Common mistakes managing estates with retirement plans --Topic of first Probate Section meeting of the season

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By Roberta M. Gubbins

Legal News

"The common mistakes we have found in estate administration and planning" are in the areas of beneficiary designations and distributions, said Patricia Ouellette, speaking at the Ingham County Bar Association Probate Section meeting on September 21st held at Gone Wired Café in Lansing.

Turning first to mistakes in beneficiary designations, she noted:

1. "Failure to update beneficiary designations when additional children are born, especially if you are single, causes problems. I had a case where a single client had one child, named the child as beneficiary of his retirement plan of a $100,000. He never named the second child by a second wife. The named child received the full amount while the second child received a minor amount. There was nothing that could be done."

2. "Remember to remove your ex-spouse as beneficiary of your retirement plan when you are divorced. There is a pre-emption of federal law over state law so if you name your ex-spouse beneficiary to your retirement, which is governed by ERISA, the money will be given to the ex-spouse. This is true even with a judgment of divorce stating that all estate planning documents are nullified." It was noted by some of the attorneys that getting a court order to give the proceeds to the estate sometimes solved the problem. Ouellette stated, "some plans are adding language 'upon divorce,' which is deemed to be a waiver by the ex-spouse of the proceeds."

3. "If you want to donate moneys from the retirement plan to charity, failure to name that charity can result in the money being distributed to the beneficiaries who will in turn have to pay tax on the distribution and then give the charity a non-taxable asset. There are ways to avoid the problem. One is to state in the trust that any distributions to charities should be paid out of income so we get an income tax deduction. A specific bequest, unless deemed otherwise, is presumed by the IRS to come out of principal, creating a tax."

4. "Remember, in situations where there are minor children, it is better to name a trust rather than the child as beneficiary of the retirement plan since, even if distributed when the child is 18, few children have the skills to administer the funds. In situations where the children are adults, it is better to plan that in case the child pre-deceases the parent, their share goes to a trust for the grandchildren."

5. "Name contingent beneficiaries so in cases where a beneficiary pre-deceases you, there will be no confusion over your intentions. I had a case recently where there were three children, one died, her share went to her siblings rather than her children."

Common mistakes in distributions are:

6. "Taking an immediate distribution of 100% of the retirement plan will guarantee that you pay the maximum tax. A recent case was a $400,000 plan that was distributed during the year of the death meaning there were few expenses and it was taxed at 34%. The next year there were a lot of expenses with no income to offset."

7. "When the estate is the beneficiary of the retirement plan, schedule distributions to coincide with expenses. This can be done using a fiscal year end. For example, if someone dies on December 15th, the fiscal year can extend to November 30th of the next year, giving time for planning. In an estate a fiscal year end can't be more than 12 months and is usually less since it ends on the last day of the month before they died."

8. "Be sure to alert the beneficiaries that they may have to pay income tax on the distribution. If it is a retirement plan, there is a tax on the distribution when it is received by the beneficiary."

9. "Remember to consult with the decedent's and the beneficiary's tax advisors to determine when the distributions will be most beneficial. A lot of times you are looking at the decedent's final tax return and the tax advisor may not know the person died. When an individual is married, often the surviving spouse will file the final tax return, and if it is second marriage and the Personal Representative (PR) is one of the children from the previous marriage and they don't communicate, the Internal Revenue Service rules state it is the PR's responsibility thus communication is needed."

10. "Double check to be sure the decedent took the final Minimum Required Distribution. Failure to do so results in a 50% penalty."

"There are probably ten more mistakes but these are the most common. Pretty much every estate plan we see now has a 401K or an IRA so planning is necessary," Ouellette said.

Asked for a reference for forms and information, Ouellette recommended Life and Death Planning for Retirement Benefits by Natalie Choate, available on Amazon.com.

Patricia Ouellette, of Bernick, Omer, Radner & Ouellette, PC is a graduate of Central Michigan University and Thomas M. Cooley Law School. She has a license as a Certified Public Accountant, is a Chartered Life Underwriter and Chartered Financial Consultant. Ouellette is Chair of the Lansing Community College Foundation. Her areas of specialty are estate planning, administration of estates, tax, and family law.

The next meeting of the Probate Section will be October 19, 2010 at the State Bar of Michigan. Rhonda Clark will speak on current issues in Guardianships and Conservatorships.

Published: Thu, Sep 30, 2010

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