Should I consider my retirement accounts a part of my estate plan?

Q: Should I consider my retirement accounts a part of my estate plan?

A: Retirement accounts come in different shapes and sizes. Estate planning for retirement accounts varies depending on the type of account. The most common kinds of retirement account include 401(k)s, pensions, and Individual Retirement Accounts, or “IRAs”.

When opening a retirement account, an individual is often prompted to designate primary beneficiaries and contingent beneficiaries. If you are married and own a federally regulated retirement account, your spouse is the automatic primary beneficiary. Federally regulated retirement accounts include 401(k) plans, 403(b) plan, and some pension plans. If someone is married and owns a federally regulated retirement account but wants to name someone other than a spouse as a primary beneficiary, the account owner’s spouse must consent to the non-spouse being named as primary beneficiary.

However, if a spouse is named as a primary beneficiary and then account owner and the spouse divorce, the beneficiary designation becomes invalid. After the divorce, even if the beneficiary designation is not updated, the contingent beneficiaries would become the primary beneficiary. If there is not a contingent beneficiary designation in place, then the retirement account becomes payable to the account owner’s estate.

In most cases, individuals are named as beneficiaries of retirement accounts. However, there are circumstances in which naming a trust—or a subtrust—may be appropriate. For example, a trust can provide greater control over the management and distribution of retirement assets for a minor beneficiary or an individual with special planning needs. An attorney experienced in estate planning and retirement account administration can help determine whether naming a trust aligns with your goals and best suits a beneficiary.

From a tax perspective, naming an individual as the beneficiary is often more advantageous than naming an estate or trust. Because the tax consequences of inherited retirement accounts can vary significantly, individuals who are concerned about minimizing taxes for their beneficiaries should also consider consulting an accountant or tax professional familiar with inherited retirement accounts.

If there is no beneficiary designation on a retirement account or the designation fails, the owner’s estate is the beneficiary. To collect the account payable to the owner’s estate, an executor or administrator must be appointed by the Surrogate’s Court. If there is a Will, the account proceeds will be distributed according to the Will. If there is no Will, the account proceeds will be distributed amongst the account owner’s next of kin pursuant to New York law.

Different, intricate legal and tax rules apply to each kind of retirement account. Thus, working with experienced professionals can help maximize your planning and reflect your wishes.