Is my IRA or 401k part of my estate plan?

Is my IRA or 401k part of my estate?

Yes, your retirement accounts are part of your estate from a tax-planning and long-term care-planning point of view. Therefore, you should review your IRA or 401k beneficiary designations and the long-term care, creditor, and tax implications of your estate planning decisions with your attorney and your CPA or other tax advisor at the same time you prepare your will or trust-based estate plan. 

Probate

What confuses many is, retirement accounts are usually not part of the probate estate. Your probate estate consists of property that is controlled by your will at your death. Retirement accounts generally avoid probate due to the fact these accounts allow transfers on death using a beneficiary designation rather than a will. However, if your beneficiary dies before you, or your estate is the beneficiary, your retirement account may go through probate 

Keep in mind, not all property can be transferred on death using a beneficiary designation. When property can't be transferred this way, it is probate property.  Probate property can only be transferred to beneficiaries by probating your will. Both state and federal laws determine what property is probate property, therefore the answer varies from state to state.

Special considerations with Retirement Accounts

  • Creditors. Protecting your inherited IRA funds from creditors and a child's divorcing spouse. Although your own retirement accounts are usually protected from creditors, the United States Supreme Court held in Clark v. Rameker that inherited retirement accounts to a non-spouse beneficiary are not protected from bankruptcy creditors. But you can fix this with proper estate planning. There are steps you can take to protect money in an inherited IRA or 401k from your beneficiary's creditors and/or a divorcing spouse. 
  • Taxes. For pre-tax retirement accounts, taxes are an important consideration. The wrong estate planning decisions can create a taxable event. You should always discuss the tax implications of your estate planning decisions with your CPA or other tax advisor. Your retirement account should never be transferred into the name of your living trust. Moreover, not all trusts are suitable as a beneficiary of a retirement account. 

For more information about protecting an inherited IRA from creditors and other retirement account pitfalls, schedule a consultation by completing the contact form or calling 704.887.5242.

Nancy Roberts
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