Protect Your Estate and Your Heirs

Think of your estate as a separate legal entity. If you should die, an estate will be created to collect your assets, pay your creditors and distribute what is left to your beneficiaries.

"Probate" assets will pass through an individual's estate and eventually will be distributed to the estate's beneficiaries: those beneficiaries named in the deceased’s will, or if there is no will, beneficiaries will set by state law. Probate assets also are subject to control by the court-appointed executor or administrator of the estate. 

Avoid the Costs and Delays of Probate

A tax-qualified retirement account with a designated beneficiary is an example of a "non-probate" asset. The advantage of non-probate assets is that they do not pass through an individual's estate, and are not controlled by the individual's will or by state law. Instead, these assets pass directly to the designated beneficiary, or to appropriate parties according to law.

Because non-probate assets are not controlled by your will, it is very important that you coordinate your retirement account's beneficiary designation with your overall estate plan. Without a proper beneficiary designation, your retirement account would be payable to your estate, becoming a probate asset by default. This could obstruct your intended disposition of assets.

Recent Tax Legislation

Thanks to the Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax exemption amount will gradually be increased from $1 million in 2002 to $3.5 million in 2009. The estate tax then will be repealed in 2010. Unless Congress takes further action to extend the current rate.

During this phase-out period, the top estate tax rate will gradually decrease from 50% in 2002 to 45% in 2007 and later years.

Your Retirement Plan Assets

The value of your assets in a tax-qualified retirement plan or IRA will be fully includible in your gross estate for estate tax purposes. In addition, because these retirement plans are typically funded with pre-tax dollars, the assets will be subject to ordinary income tax upon distribution to your beneficiary.

Since both income taxes and estate taxes will be part of the equation, it can be difficult to incorporate retirement plan assets in an effective estate plan. Further, the identity of the beneficiary and the timing and form of distributions can have a significant impact on the estate and income tax results. For these reasons, you should consult a qualified tax advisor to help you integrate your retirement plan into your estate plan.