Retirement Plans and Estate Planning

By Gary Webb

Who receives your retirement plan benefits after your death?

You can designate who will receive your retirement plan account at your death by designating a beneficiary on the account (Your spouse may have certain rights). It is generally recommended that you designate  beneficiaries and any backup beneficiaries on the account.

If you do not have a named beneficiary (or the designated beneficiary predeceases you and you do not have a backup beneficiary), benefits will be distributed according to the terms of your retirement plans (which may  specify certain default beneficiaries, such as a spouse). If retirement plan benefits end up distributed to your estate, the plan benefits will be distributed according to the terms in your will. However, if you do not have a will or if the benefits cannot be distributed under the terms of your will, the benefits will be distributed under your state's intestate succession laws. A typical intestate succession law might give one-half or one-third to your spouse with the balance divided equally among your children.


Estate taxation of your retirement plan benefits at your death

At your death, your retirement plan benefits will generally be included in your gross estate for federal estate tax purposes. However, if your retirement benefits consist of annuity payments for life that end at your death, there is nothing remaining to include in your gross estate. There is an unlimited marital deduction for property you leave to your surviving spouse, and an unlimited charitable deduction for property you leave to charity. You have an applicable exclusion amount that can protect some or all of your taxable estate from estate tax.

Income taxation of retirement plan distributions after your death

After your death, your beneficiaries will generally be required to take distributions from your retirement plans over their life expectancy. The rules may be more  favorable if your surviving spouse is the beneficiary of your retirement plan.

Generally, property that is included in your gross estate receives an income tax  basis that is stepped-up (or stepped-down) to fair market value at your death.  However, your retirement plan benefits do not receive such a step-up (or step-down) in basis. In general, for income tax purposes, your   beneficiaries will include distributions from the retirement plan as income when received. Distributions made after your death from a Roth 401(k) plan or a Roth IRA will generally be qualified distributions that are not taxable income to your beneficiaries (as long as certain five-year holding periods are met).

State taxation of retirement benefits

Your retirement benefits may also be subject to state estate, inheritance or income taxes.

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