Welcome to the EPAC Corner! We are pleased to bring you this content from the Estate Planning Advisory Committee (EPAC) of the DeKalb County Community Foundation. If you have any questions about the information below or the EPAC group, please contact Community Foundation Executive Director Dan Templin at 815-748-5383 or dan@dekalbccf.org. 

To say that the total dollar amount in Americans’ retirement accounts is massive would be an understatement. Accounting for 30 percent of all household financial assets, at the end of 2022, total retirement assets in the United States topped more than $33 trillion, including assets in IRAs, defined contribution plans such as 401(k)s and 457 plans, pension plans, and annuities. IRAs topped the charts at $11.5 trillion–the most assets of any category.

The large balances in traditional IRA accounts (not to be confused with Roth IRAs) are partially due to the fact that many taxpayers have rolled over–tax-free–assets from their employer-sponsored qualified retirement plans to IRAs after retiring or changing jobs.

If you have one or more traditional IRAs, you’re probably familiar with the basics: 

• An IRA can have multiple beneficiaries following your death, and you can designate a dollar amount or percentage of assets.
• You can change your IRA beneficiaries as often as you like, and beneficiaries can differ across your multiple IRA accounts.
• Suppose a beneficiary dies before you do, and you don’t change the beneficiary designation. In that case, the assets will be proportionately reallocated to remaining beneficiaries when you die.

It is a common misconception that a Will or Revocable Trust is the principal document of an estate plan that determines asset payment upon the death of the testator or settlor. This ignores the importance of beneficiary designations in a well-planned estate.

These are three common pitfalls to avoid by coordinating beneficiary designations with your estate plan:

1. Suppose a minor child is directly named as beneficiary of a retirement account. In that case, they will receive that account without the protections that your Will or Trust has designed to protect the child from financial immaturity. For example, many estate plans create a “Children’s Trust” to manage the child’s inheritance until they reach adulthood or beyond. If the retirement assets name the child as beneficiary or contingent beneficiary, those assets will bypass the “Children’s Trust.”
2. Consider how a child’s death could affect the beneficiary designation if you are naming adult children as beneficiaries. Without specifically designating that a deceased child’s children will receive the deceased child’s share, most beneficiary designations cause those grandchildren to be disinherited. To avoid this, many beneficiary designation forms have an option (often referred to as the “per stirpes” option) to include grandchildren as additional contingent beneficiaries.
3. One of the most significant benefits of retirement plans is the income tax deferral and minimization they provide during the working years. By integrating these assets into your estate plan, you can preserve this income tax deferral to some degree after death. Suppose charitable giving is a part of your estate plan, and you have retirement assets. In that case, this is an opportunity to maximize your gifts to your family and the charity by utilizing the retirement assets. The challenge is to make a holistic estate plan. Additionally, the mix of assets you hold when you make your Will could be dramatically different than the mix of assets at your death. For this reason, an estate plan that uses “asset-based planning” to designate certain assets to specific beneficiaries and other assets to other beneficiaries is likely to result in unintended consequences.

– Matthew L. Brown, local attorney and member of the DeKalb County Estate Planning Advisory Committee

Established in 2020, the DeKalb County Estate Planning Advisory Committee (EPAC) is comprised of local professionals providing estate planning services, including Attorneys, Trust Officers, CPAs, Wealth Advisors, and Insurance Agents. The purpose of the EPAC is to raise awareness and understanding of the Community Foundation as a resource for professional advisors and their clients, assist with efforts to deliver effective estate planning education to the general public, and to notify estate planning professionals on topics relevant to the intersection of estate planning and philanthropy.

Matthew L. Brown