Share this article

print logo


Do you understand the options for distributing money from an IRA or 401(k) account to beneficiaries in the event of your death?

Can you even name all the primary and secondary beneficiaries listed on your retirement accounts?

If you answered no to either of those questions, you are not alone.

Professional advisers see an information gap in the area of estate planning with retirement accounts.

The extended bull market has helped many Western New Yorkers build large individual retirement account and 401(k) funds. People spend hours thinking about where to invest money, but little time planning what happens to it when they die.

"This is a new problem that 20 years ago wasn't an issue. And as account balances get bigger, it's only going to get worse," said Christopher Flynn, an employee benefits attorney with Cochrane, Flynn & LoTempio in Cheektowaga.

Some people fail to spend enough time planning how they will take distributions from retirement accounts, and never even broach the topic of what happens if they die.

Twenty years ago, most Americans retired with corporate pension plans leaving little need for estate planning.

When the pensioner died, the spouse could still collect on a joint annuity. When the spouse died, the money stopped.

The newer defined contribution plans carry important estate planning responsibilities.

"With the real prevalance of defined contribution plans, the 401(k) plans and the profit sharing plans, each individual has their own account. So they or their estate are entitled to the entire balance of that account," said Bob Pollack, an accountant with Dopkins & Co. in Buffalo.

Retirement accounts carry distinct beneficiary designations and are governed by a separate section of the tax code. The IRS publication on retirement accounts is about 60 pages long.

As Vanguard, one of the nation's largest mutual fund companies succinctly warns its clients: Retirement account assets are paid to beneficiaries named on the account "no matter what your will specifies."

Designating a spouse as beneficiary is not too complex, but designating children as primary or secondary beneficiaries can be much more involved.

Different accounts have different options. For example, Vanguard offers five types of beneficiary designations to split money between children and grandchildren.

Should the children all get an equal share? If one child predeceases the account holder, how large a share do his or her children get designated?

Many account holders fill out beneficiary forms when they open the account and fail to review it for years. Family situations change, divorces happen, family members die, and suddenly the beneficiary plan is out of date.

"One of the biggest mistakes people make is not remembering who they have designated as beneficiaries over time," said John Leone, an estate planning attorney with Gross, Shuman, Brizdle and Gilfillan in Buffalo.

Leone recommended that investors know their beneficiary designations and know their account options for distributions. People should review the information periodically to make sure their estate plan is up to date with family situations and changes in tax code and account rules, he said.

Beneficiary designations can also require some financial planning. Some investors use irrevocable trusts to structure their estates so children are forced to take retirement account money over an extended period of time.

Some retirement accounts have grown so large they become the primary asset in an estate, surpassing the value of a family home.

Children inheriting large retirement accounts are often tempted to grab the money as fast as possible, paying a large tax hit, said Mark Stevens, president of Design Financial Services in Orchard Park.

"Let's face it, you worked and sweated for that money. It's found money to the kids, so 'who cares if up to 40 percent is gone off the bat,' " Stevens said.

Many beneficiaries put little thought into how to take the money, Steven said. They simply rely on information provided from a clerk with the investment company.

Stevens recommended young beneficiaries use a tax code option allowing them to spread distributions over their life expectancy. Taking a smaller amount of money annually reduces the tax burden and allows the money to remain invested.

Cheryl Mortellaro of West Seneca chose that option when her father, an ABC camera man in New York, died before taking distributions from his IRA. Ms. Mortellaro, a 34-year-old Empire State College business student, did not have a retirement account of her own.

"This way the whole account can be invested and work for me," she said.

Ms. Mortellaro said she did not fully understand all her options before getting some professional advice.

Beneficiaries have the option of spreading payments over their life expectancy only if the account holder has not yet begun taking distributions.

"Once they hit distribution status, the money has to keep coming out as fast as it was before the person passed away," Pollack said.

The big mistake many people make is ignoring the estate planning aspects of retirement accounts altogether. Rules vary among accounts and some options are highly technical.

The planning aspects become increasingly important as accounts grow and account holders age.

"The fact is, this is so technical that they really need to speak with professionals, because there are so many different options," Leone said. "We always hope to get the clients in here well before they hit 70, because there are some difficult decisions to make and people don't like to think about death."

There are no comments - be the first to comment