Page 9 - web Summer 2018

Counsel’s Corner

Estate Planning For Retirement Assets

Introduction
Qualifi ed retirement assets, which include pensions, 401k, 403(b) and 457 plans, IRAs, SEP,
SIMPLE plans and certain annuities, often comprise a large part of an estate. Qualifi ed retirement
plans are income tax-deferred investment vehicles. What are the advantages of “tax-deferred
investment vehicles”? If you can’t totally avoid paying income tax, the next best thing is to put it
off. Tax on earned income is delayed to a later date, and, in the meantime, the funds grow if in-
vested wisely. When an employee (or the employer on the employee’s behalf) makes a contribution
to such a plan, the employee’s gross income is reduced by the amount of the contribution, which
results in a reduced income tax liability for the tax year. However, Uncle Sam wants to collect his
share eventually; withdrawals are reported as income in the year withdrawn and taxed as ordinary
income at the taxpayer’s applicable tax rate.
Though plan participants may begin taking withdrawals from our plans as early as age 59 ½, many wait until much later
in order to put off having to pay Uncle Sam. Depending on the plan, you can begin taking withdrawals as late as April
1 in the year after you retire, or April 1 in the year after you turn 70 ½. This is called your Required Beginning Date or
RBD. On your RBD, you are required to begin taking “minimum distributions,” which are calculated based upon your life
expectancy. By design, the benefi ts should last for your expected life span. If you die earlier, the balance is paid to your
estate or your designated benefi ciaries.

Naming a Designated Benefi ciary
Plan participants should make sure to name a designated benefi ciary for their retirement assets by their RBD. If a partici-
pant dies without having named a Designated Benefi ciary, IRS regulations require that the entire account be paid out with-
in 5 years of the participant’s death, which can result in a large tax bill. To avoid the payout over 5 years, fi nancial plan-
ners look to available options to “stretch” the distributions over a longer life expectancy - that of the Designated Benefi ciary.

Who is a Designated Benefi ciary (DB)?
The general rule is that, with certain exceptions, a DB must be an individual (natural) person, as opposed to an estate,
charity or corporation. In fact, naming an estate, charity or corporation as a benefi ciary of an account (even if named as
a contingent benefi ciary or in addition to other individual benefi ciaries), may cause the account to be treated as having no
DB at all, resulting in payout of the entire account over fi ve years. A participant can change his designated benefi ciary,
but the change will not lengthen the payout period beyond what was originally established at the RBD.
Naming benefi ciaries is a key component of, and should be coordinated with, your overall estate plan. In my next column,
I will discuss the option of naming a trust as a designated benefi ciary of retirement assets.
Richard Hamburger, Esq.
Rose M. Elefante, Esq.

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