Disclaimer Dilemma

     Qualified Retirement Plans (QRPs) comprise a significant share of the estate value for many Americans. This remains true despite the inevitable ups and downs of the stock market. One reason QRPs weather economic storms better than non-qualified investments is their unique tax treatment.
     All contributions to QRPs are made with pre-tax dollars and all of the growth inside such plans is tax-deferred until withdrawn. Hence, contributions to QRPs not only reduce your current income tax liability, but also grow with compound interest and without the reductions for annual income taxation.
     However, married couples in particular face unique tax challenges when selecting the Designated Beneficiary (DB) of their QRPs.

Death Tax Basics

Contrary to popular belief, QRP assets are included in the overall value of your estate for estate tax purposes. Under current tax law, every taxpayer has a $2 million Applicable Exemption Amount, which can be used to exempt assets from estate taxation. (This is an extremely valuable exemption because estate tax rates are progressive, and can exceed 45 percent.) Accordingly, a married couple may, with proper estate tax planning, use two of these exemptions to protect a total of $4 million in estate value.
     This double exemption, however, is not automatically applied and, without proper planning, a married couple may lose the full benefit of their combined $4 million protection to the unnecessary enrichment of the IRS.

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Insuring Legacies

     Did you know that you may unintentionally disinherit your children from your Qualified Retirement Plans (QRPs), especially if yours is a blended family?
     To illustrate this point, assume the following facts:

1. Husband and Wife have adult children from their respective prior marriages and a minor child together.
2. Wife has a $2 million QRP.
3. Wife selects Husband as the Designated Beneficiary (DB) of her QRP.
4. Wife establishes a Credit Shelter Trust (CST) with Husband and then children as beneficiaries.
5. Wife also names the CST as the Contingent Beneficiary of her QRP.
6. When Wife dies, Husband inherits the QRP as an income-tax-deferred rollover.

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QuickTip

Is it Time to Review Your Plan?

  Estate Planning is a Lifetime Process, not simply an after-death distribution program. So, it makes sense to periodically review your Life & Estate Planning goals, and legal documents as circumstances in your life change. Review this list of life changes or activities that could alter your estate-planning needs. 

1. Marriage or divorce.
2. Death of a spouse.
3. Large change in estate size.
4. Death or incapacity of an executor, trustee or guardian.
5. Move to or acquisition of property in another state.
6. Birth or adoption of a child.
7. Serious illness of a family member.
8. Change in business interest or retirement.
9. Change in insurability.
10. Marriage or divorce of a beneficiary.
11. Change in beneficiary attitudes.
12. Irresponsibility of a child.
13. Change in tax law.
14. More than two years since review of plan with attorney.