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Beneficiary Designations for Qualified Plans and IRAs* *Or, Ten Things Every Attorney Should Know About Beneficiary Designations Eugene Parrs Harvey & Battey, P.A. 1001 Craven Street Beaufort, SC 29902 Tel: 843-524-3109 E-Mail: eparrs@gmail.com I. Introduction A. A client’s beneficiary designation for a qualified plan (i.e., 401(k) plans, pension plans, and 403(b) plans) or an individual retirement account (IRA) are the “weakest link” in chain of estate planning documents. It is the most likely place a mistake will occur. B. With beneficiary designations there is generally no “construction proceeding” that can be brought after the client’s death to fix a mistake. The decedent’s “intent” does not change the effect of the designation. C. Errors with plan and IRA payouts are magnified because distributions can be large and they are subject to full estate tax and income tax. D. There are several reasons why so many errors occur with beneficiary designations. 1. Clients do not realize how much of their estate is controlled by beneficiary designations, not their wills. Clients simply do not review or update designations after death of a spouse, divorce, or remarriage. Eugene Parrs Plan and IRA Distributions Page 1
2. The estate planning attorney is rarely asked to actually prepare or review the designation form. 3. The beneficiary designation forms are confusing, even for attorneys. 4. Many excellent financial consultants and investment advisors know very little about the correct choices for the client. 5. The tax laws for qualified plan and IRA distributions are complex. II. Income Tax Overview A. Qualified plan and IRA distributions are controlled by IRC §401(a)(9), which impose the “required minimum distribution” (“RMD”) rules. B. Qualified plans, as opposed to IRAs, may have limited choices for payouts at death. Most qualified plans require the spouse to be the beneficiary. You must check the plan to see if it offers the payout option that suits the client’s needs. III. Ten Things to Know About Beneficiary Designations #1. The “Bible” for qualified plan and IRA distributions is Life and Death <strong>Planning</strong> 2011 7 th Edition, by Natalie Choate. (www.ataxplan.com) #2. If the client maintains his/her 401(k) account after retirement, it is almost always advantageous to transfer the account to an IRA. The 401(k) plan most likely has very limited payment options. Most IRAs offer a wide range of options. #3. The beneficiary designation in a qualified plan must be implemented notwithstanding evidence of a client’s mistake or misunderstanding. Kennedy v. The DuPont SIP, 129 S.Ct. 865 (2009). See Attachment A. #4. Look to qualified plan and IRA distributions to fulfill charitable bequests. #5. Take advantage of “look-through” trusts. See Attachment B. Eugene Parrs Plan and IRA Distributions Page 2
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Attachment A
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plan documents, which included the
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Attachment B
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Note: Here’s how to understand th
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always result in a better settlemen
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S.E.2d 803 (Ct.App. 2004). Also, if
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self-settled trust issue), designat
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entities that are to be utilized. A
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Considera6ons Prior to Administr
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Family Settlement Agreements in the
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4. South Carolina Code § 62-7-111.
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STATE OF SOUTH CAROLINA ) IN THE PR
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STATE OF SOUTH CAROLINA ) ) AGREEME
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AGREEMENT TO CONVEY REAL ESTATE Fac
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Witness: ________________________ _
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c. Upon the death of Joe Smith, the
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Agreement regarding distribution of
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STATE OF TENNESSEE ) ) P R O B A T
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