Incapacity and Your Retirement Plans

During the planning of your estate, you probably signed Health Care Power of Attorney. The power of attorney should be made durable. This means that you want your named agent to make medical decisions for you if you become incapacitated and unable to make such decisions for yourself. Without the word “durable” or reference to a statement that the power of attorney shall not be affected by your subsequent incapacity, this power will lapse precisely when you need it most, when you are unable to act on your own behalf.

INCAPACITY AFFECTS YOUR RETIREMENT PLANS

What happens if you become incapacitated prior to the required beginning date when you must take distributions from your existing retirement plans? Signing a Durable Power of Attorney for Property Management now would enable you to authorize your agent to change your distribution election, change your investment vehicles, and account custodian, and accelerate distributions if you need it. Such authority could also allow your agent to make gifts to save transfer taxes or convert IRAs to Roth IRAs which may also be a tax advantage to you.

Ideally, your beneficiary designation should be prepared by your estate planning attorney rather than by your plan administrator. The advantage of this is that your customized beneficiary designation could cover circumstances not usually provided for by the plan fill- in-the blank forms. Examples include 1) the ability for your surviving spouse to disclaim assets, 2) simultaneous death of you and your spouse, 3) distribution on the death of a beneficiary who survives the plan participant but dies before the account is fully distributed, 4) the ability of the beneficiary to change investments, custodians, or accelerate distributions, 5) the creation of separate accounts or shares after the participant’s death.

If your children are named as beneficiaries, it may be prudent to establish separate accounts for each child, otherwise, your oldest child is treated as the designated beneficiary for purposes of calculating the minimum distribution requirement. If you do this, however, you will also need to evaluate the added administrative burden of maintaining those separate accounts.

Surviving spouses who wish to disclaim some or all of a large IRA for its tax advantages must do so in writing within nine months from the date of the participant’s death.

OTHER PRACTICAL RECOMMENDATIONS FOR YOUR IRAS

Custom beneficiary designations should be sent return receipt requested to the IRA custodian or trustee. Be prepared to meet with some resistance from the IRA custodian regarding the acceptance of custom designations as most prefer you to use their familiar form. It may be necessary to have your estate planning attorney review the underlying IRA account agreement, in addition to preparing the customized beneficiary designation, to assist you in the implementation of your designations.

An IRA beneficiary who is not the surviving spouse must be able to identify the source of each IRA held. The IRA custodian, should designate the account as “John Q. Public, beneficiary of the Jane Doe IRA”. This is important because the rules are different depending on the relationship of the beneficiary to the IRA owner. IRAs established by a non-spouse beneficiary must be kept separate from one established by that person as his or her own IRA.

Don’t overlook the benefits of recalculating the distributions on your life or your spouse=s life. This should be done before the required beginning date.

If the QTIP trust, bypass trust, or child’s trust is to be the beneficiary of a retirement plan, you should designate the actual sub-trust rather than the revocable living trust or the testamentary instrument. Failure to do this may mean that retirement assets would be available to pay the decedent’s expenses and taxes, resulting in the estate being the beneficiary. This also means that there would be no life expectancy recognized for minimum distribution purposes.

Be sure your estate planning attorney addresses community property issues with respect to your IRAs and other qualified retirement plans. This is especially important if you are in a second marriage and you and your spouse have children from prior marriages. You may also wish to discuss the use of an aggregate theory approach to community property.