Estate Planning for Tax-Deferred Plans

Estate Planning for Tax-Deferred Plans

July 9, 2015

Tanko Law Montana

Retirement accounts come in many different forms and are available to nearly every employee. Some retirement plans are known as “qualified plans,” the most common being employer sponsored 401(k) plans, profit sharing plans, defined benefit plans, and employee stock ownership plans[i]. Other retirement options include qualified annuity plans, tax sheltered annuity plans, 403(b) plans, traditional IRAs, Roth IRAs, and SIMPLE IRAs[ii]. The retirement options pose different challenges for those wanting to plan their estates. And no account is too small to ignore.


Estate planning for tax-deferred plans is complicated by several factors. IRAs and tax-deferred retirement accounts allow for compounding of principal on a pre-income tax basis. That wealth, however, is significantly reduced when offset by taxes paid when distributions occur. Compared to non-retirement assets, IRAs and retirement plans are often governed by pre-printed plan documents, which dictate when, how, and by whom distributions may be made, thus, limiting the options for allocating this wealth. Conversely, most non-retirement assets may be disposed of any time, without restrictions imposed by a plan administrator. Disposition of non-retirement assets is usually accomplished through the use of a Will or Trust drafted with impeccable detail. For surviving spouses, they may rollover tax-favored retirement accounts to further defer income taxes, but non-spouse beneficiaries are normally limited to receiving those benefits over their remaining lifetimes.


Retirement assets are also includible in your taxable estate for federal estate tax purposes, but may not necessarily be available for payment of the estate tax liability, expenses of administration, or creditor claims. Non-retirement assets typically must be liquidated in order to pay estate taxes, creditor claims and the like, sometimes resulting in an unintentional, but inequitable distribution or your estate. Without careful planning, your personal representative or trustee could be forced to liquidate your estate to satisfy your claims. Section 2002 of the Internal Revenue Code states that it is the personal representative of your estate who is primarily liable for the payment of federal estate taxes, even if the tax is principally generated by non-probate assets, such as retirement account, jointly titled assets, and beneficiary designated assets. Section 2207 does provide the personal representative with power to seek recovery of proportionate shares of the estate tax from recipients of non-probate assets, but that right too can be limited by Wills, Trusts, or state law.


Today, estate planners have several tools available to minimize income taxes, plan for estate taxes, and equalize distributions of retirement accounts. Section 2010 of the Code permits the use of tax-favored plans towards the decedent’s unified credit (presently $2,000,000.00) for non-spouse beneficiaries. A participant may also provide income for a surviving spouse from the retirement account by using a “credit shelter trust,” but that benefit must be weighed against the income tax deferral. Differing life expectancies between the surviving spouse and remaindermen beneficiaries might result in more tax being paid over the life of the retirement plan. Section 691(c) of the Code does provide some relief by allowing an income tax deduction to the beneficiary of a plan as long as the plan is included in the decedent’s taxable estate. Disclaimers are another great tool to alter asset distributions and utilize the full unified credit. Disclaimers are completed by beneficiaries who do not wish to receive an asset designated for them, thus, causing the asset to be distributed elsewhere pursuant to the decedent’s estate plan or applicable retirement plan. IRS regulations also allow the use of trusts to allocate retirement assets among heirs rather than being limited by inflexible plan documents.


What’s important to remember is that it does not take very long to accumulate a retirement account. And with any type of wealth, you’ll want to consider estate planning to effectively and efficiently manage that wealth.  Estate planning attorney Brian C. Tanko can help you with all your estate planning needs.


[i] Qualified retirement plans are governed by §401(a) of the Internal Revenue Code of 1986, as amended, (hereafter the “Code”).


[ii] Qualified annuity plans are governed by §404(a)(2) of the Code. Tax sheltered annuity plans are those plans sponsored by §501(c)(3) charitable organizations and otherwise meet the requirements of §403(b) of the Code. Individual Retirement Accounts (IRAs) are governed by §408 of the Code.

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