Depending on the age of the client, IRAs (and retirement plans such as 401(k)s) are often their largest asset. Yet, many times, these assets slip through the cracks and their value is not maximized. Here are some common mistakes:

1. Not updating beneficiary designations

Unfortunately, an IRA which names your mother or an old flame is going to control, even if your family circumstances have changed and even if your will or trust names different beneficiaries. It’s critical that clients update their beneficiary designations periodically.

1. Not considering a Roth IRA

Roth IRAs (and 401(k)s) can be a good alternative, depending upon the situation. With a Roth plan, the contributions do not get an income tax deduction, but the distributions are not taxed. That means that they grow not tax-deferred like a traditional plan, but tax-free. Also, there are no required minimum distributions during the participant’s lifetime with a Roth. So, a good strategy to consider is converting the assets in a traditional IRA to a Roth IRA when in a low income tax bracket. The payment of the income taxes upon conversion reduces the taxable estate, which can be particularly important with a taxable estate.

1. Not designating the right beneficiary

The designated beneficiary of an IRA or retirement plan determines the measuring life over which distributions must be taken post-death. In other words, if you name the right beneficiary, they could stretch the distributions over a longer period.

1. Not considering asset protection for the beneficiary

An inherited IRA does not have asset protection under federal law. However, if that same IRA is left to a discretionary trust for the same beneficiary, it gains the asset protection wrapper of the trust. If the trust is drafted as a see through trust, the same measuring life could be used as if they had been named directly, depending upon how the trust is drafted.

Retirement assets are an ever-increasing part of our clients’ lives and their wealth. It is important that we know how to plan for the client to pass these assets to their intended beneficiaries to minimize income taxes and maximize asset protection.

Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555
www.aaepa.com