Passing It On

For many Americans, retirement accounts like IRAs and 401(k)s represent a significant portion of their assets. Because of a historically high federal estate tax exemption, few Americans will face estate taxes after death. However, the true planning opportunities (and pitfalls) often lie elsewhere: income taxes. Retirement accounts are generally subject to income tax when distributed, and poorly structured planning can significantly reduce their value over time. A well-designed plan can help preserve these assets for the next generation.

Revocable trusts remain the most powerful estate planning tool. They can help provide control, protection for beneficiaries, and assurance that assets are used the way you intend. However, retirement accounts come with their own set of complex tax rules, and not all trusts are designed to properly handle retirement accounts. Outdated or poorly drafted trust provisions can force beneficiaries to take distributions sooner and pay more in taxes than they would otherwise have to pay.

Those issues are largely connected with the SECURE Act of 2020 and SECURE 2.0 Act of 2022. Trusts that were drafted prior to these changes may no longer produce the results you intend and, in some cases, may cause unintentional tax consequences. Even if your trust was completed or updated after those changes, if retirement accounts make up a significant portion of your net worth, it is imperative to ensure that your trust is designed to efficiently transfer those assets.

Consulting with an estate planning attorney familiar with these complex planning strategies can help ensure hard-earned assets are preserved for your beneficiaries, not Uncle Sam. If you have questions or would like to schedule a consultation with our estate planning attorneys, please give us a call at (248) 477-6300.