When thinking about how you would like your affairs to be handled after your passing, creating a Trust-Based Estate Plan is important as it makes the transfer of your assets after your death much easier for your heirs. It also alleviates the number of tasks and expenses your loved ones will be left with following your death. Most of all it removes a lot of uncertainty as to your final wishes in regard to handling your Estate.
A Living Trust is a legal document that designates a Trustee over your assets, which can include anything from real estate to bank accounts, to your retirement accounts. Creating a Living Trust is important not only because it lessens the stress put on your loved ones, but it also ensures that you have full control of who your assets are transferred to in the event of your death.
Each of your assets will have a different set of requirements to transfer them to your Trust. In this article, Trust & Will, a leader in online estate planning, is going to focus specifically on retirement accounts and how to transfer them to a Trust. Transferring your retirement accounts to a Trust is often a more complicated process than with other assets because it is often risky to do so.
You may now be wondering why it’s not often common to transfer your retirement account to your Trust, especially now that you have the knowledge that Trusts tend to make the transfer of your assets after death much easier. Trust & Will knows how confusing this can get, which is why we are going to explain in more detail below, as well as go over the available options that may be better for you.
Risks of Transferring Your Retirement Account to a Trust
You are often ill-advised to transfer your retirement accounts to a Trust, and the main reason for this has to do with your taxes. When it comes to your individual retirement plan, also known as your IRA, any change of ownership of your account is considered a 100% withdrawal from the account, according to the IRS. When a 100% withdrawal occurs, that entire amount is considered taxable at the end of the year and will be included in your income tax. This means that you will be paying taxes on all of your retirement account savings at the end of the year. This is important to know because the IRS considers even the transfer of your funds to a Trust as a withdrawal, meaning that however much money is in your IRA you will have to pay taxes on if you transfer your retirement account to a Trust.
Another issue you may encounter when transferring your retirement account to a Trust is that your IRA could present a withdrawal penalty for any amount of money that is taken out of your account before you are 59 ½ years old. The IRS defines any transfer of funds as a withdrawal of funds. If you were to transfer your retirement accounts to a Trust before the age of 59 ½ years old, you will likely pay a penalty upwards of 10% on top of already having to pay taxes on the money.
Given the risks of transferring a retirement account to a Trust, it is important to know the current regulations for rollovers and transfers among retirement accounts in order to avoid costly mistakes.
Below, Trust & Will has put together a list of the common option used in protecting the assets within your retirement accounts:
How to Transfer Assets Within Your Retirement Account
When planning for your future in regard to your retirement accounts, there are two main routes that you will want to consider in replace of transferring your accounts to a Living Trust.
Designate a beneficiary
One option that you can consider when deciding what you want to do with your retirement account after your death is to designate a beneficiary of your account. The beneficiary of your account is the person that you have chosen to inherit your account after your death. It will then be their responsibility, as determined by the IRS, to start withdrawing money from the account they inherit after your passing. When it comes to withdrawing the money, your beneficiary can elect to do the five-year withdrawal plan if you die before the age of 70 when withdrawals are required. This gives your beneficiary five years to completely empty your IRA account, as determined by the IRS.
Anyone can be appointed the beneficiary of your account, whether you are related to them or not. However, the most common beneficiaries of IRA accounts are spouses who will inherit the account after your death.
Consider your spouse
While designating a beneficiary is the primary option for deciding how to allocate your retirement accounts after your death, there is another option for spouses only. The IRS designates a special consideration that is given only to spouses that are made the beneficiaries of retirement accounts. If your spouse is labeled the only beneficiary of your account, then when you die, they can become the sole owner of the account. This gives them all the same rights that the original account holder would have had, such as the ability to deposit more money into the account, or they can rollover the money to their own existing retirement accounts, as discussed within the IRS beneficiary page. However, it is important to remember that they are still held to the same withdrawal rules.
Preparing for your death and creating your Trust-Based Estate Plan can be emotional and time-consuming. After all, there are many legal and financial considerations to think about. Trust & Will recognizes the significance of preparing an Estate Plan and is ready to help in any way that we can so that your final wishes are legally documented. That is why we have created online Estate Planning services that will guide you in drafting your customized online Trust-Based Estate Plans, determine your Wills, and create legal documents for the guardianship of your children. Check out our Estate Planning website today to learn more!