An Article by Arden Dale of WSJ, featuring Susan Elser.
“When crafting their estate plans, some people neglect to pay much attention to how best handle their retirement accounts.
And that lack of attention to detail can create potential problems–such as higher estate and income taxes–for their heirs.
Many people often assume an estate plan is as simple as naming a beneficiary. In fact, it can include a trust to protect spendthrift kids or a spouse. Or a well-developed plan may have provisions to get a tax advantage by giving an account to charity.
Financial advisers are careful to review retirement accounts because they are so often ignored, even when they comprise a large share of an estate–sometimes the biggest portion it. A surprising number of clients, for example, forget to even name a beneficiary or change the names after a divorce.
“We’re always asking clients about these accounts and they look like deer in the headlights,” said Karen Altfest, principal adviser at Altfest Personal Wealth Management in New York, which manages around $1 billion.
Last week, one of her clients, a single woman with an account worth around $500,000, chose her nieces as beneficiaries after Ms. Altfest discovered she hadn’t named anyone yet.
This year, changes to the federal estate tax add a new twist. Spouses need to review whether to name each other as beneficiaries now that they can share their estate-tax exemptions.
Michael Krol, a senior wealth counselor at Waldron Wealth Management in Bridgeville, Pa., said the new estate rules, known as “portability,” will have the biggest effect on spouses with a combined net worth over $10 million and who have a lot of money in IRAs. In the past, his firm often counseled clients with this profile to create trusts to be beneficiaries of the IRAs.
“Now we’re looking at all our client situations, and we would not want a trust to be a beneficiary,” said Mr. Krol, whose firm manages around $1 billion.
Divorce that leads to a second or even third marriage is the source of many of the missteps she sees with clients’ retirement accounts, said Susan C. Elser, an adviser with her own firm in Indianapolis, who manages $85 million. People either forget to change beneficiaries, or name the new spouse with no provisions to ensure their own children by a first marriage will get some of the money, she said.
Another common mistake, Ms. Elser noted, is when a person creates a trust in estate documents to distribute wealth to their children over time, and then naming the same kids as primary beneficiaries on a retirement account. All of the retirement money will go to the kids at once that way, circumventing the goal of the trust, she said.
To keep minor children from inheriting a large retirement account all at once–or any other heir not up to managing money–advisers sometimes recommend that an account name a trust as beneficiary. That way, a trustee can control when the funds get distributed.
Another common mistake with retirement accounts: Giving it to the kids when the charitably inclined owner could give it to a favorite cause instead. Charities don’t have to pay income tax on retirement accounts they inherit, and the donor gets a charitable deduction for the gift.
“I can’t tell you how many wills I’ve seen that leave some amount to charity when they have this lovely taxable IRA going to beneficiaries who will have to pay income tax on it,” Ms. Elser said.
Lesley Moss, an estate attorney for Oram & Moss in Chevy Chase, Md., said more states have adopted rules to let someone with a power of attorney change beneficiaries. That’s helpful as more grown children assist aging parents to get their retirement savings in order. An older person may have had 401(k)s with three or four different employers.
“We find where they moved from, say, Morgan Stanley to Merrill Lynch and didn’t change the beneficiary; the power of attorney can help,” Ms. Moss said.”
