Should You Include Your Retirement Accounts in Your Texas Estate Plan?

When it comes to estate planning, many people overlook one of the most important parts of their plan – their retirement accounts. Many people believe that their retirement accounts are separate from their estate and will not be included in their estate planning documents, but this is not really the case. In fact, your retirement account needs to be part of your total estate if you want the least amount of stress for your loved ones.

The following are some things to keep in mind when deciding on whether or not to include your retirement accounts in your Texas estate plan.

What is a Retirement Account?

Retirement accounts are a great way to save for one’s future. They allow a person to set aside money each month, which can grow over time. There are a number of different types of retirement accounts, and usually, people pick the one that they believe to be the most beneficial for them. Some common types of retirement accounts include Roth IRAs, Traditional IRAs, and 401(k)s.

These retirement accounts are mostly attractive because they typically have low- or no-cost features, such as automatic transfers from your paycheck, and the potential to earn high returns on your retirement deposits. Plus, a number of retirement accounts offer quite a number of tax advantages.

The Main Reasons Why You Need to Make Provisions for your Retirement Accounts in your Estate Plan:

If you do not make any provision for your retirement accounts in your Texas estate plan, your loved ones may end up with a significant financial shortfall when you die. This could mean that, despite having a sizable sum in your retirement account(s), your loved ones will not be able to access the whole sum of money as easily as you would have liked. Here’s why:

a. Probate

If you do not properly name beneficiaries for your retirement accounts, they may have to go through a drawn-out and expensive probate proceeding.

Probate is the process of settling an estate after someone dies, and it can be very expensive. The process can take many months, and in some cases, even years, depending on the specifics of the estate. So, if you do not properly name a beneficiary via estate planning, your retirement savings may end up having to go through probate before it is given to your loved ones. In fact, after probate, it may go to someone whom you may not have wanted to have it.

b. High Tax

If your children are the beneficiaries of your individual retirement account (IRA) or 401(k), they may be subject to hefty income tax penalties as a result of the Securing a Strong Retirement Act of 2020. This is because beneficiary children are unable to transfer the account into their own individual retirement account. So, what exactly is the problem, you may ask? The issue here is that the money has to be withdrawn from the account within 10 years.

This may cause two issues to arise:

i.) If your children are minors, having immediate access to huge funds may make them lose focus and go a path that you may not have wanted them to. The ten-year rule mostly implies that they will be required to remove one-tenth of the account on an annual basis. Even if they are able to make a special arrangement and decide to wait until the tenth year to make a one-off withdrawal, your children may still be too young to know how to properly handle such sums of money.

ii.) If your children are already adults, the funds from your retirement account will most likely place them in a higher tax band. As they will be required to transfer one-tenth of the account funds each year, this will often result in a loss of interest and an increase in the amount of income tax they owe. Essentially, this will result in a considerable increase in the amount of income tax they are required to pay.

A Number of Estate Planning Tools That Can Be Helpful for Your Retirement Accounts:

a. A Revocable Living Trust with your heirs named as beneficiaries: With a living trust, you create a legal document that designates someone (often called the “trustee”) to manage your assets for your benefit during your lifetime and after your death. This person is usually named as the trust’s sole beneficiary, which means that they are responsible for receiving all of the trust’s income and assets on your behalf. This can be especially helpful if your kids are very young and you would like an expert to help them manage their affairs when you are gone.

b. Adding more beneficiaries to your retirement accounts: Adding more beneficiaries to your retirement accounts is an easy way to reduce each beneficiary’s tax burden. For example, you may also include your grandchildren as beneficiaries to reduce individual tax liability and free up money that can be used for other purposes. Trusts may be set up for any beneficiaries who are young and might need help with managing their finances.

c. Charitable giving: If you wish, you may give all or part of your retirement account funds to a charity. This way, a cause that is close to your heart can receive your support when you pass on. It is important to note that the IRS does not tax charitable donations. However, for this to apply, the charity must be registered with the IRS and it must be a qualified organization.

What to Do if You Have Retirement Accounts and Want to Include Them in Your Texas Estate Plan

If you have a retirement account and want to include it in your Texas estate plan, contact a lawyer at Kazi Law Firm to discuss your specific situation. We would be happy to discuss what might work best for you and will ensure that your retirement funds are distributed the way you want them to be. We can also help you if you need help with other aspects of estate planning in Texas.

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