401k Inheritance Child Options in Florida

401k Inheritance Child Options in Florida

 

If you want to name a minor child as a beneficiary, you should consider consulting with an estate planning attorney first.

Most 401(k) plans will not transfer money directly to a minor.

Instead, a court will have to appoint a trustee or guardian to receive the funds, which can take some time.

There are a few ways to avoid this, and your options may depend on the laws in your state.

Some states allow parents to name a minor as a beneficiary and a custodian who will manage the assets in the child’s best interest until they reach a certain age — usually 18 to 25, depending on the state.

Another option is to create a trust.

When you create a trust, you also name a trustee who will manage trust assets on behalf of your child — either until they reach a certain age or for their lifetime.

Then you would list your child’s trust as your beneficiary.

In either case, it’s a good idea to consult with an attorney first to make sure you’re not unintentionally jeopardizing your child’s inheritance.

 

Children who inherit a 401 (k) can roll it over into a Roth IRA

 

The IRS has given families a little more flexibility in handling a 401 (K) and pension plans.

According to an IRS announcement, children who inherit a 401 (k) or pension plan can now roll it over directly into a Roth IRA.

Before, a spouse who inherited a 401 (k) or pension plan could roll it over into a Roth IRA, but this was not true for a beneficiary other than a spouse, such as a child.  But now its true for any beneficiary.

(In the past, a non-spouse beneficiary could roll over an inherited 401(k) or pension plan into a regular IRA, but not a Roth IRA).

What this means is that if parents want to leave money in a 401(k) or pension plan, rather than rolling it over into an IRA, they can do so without depriving their heirs of the ability to eventually have the money in a Roth IRA.

There are several reasons why a parent might want to leave money in a 401(k) or pension.

For example, in some states, assets in a 401(k) or pension are more protected from creditors than assets in an IRA, so doctors or other individuals with significant liability concerns might prefer such an arrangement.

Also, in some states pension payments will not “count” against a person when determining Medicaid eligibility, but distributions from a Roth IRA will.

 

NEW INHERITED IRA RULES: HOW TO AVOID A MAJOR MISTAKE WITH YOUR RETIREMENT BENEFICIARIES

If your trust is the beneficiary of your retirement accounts, you may need to take steps to protect your heirs’ inheritance. Ignoring the new Inherited IRA rules under the SECURE Act could cost them dearly.

Inherited IRA account balances must be fully withdrawn within ten years of inheritance.

While a beneficiary isn’t required to continue RMDs, he/she can no longer stretch out distributions and control the tax obligations over their lifetime.

The entire account balance must be withdrawn – and taxes must be paid – within ten years of inheritance.

The IRS allows the following beneficiaries to still benefit from the Stretch IRA in 2020 and beyond:

  1. The surviving spouse
  2. Individuals who are not more than 10 years younger than the original owner
  3. Minor children, not grandchildren, then 10-year rule becomes effective no later than age 26
  4. Disabled and/or chronically ill beneficiaries
  5. Beneficiaries of annuity contracts in which an irrevocable income election is already in place.
  6. Beneficiaries of inherited Government-sponsored retirement plans until Jan 1, 2022

 

Legacy planning under the Secure Act

If this isn’t how you envisioned leaving an inheritance to your children or grandchildren, you may want to consider some alternative planning opportunities during your lifetime. Once your pass away, your beneficiaries won’t have many options available to them other than to take the funds by the end of the 10-year window.

Some planning opportunities for account owners may include:

  • A Roth conversion: converting funds from an old 401(k) plan or a traditional IRA to a Roth IRA won’t help your heirs extend their payout period beyond 10 years, but it can help them avoid realizing large sums as ordinary taxable income. Provided beneficiaries wait at least five years after you first funded the Roth IRA, distributions will be tax-free. Keep in mind, converting pre-tax money to a Roth IRA means you will recognize the amount in your ordinary income for the year. If you’re in a high marginal tax bracket or still working, this may not make sense.
  • Leave taxable assets in a revocable trust instead: These changes only apply to inherited retirement accounts, not regular taxable investment accounts. To avoid probate, consider bequeathing assets in a taxable brokerage account to heirs through a revocable trust, also called a living trust. Under current tax law, assets will receive step-up in cost basis to the fair market value as of the account owner’s date of death. While tax will be due on any subsequent capital gains or dividends received, there is no requirement to withdraw the funds.
  • Review existing trust payout terms: Speak with your estate planning attorney to understand how the new law may change your existing strategy and if changes should be considered. For example, if you named a trust as the beneficiary of your IRA and the payment terms indicate that only required minimum distributions can be distributed, this could mean beneficiaries are only entitled to receive a lump sum in year 10 under the Secure Act, a situation some are calling a ‘tax bomb’.
  • Consider a charitable remainder trust: At a very high level, here’s how it works: a charitable remainder trust (CRT) is established and named the beneficiary of a retirement account. The beneficiaries of the CRT are your adult children. The charitable remainder trust could make payments to your kids for up to 20 years before the remaining assets were distributed to the charity you selected. There is a cost to set up and administer this type of trust, and it won’t be right for everyone, so be sure to discuss the pros and cons with an estate planning attorney in your area.

Carefully weigh your options with your financial advisor, estate planning attorney, and tax advisor before making any changes to your situation and be sure to fully understand the pros and cons.

Keep in mind, these strategies could also fall victim of new legislation in the future, with or without grandfathering. So it’s important to weigh your goals with the risks and opportunities.

401k Inheritance Child Options in Florida Financial Planning

There is a large difference between passing on assets and passing on a legacy.

If you involve your children in the process and base your inheritance decisions on a purpose, you can leave the right amount of money to your children while creating a rewarding experience for both.

We help individuals navigate financial concerns, restoring clarity, energy, and optimism!

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