Beneficiary Designations on “Tax-qualified” investments

Wow.  Its hard for me to believe is has been a year since my last newsletter!  I owe readers a huge apology.  About 9 months ago, I asked a number of you if you would like to receive this as a “pdf” document in your e-mail and the response was mostly affirmative.  I had the best of intentions of sending out at least one last mailing asking for a choice between e-mail and regular mail.  Obviously, the e-mail route is (currently) a more “economic” choice for me.

  But I digress.  The apology.  I promptly dropped the ball and never produced a newsletter during the 2007 calendar year.  What can I say that doesn’t ring of “dog ate my homework,” and acknowledge that the “road to Hell is paved by good intentions?”

Being near the year-end, it may be a good time for a reminder on beneficiary designations for qualified retirement plans, individual retirement plans, and certain non-qualified annuities.

Those of you who know me, have worked with me or heard me speak know that I am an advocate for the revocable living trust as a planning tool.  However, every “rule” has at least one, notable exception.

In this case, these “investments” create a very significant exception which may militate against using the revocable trust with them.  They are, as a general rule, the only assets clients have which have an “unpaid” income tax component to them.  Qualified retirement assets are generally all income taxable to the recipient (whether the plan participant, or an heir).  Non-qualified annuities are at least partially income taxable.  Both are subject to regular income tax rates.

The problem arises because over the years the IRS has been less than clear about how these items will be taxed if payable to a trust.  The regulations require special, often complex language be included in the trust document and perhaps in the beneficiary designation.  They also require the Trustee or other administrator to be savvy about the elections necessary and the timing of those elections.

My “rule of thumb” advice to clients about treatment of these investments in the estate plan is that if you have responsible adult beneficiaries, you should name them directly, bypassing the trust on these assets.  Only if there is a compelling reason (e.g., minor children or other incapacity), should you name a trust as beneficiary, and then only if the trust has been drafted or amended to include particular provisions for proper treatment of these assets.

As another year comes to a close, I want to thank all of you for our professional relationship and your support and friendship through the years.

Best wishes to all for a happy and healthy holiday season.

This Newsletter is intended to be informational, only and does not constitute legal advice.  If you have questions, concerns or comments, please contact me at: arichards@smithbovill.com, or by Telephone at 989-652-9923.

Andy Richards

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