How should you handle your retirement accounts in your estate plan?
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One of the largest assets that most people have are their retirement accounts. Whether this is an IRA, 401K, SImple, or any of the other types of qualified accounts.
These accounts get special tax treatment. They are able to grow tax deferred until you retire. Once you take the money out, they are taxed at the ordinary rate. They lose that special tax status at that time.
These accounts are normally protected from creditors too. In Minnesota, so long as they are ERISA covered, like a 401K, creditors can’t tough them. However, IRAs are not ERISA protected.
These same concerns pass on to your heirs. When you pass these to your heirs, you must be careful in how you pass it so that you can keep the tax advantages for them.
So be wary of class beneficiaries. Otherwise, you might not get the best tax results and you could even forfeit them all together.
Also, the Supreme Court recently determined that inherited retirement accounts don’t really get protection from creditors. Your spouse probably still gets it, but not anyone else. The court determined that Congress intended for these protections to cover retirement funds. Most people who inherit IRAs can’t say that it was their retirement money. It is yours.
There are special types of trusts called Retirement Trusts that will preserve all of these benefits and keep the money out of the hands of creditors. If you have a significant retirement account then you should consider leaving it to your heirs in one of these trusts.
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