As a elders attorney and estate planner, I have found that a large percentage of my clients’ wealth is invested in retirement plans. I have reviewed many pension plans with different sets of rules. These plans include Annuity, Profit Sharing, 401(k), IRA, Roth IRA, SEP-IRA (Simplified Employee Retirement Plan), Simple IRA, 403(b) and 457.
When planning an estate, it’s important to remember that retirement savings are different from other assets. There are seven reasons why retirement assets differ from other assets.
1) Retirement savings were never taxed. While most of your assets, such as For example, if your home and non-retirement investments are purchased with after-tax dollars, pension contributions will be paid with pre-tax dollars. No income tax is paid on the money paid into the plan, and year after year the pension contributions grow tax-free. However, this means that if distributions are taken out of the plan, they will be taxed as income.
2) Your will does not determine who receives your retirement assets. Individuals make wills to ensure that their assets pass to their heirs according to their wishes. This does not include all assets, however, as assets such as B. Retirement benefits, are transferred by contract and not by testament. The contract is the beneficiary naming form that is completed for the qualifying plan or IRA. Therefore, this form could be the most important part of your estate planning.
3) Retirement assets are not subject to estate administration. Because retirement savings are transferred to beneficiaries by this contract and not by will, they will not be included in the probate proceeding unless the participant designates a beneficiary other than the estate.
4) The retirement assets are not “incremented” upon the death of the insured. As you may know, any investment you own, including your home, is subject to capital gains tax on sale. If your heirs receive these assets upon your death, they will receive the assets with a step up based on the market value on the date of your death. This is not the case with retirement provision.
5) Individuals generally pay higher tax rates on retirement assets. If your heirs later sell your tangible property, they will pay capital gains on any appreciation that occurs after your death. In other words, your heirs will pay tax on the difference between the selling price and the market value on the day you die.
6) The holder of retirement savings cannot “give away” this savings during their lifetime without incurring a tax. A common strategy for reducing an individual’s taxable estate is to make gifts during their lifetime, thereby reducing the overall size of the taxable estate. As part of the gift tax regulations, part of the estate can be passed on to future generations tax-free. Retirement assets, on the other hand, cannot be transferred during lifetime, since all transfers are considered distributions and these distributions are taxable for the donor.
7) Participants are more emotionally invested in their retirement savings. For retirees, retirement savings represent the rewards of a lifetime career. The retiree likely spent much of their life building up these funds and maintaining them for retirement. Owners are sacrificing other immediate goals in favor of saving for retirement and are closely watching their retirement savings grow over a lifetime. As a result, retirees have high expectations of these funds — and great fears. Will the money last as long as you? What will they do if this is not the case? When it comes to protecting your assets, it is important to remember that your retirement savings are not only protected because they are the fruit of your hard work. However, there are strategies that can be implemented to protect what you’ve worked so hard to protect.
Attorney Daniel O. Tully is a solicitor with the law firm of Kilbourne & Tully, PC, Members of the National Academy of Elder Law Attorneys Inc., with offices at 120 Laurel St., Bristol. (860) 5831341 or ktelderlaw. com.