Many people wonder if their retirement accounts, such as IRAs and 401(k)s are subject to probate upon their passing. With careful and proper planning, retirement accounts such as these can avoid the probate process. The following is a breakdown of what you should know regarding your retirement accounts and the potential impacts on your estate plan.
Retirement Accounts and Probate: What You Need to Know
In general, retirement accounts do not pass through probate. However, this is only the case if beneficiaries on the account are properly designated. An important fact to note is that the named beneficiaries on your accounts will take precedence over your will, even if your will includes anything regarding the retirement accounts. Because of this, the assets in the accounts will be distributed to the beneficiaries who are named on the accounts.
What Happens if You Do Not Name Beneficiaries on Your Retirement Accounts?
If you do not name any beneficiaries on your retirement accounts, this will cause these accounts to be subject to probate. Additionally, this includes accounts in which beneficiaries are named but all pass away and the accounts are not updated with new beneficiaries.
Are Your Retirement Accounts Subject to Taxes Upon Your Death?
Many retirement accounts will be subject to taxes upon your death. Retirement accounts excluding Roth IRAs are subject to both federal and state income taxes at the time of your passing.
Additionally, depending on the size of your estate, your retirement accounts may be subject to estate taxes as well. Keep in mind that, much like income taxes, estate taxes exist at both the federal and state levels. With this said, not every state taxes your estate – for example, you may be subject to estate taxes in New York, while Virginia has no estate tax.
While income taxes and estate taxes are the two most likely that your retirement accounts can be subject to, there are a number of additional taxes your accounts may face upon your death as well.
What Are Alternatives to Naming Beneficiaries on Your Retirement Accounts?
The following are a few instances in which you must consider complications surrounding your retirement accounts:
- Trusts
- Inheritance
- Charitable donations
Trusts
If you transfer your retirement accounts to a trust, you will need to report the total value of your account on your tax return and pay any associated taxes.
Inheritance
Passing on retirement accounts as an inheritance can be complicated, as such instances are subject to strict regulations.
Charitable donations
If you are looking to donate any portion of your retirement funds to a charity, or even donate to an individual, you will need to take a distribution from the account and pay any applicable taxes on whatever funds you are taking out before making the donation.
As highlighted above, there are situations in which you can avoid the probate process for your retirement accounts. For any questions regarding the impacts of your retirement accounts on your estate plan or any of your other estate planning needs, we are here to help. Contact us today to learn more about how we can work with you.
For more information regarding various estate planning and elder law topics, view our resources page, where you will be able to find previous blog articles, newsletters and our informative webinar series.
Image by Megan Rexazin Conde from Pixabay
