What will happen to your Retirement Plans after you’re gone?

Few people truly understand what could happen to their retirement plans after they pass away. In theory, leaving retirement plans to your heirs seems pretty simple. All you need is a beneficiary designation form where you designate who gets what. In real life though, what happens to retirement accounts after the death of a plan owner is oftentimes surprising.
There are numerous reasons for the surprises. For example, sometimes the right people are not listed because a beneficiary designation form was not updated after a divorce, marriage, death, or a birth, and this lack of follow through, results in unintended beneficiaries. Another common shock occurs when retirement plans are left to children who are not ready to handle the funds. First of all, if the funds are left to a minor, a court guardianship will likely be needed. Second, if a retirement account is left to a child through a living trust which does not have conduit provisions, that plan could be forced into paying out in five years or less, causing an acceleration of taxes and loss of tax deferral opportunities.
What’s the big deal you wonder? The answer is best illustrated with an example: if you leave a $100,000 IRA to a 30-year-old child and the funds earn an average of seven percent per year over the life of the child, (which according to the IRS is 53 years) the IRA value would be $1,026,533. A $100,000 IRA left to an even younger grandchild can easily reach $2,000,000. Conversely, when retirement accounts are left outright to a child, most children take out the funds in 6 months or less, according to the IRS.
What’s more, is that even if your beneficiaries can resist the temptation to take the money and run, there are now creditor protection dangers. That’s because in the 2014 Clark vs. Rameker Supreme Court case, the court ruled that inherited IRAs are no longer protected in bankruptcy. The ramifications of this decision reach far and wide. Today, divorcing spouses, business partners, banks and the like, can attach inherited retirement accounts. The only way to truly ensure that stretch-out opportunities are not lost – as well as your heirs being able to receive asset protection on your retirement account(s) – is through the use of a Retirement Trust.
To set up a Retirement Trust for your family, please contact Randall F. Kaiden, Esq. of Kaiden Elder Law Group, PC at 661-247-8433, or via our website: www.kaidenelderlaw.com.