Top 2 IRA/401K Estate Planning Mistakes

IRAs are individual retirement accounts that allow you to save money for retirement in a tax-efficient way. A 401k is similar to an IRA a retirement savings plan that is sponsored by an employer. It lets you save and invest a piece of your paycheck before taxes are taken out. You will get taxed on those pieces of income later in life. 

Do IRAs and 401ks go into your living trust? To answer this question, we first need to understand what kind of asset an IRA or 401k is from an estate planning perspective. 

From an estate planning perspective, IRA and 401Ks are special assets called beneficiary designated assets. Upon death, it will be distributed to the beneficiary listed, not your beneficiaries in your living or family trust. 

In addition, it is impossible to put an IRA into trust. The trust can never be the owner while you are alive. However, the trust can be the owner of the proceeds of the IRA or 401k when you pass away. The beauty of them is that they will bypass probate as long as they have a listed beneficiary.  

Need to protect your children in case of an IRA or 401k inheritance? Discover how you can be prepared by signing up for a strategy session today.

So, what are the problems that can arise from these IRA or 401ks when looking at it from an estate planning perspective?

PROBLEM 1

The issue we typically see is that the parents have a fantastic well-written trust. The trust protects the son from his gambling and drinking addiction. It also protects the daughter from a possible future divorce from her current husband.

However, the person listed as a beneficiary on your IRA or 401k are your two children above!

This means that because these two assets bypass the trust, they create a problem for your two children since they have FULL ACCESS to your IRA and 401ks. All the planning you did with that well-written trust is lost since they have access to money to fuel their addictions or split with their spouses.  

PROBLEM 2

The second largest problem is when parents list the Trust as a beneficiary of the IRA or 401k. Wait, why is this a problem?? I just finished telling you above that your children should probably not be direct beneficiaries of the IRA or 401k. 

Well, if you make the Trust the beneficiary, you can be subjection your family to horrible tax consequences. These tax consequences could result in huge tax bills for five straight years. 

The solution is to make an IRA inheritance trust or a look-through trust. That gives you the best of both worlds. 

Need to protect your children in case of an IRA or 401k inheritance? Discover how you to properly plan by signing up for a strategy session today.