In my experience, once you've signed your foundational estate planning documents, choosing the right beneficiaries for your IRAs and 401(k)s is just as important as getting the appropriate legal documents in place. Only you and your estate planning attorney can determine the right beneficiaries in your situation, but here are some things to consider if you're single when updating the beneficiaries of your accounts to coincide with your overall estate planning goals.
Are all of your beneficiaries adults?
If so, then your first choice is to leave your IRA or 401(k) directly to your beneficiaries. For IRAs and some 401(k)s, this will allow each beneficiary to stretch out the required minimum distributions (or RMDs) over his or her own life expectancy. Of course, a beneficiary can choose to forgo the lifetime stretch out of payments by withdrawing all of the assets out of the account.Are any of your beneficiaries a minor?
If so, then leaving your IRA or 401(k) directly to the minor is out of the question since a court-supervised guardianship or conservatorship will be needed to manage the account until the beneficiary reaches age 18 or 21. Instead, the separate trust share established for the benefit of the minor under the terms of your Revocable Living Trust should be named in order to prevent the need for a guardianship. However, check with your estate planning attorney to insure that your Revocable Living Trust has the appropriate language to allow each trust beneficiary to stretch RMDs out over their own life expectancy. You may also want to consider creating a special "IRA Trust" for the benefit of your beneficiaries.Do you want to provide creditor protection for your beneficiaries?
Are any of your beneficiaries bad with money, in a bad marriage, or in a high risk profession that's subject to frequent lawsuits? Protecting a beneficiary from all of these things can be accomplished by creating a separate lifetime trust for the benefit of the beneficiary and then naming the trust as the beneficiary in place of the individual. However, as mentioned above, check with your estate planning attorney to insure that your Revocable Living Trust has the appropriate language to allow each trust beneficiary to stretch RMDs out over their own life expectancy, otherwise the life expectancy of the oldest trust beneficiary must be used. You ma also want to consider creating a special "IRA Trust" for the benefit of your beneficiaries.Are you charitably inclined?
If so, then retirement accounts are an excellent choice for meeting your charitable goals. Why? Because not only will IRAs or 401(k)s left directly to a charity create a charitable deduction for your estate and reduce your estate tax bill, but in addition the charity will avoid payment of income tax on the gift received. On the other hand, individual beneficiaries must include IRA and 401(k) distributions in their ordinary income. You can also leave your IRA to a charitable remainder trust for the benefit of one or more of your beneficiaries. This will provide a steady stream of income to your beneficiaries for a specific number of years or for their remaining lifetimes and create a corresponding charitable deduction for your estate.Do you want to create a legacy for your beneficiaries?
If your beneficiary designations are structured properly and your Revocable Living Trust or special "IRA Trust" contains the appropriate provisions, then you can create a lasting legacy with your retirement accounts for many generations to come through the use of a Dynasty Trust. This will include maximizing lifetime stretch out of RMDs, protecting beneficiaries at each generation from bad decisions, creditors, lawsuits and divorcing spouses, and minimizing or even eliminating estate taxes at each generation.
