishes are respected. Contact us today to speak to an attorney about your estate plan.