How Your IRA Can Affect Your Estate Plan

If you own an IRA, or any similar type of retirement plan, then special considerations will need to be made to ensure that these accounts are distributed correctly upon your death. Since IRAs and other retirement accounts are usually beneficiary designated, they are not normally considered an asset that will pass through trust administration or probate. Instead, upon your death, retirement funds will be released directly to the beneficiaries listed on the account. This type of distribution can be problematic, as it may conflict with the unique terms of your estate plan.

Contradictory Trust and IRA Distribution Terms

A key component of any living trust is naming beneficiaries to inherit your estate upon your death. As part of this designation, your trust may direct that certain requirements are met before funds and inheritances are distributed to beneficiaries. For instance, you may want your children to inherit your estate, but not until they reach age 25. Or, maybe you want a special needs beneficiary to inherit your assets without causing interference to any government benefits they receive.  

While we can draft your estate plan to conform with any of your specific requests, your IRA will not take these terms into account. Rather, the beneficiaries listed under your retirement account will receive funds directly upon your death, regardless of if certain requirements are met. Therefore, it is imperative that you consider and review these potential conflicts when drafting your estate plan and making beneficiary designations under your IRA.

Considerations for Special Needs Beneficiaries

As previously discussed, a sticky situation may arise when you have a special needs beneficiary who inherits money directly from an IRA or other retirement account. A “special needs beneficiary” may be a disabled individual who receives certain government benefits such as Medi-Cal or Supplemental Security Income. If you are designating a special needs beneficiary to inherit under your trust, then we recommend setting up a separate “Special Needs Trust” for that beneficiary. The Special Needs Trust will essentially transfer your trust assets to the beneficiary while maintaining their income eligibility for Medi-Cal or other assistance programs.

Now, if a special needs individual is listed as a beneficiary on your retirement accounts, then your retirement funds will be released directly to them from the financial institution. This can be especially concerning, as depending on the value of the funds, their inheritance from your retirement account may cause them to become disqualified from certain assistance programs. Consequently, the needs of beneficiaries are an important factor to consider when evaluating your estate plan and designating retirement distributions.

How We Can Help You Can Plan Accordingly

The first step in guaranteeing your retirement assets are distributed in accordance with your intentions is to consult with a qualified Los Angeles estate planning attorney. Schedule a free consultation to speak with me about how we can help bridge the gap between the terms of your estate plan and beneficiary designated accounts.