Category Archives: Estate Planning

Naming a Trust as Beneficiary of Retirement Benefits

Under certain circumstances naming a conduit or “see-through” trust as the beneficiary of your 401(k) plan or IRA assets upon your death may be the best choice to make to ensure that after your death these retirement benefits remain available and continue to grow tax-free for your loved ones who might otherwise withdraw the funds immediately and dissipate them. Another reason to use a trust as beneficiary is to protect the retirement assets from the claims of creditors for those of your beneficiaries who do not reside in states like New Jersey, which has passed laws specifically exempting from creditors’ claims the assets in an inherited IRA or qualified retirement plan. See N.J. Stat. § 25:2-1. This blog will discuss how to use a conduit or “see-through” trust as the beneficiary of defined contribution plans, i.e., 401(k) plans, profit-sharing and money purchase pension plans, as well as IRA’s.

To understand why naming a conduit trust may be a good choice as beneficiary of retirement benefits, one must first understand the required minimum distribution rules that apply to the payout of benefits to the named beneficiaries after the account owner’s death.

Generally, an owner of either an IRA or 401(k) account must begin taking required minimum distributions (“RMD”) from these accounts in the year the owner attains age 70½, which may be postponed for that year only until April 1 of the following year (the “Required Beginning Date” or “RBD”). For each successive year during the owner’s life, the RMD must be taken by December 31. The RMD for any year is computed by dividing the account balance as of December 31 of the previous year by the individual’s life expectancy found in the IRS’s Uniform Lifetime Table or the Joint and Survivor Life Expectancy Table in IRS Publication 590.

If the account owner dies before his RBD (age 70½), and has no surviving spouse, each named beneficiary may demand immediate payment of the IRA or qualified plan benefits, or they may choose to receive the benefits over each beneficiary’s life expectancy while the undistributed funds continue to grow tax free. If the account owner dies after his RBD, then the IRA or qualified plan benefits may be paid over the longer of the account owner’s life expectancy or the life expectancy of the named beneficiary.

If, on the other hand, the account owner has created under his Will (or revocable trust) a conduit “see-through” trust, naming individuals as the beneficiaries of the trust, the IRA or qualified plan benefits must be paid out over the life expectancy of the oldest of the beneficiaries of the conduit trust, or, if separate shares are created for individual beneficiaries, the amounts in each share may be paid out over each individual’s life expectancy.

For example, assume John, age 53, is a widower with three children, ages 27, 14, and 11. On his IRA beneficiary designation form John named the conduit trusts created under his Will as the beneficiaries of his IRA with separate equal shares funding separate sub-trusts for each of his three children. Under the required minimum distribution regulations of Internal Revenue Code Section 401(a)(9), the children are referred to as “designated beneficiaries.” Assume John dies at age 53. Within one year after the year John dies, each conduit sub-trust must take the RMD calculated for each of the children by using the life expectancy of each child whose separate share is funding a separate sub-trust for that child. Without the conduit trusts the benefits would have been paid out over the life expectancy of the oldest of the three children, which is 56.2 years, instead of over each child’s separate life expectancy, which would be 56.2 years, 68.9 years, and 71.8 years, respectively. If John died after his RBD of 70 ½ the payout of the IRA benefits would still be over 56.2 years, which would exceed John’s remaining life expectancy of 31.4 years. The use of the conduit trusts allows the undistributed IRA benefits to grow tax free for a substantially longer period of time, compared to John’s life expectancy, while also protecting the benefits from the claims of creditors.

In the above example, to achieve the “stretch-out” periods for each child, the conduit trusts must satisfy the requirements in Treas. Reg. Section 1.401(a)(9)-5. These requirements are:

1.The trust must be valid under state law

2. The trust must be irrevocable or become irrevocable upon the death of the account owner

3.The beneficiaries of the trust who are beneficiaries with respect to the trust’s interest in the employee’s benefit must be identifiable from the trust instrument

4.The trustee must provide certain documentation to the plan administrator of a qualified retirement plan or, in the case of an IRA, to the IRA custodian or trustee

In addition, if the trust has multiple beneficiaries, each of the beneficiaries must be an individual in order for there to be a designated beneficiary under the minimum distribution rules to allow the payout over the life expectancy of the oldest beneficiary.

The conduit “see-through” trust may be used to safeguard the retirement benefits from a beneficiary’s creditors, future ex-spouses, and other predators for an extended period of time, at the same time giving the account owner peace of mind that the retirement benefits, after his or her death, will not be immediately dissipated by a prodigal beneficiary.

For a consultation to discuss how a conduit “see-through” trust may benefit your estate and your loved ones or how an “Accumulation Trust” may safeguard the retirement benefits for a special needs beneficiary, please call (973-744-0073) or email (dhaase@dmhaaselaw.com) Dennis M. Haase, Esq. for an appointment.

 
 

Act Now To Replace a Divorced Spouse as Beneficiary of Your Retirement Plan Benefits

Many states, including New Jersey, have laws stating that divorce automatically revokes the designation of a spouse as a beneficiary of certain kinds of assets passing outside the Will. However, divorce is not effective to revoke the ex-spouse as beneficiary of a deceased spouse’s 401(k) plan or any other type of retirement plan subject to the federal law known as the Employee Retirement Income Security Act of 1974 (“ERISA”).

The U.S. Supreme Court has ruled that ERISA preempts such state laws revoking the designation of the ex-spouse as plan beneficiary on divorce, and, if ERISA governs the 401(k) or other retirement plan, the ex-spouse will have the right to the plan proceeds. See Kennedy v. Plan Administrator For Dupont Savings & Investment Plan, 555 U.S. 285 (2009). In Kennedy, an employee participated in an ERISA employee pension benefit plan and designated his wife as the sole beneficiary. The couple subsequently divorced, and as part of the divorce decree the wife agreed to waive her interest in her husband’s pension plan. However, the husband died without amending the pension plan documents to replace his ex-wife as the designated beneficiary. The husband’s estate claimed a right to the plan proceeds, citing the ex-wife’s waiver. The plan administrator, however, relied on the husband’s pre-divorce designation form and paid the funds to the ex-wife. The husband’s estate then sued the plan administrator to recover the benefits. The Supreme Court held that the ex-wife’s waiver “did not constitute an assignment or alienation rendered void [by ERISA’s anti-alienation provision]” and therefore was not invalidated by ERISA. Kennedy, 555 U.S. at 297 (emphasis added). Nonetheless, the Supreme Court declared that a plan administrator is “obliged to act ‘in accordance with the documents and instruments governing the plan,'” and that “ERISA provides no exemption from this duty when it comes time to pay benefits.” Id. at 300 (quoting 29 U.S.C. § 1104(a)(1)(D)). Thus, although the ex-wife had waived her right to the pension, the Supreme Court concluded that the plan administrator “did its statutory ERISA duty by paying the benefits to [the ex-wife] in conformity with the plan documents. Continue reading

 
 

Executor’s Post-Death Elections to Reduce Taxes

The basic goal of post-death tax planning for estates is to reduce taxes for the decedent’s estate and the beneficiaries. An executor has many opportunities available for making the right elections that will have a direct impact on the overall tax liability of the estate and beneficiaries. The failure to exploit these opportunities could result in the executor’s liability to the estate and beneficiaries for the lost tax savings. A few of the many elections are discussed below. Continue reading

 
 

Protecting IRA Benefits from the Beneficiary’s Creditors and Other Predators

On June 12, 2014, the United States Supreme Court held in Clark v. Rameker that “inherited IRAs” are not retirement funds in the Bankruptcy Code and are, therefore, not exempt from the claims of the IRA beneficiary’s creditors in bankruptcy. An “inherited IRA” is an IRA that is bequeathed by the IRA owner to the intended beneficiary of that IRA.

In Clark, the Supreme Court ruled that assets in an “inherited IRA” are not retirement funds for three reasons: first, the holder of an inherited IRA cannot contribute additional funds to the account; second, holders of inherited IRAs are required to receive distributions from the accounts regardless of their age; and third, the holder of an inherited IRA can withdraw the entire balance of the account at any time regardless of age and use the funds for any purpose without a 10% premature distribution penalty.  These reasons underlie the notion that the funds in the inherited IRA represent contributions made by the IRA owner for the IRA owner’s retirement, not for the retirement of the beneficiary. Continue reading

 
 

How to Probate a Will in New Jersey

Upon the death of an individual, the family or next of kin should determine whether the deceased person (referred to as the “decedent”) left a Last Will and Testament. If so, they should review the Will and identify the person named in the Will as the executor. It then becomes the legal duty of the executor to probate the Will by presenting the original Will, the death certificate, and a list of the names and addresses of the decedent’s next of kin to the New Jersey Surrogate’s Court in the county where the decedent resided at the time of death. The death certificate will indicate where the decedent resided at the time of death.    In most counties in New Jersey, the Surrogate will prepare the Application for Probate and other papers necessary to qualify the executor to act on behalf of the estate of the decedent.

After the Surrogate’s Court appoints the executor, which under New Jersey law can be no sooner than 10 days after the decedent’s death, the executor will receive the “Letters Testamentary” from the Surrogate. This authorizes the executor to gather the assets of the decedent, which constitute the estate, and pay the decedent’s funeral expenses, debts, and any income, estate or inheritance taxes, before distributing the remaining assets of the estate to the decedent’s beneficiaries named in the Will.  Within 60 days of probate, the executor must notify all beneficiaries named in the Will and all next of kin that the Will has been admitted to probate and state that a copy of the Will shall be furnished upon request.

The executor is under a legal and statutory duty to settle and distribute the estate in as expeditious and efficient a manner as possible. The executor is personally liable for filing and paying the decedent’s final income tax return and filing any estate or inheritance tax return and paying those taxes before making distributions to the beneficiaries. Before the estate is closed, the executor will have to render either a formal accounting to the Surrogate’s Court and beneficiaries or an informal accounting to the beneficiaries to explain the amount and nature of the assets received under the executor’s control and how those assets were used to pay expenses, debts and taxes before distribution to the beneficiaries under the Will.

Probate of a Last Will and Testament in New Jersey is often a relatively streamlined and uncomplicated process compared with other states, unless the Will is contested.

Dennis M. Haase, Esq. has 30 years’ experience in handling estate administration and estate litigation and Will contest matters.  Please call me at 973-744-0073 or email me at dhaase@dmhaaselaw.com for a consultation.