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Do Retirement Accounts Go Through Probate Court?

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Estate planning is one excellent way to secure the future of you and your family. It involves several strategies for growing and preserving wealth, including setting up and contributing to an individual retirement account (IRA).

May 6, 2024
Author: NCH

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IRAs are tax-advantaged retirement accounts designed to help individuals save and grow money for retirement. But what happens to all of your accounts once you pass away? Will it go straight to your beneficiaries, or will it go through probate?

In this blog, we’ll answer some of the most pressing questions and concerns about IRAs and discuss their role in estate planning

Read on to learn how to prevent your retirement accounts from going through probate

The Role of Individual Retirement Accounts (IRAs) in Estate Planning

IRAs are retirement accounts that allow owners to save money on a tax-deferred basis. They’re excellent tools for estate planning, allowing individuals to grow their wealth and diversify their investment portfolios.

They are typically used by self-employed workers who don’t have workplace retirement accounts like the 401(k). However, even those with a 401(k) can open an IRA through banks and investment companies. 

There are four primary types of IRAs: traditional, Roth, Simplified Employee Pension ISEP, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. Each type of IRA has its own rules and benefits. 

For example, contributions to traditional IRAs can be tax-deductible depending on the owner’s income level. Roth IRAs, on the other hand, don’t have tax deductions since they’re typically made with after-tax earnings. 

The right type of IRA for you will depend on your needs and goals. It would help if you also considered factors such as income levels, employment, and tax status.

Do Individual Retirement Accounts (IRAs) Go Through Probate?

The short answer is no; retirement accounts don’t go through probate if set up properly. 

Probate is the legal process of authenticating and validating someone’s will. It involves reviewing the deceased’s assets and distributing them to the beneficiaries as the will outlines.

They typically happen when the deceased’s estate is of great value or if they died intestate or without a will. 

How do IRAs bypass probate? When someone decides to open an IRA, they must name at least one or two beneficiaries who will inherit the account upon death. 

If the owner names their beneficiaries correctly, the IRA will no longer have to undergo probate. But, if they make a mistake in their beneficiary designation, the account may end up in probate. 

To prevent this from happening, you must avoid these three common mistakes when selecting your beneficiaries:

  • Not Naming Your Spouse: In community property states, a spouse is entitled to half of anything the other spouse puts into their retirement account during marriage. If the owner names other beneficiaries in addition to or instead of the spouse, the spouse has the right to file a claim on their portion of the IRA, sending it to probate. 
  • Naming a Minor: Minors cannot hold assets in their own names. So, if they’re named the beneficiary of an IRA, they will need someone to manage it. So, to avoid probate, you need to designate someone who will manage your account on behalf of your minor beneficiaries until they become adults.
  • Forgetting Alternate Beneficiaries: In some instances, the beneficiaries cannot receive the account, so IRA owners need to name alternate beneficiaries. 
  • Not Updating Beneficiaries: Who you want to be your beneficiaries will most likely change over time. We suggest you regularly update your list of beneficiary designations to ensure that your hard-earned savings go to the right beneficiary.

Can You Put Retirement Accounts into a Trust?

It is possible to transfer retirement accounts into a trust. However, most estate planners don’t recommend it. 

Since trusts are considered separate legal entities, the IRS treats any IRA asset transferred to them as a distribution and taxes it accordingly. This rule applies to all four IRA types. Moreover, the IRS will impose an early withdrawal penalty if the IRA owner is under 59½ during distribution. 

As an alternative, experts suggest naming a living trust as your beneficiary. This strategy is commonplace in retirement and estate planning. But like anything else, there are advantages and disadvantages to a trust beneficiary. 

Advantages of a Trust Beneficiary

For instance, trust beneficiaries are great if your beneficiaries are minors or have special needs. It allows you to dictate how they will use the benefits they receive from your IRAs. 

In addition, trust beneficiaries also help protect your IRA from creditors. According to a 2014 US Supreme Court ruling, inherited IRAs do not qualify as “retirement funds,” exempted from creditors’ claims under the Federal Bankruptcy Code. 

Disadvantages of a Trust Beneficiary

One primary disadvantage of having trust beneficiaries is that it subjects your IRA to a required minimum distribution calculated based on the oldest beneficiary’s life expectancy. 

This rule won’t affect you if you only have one beneficiary. However, having multiple beneficiaries of varying ages can complicate things.

Moreover, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 requires non-spouse beneficiaries of IRAs to take full distribution of all the amounts held in the account within ten years after the owner’s death.

Get Expert Advice Today

While trusts can be an excellent tool in estate planning, there are several factors you must consider before using it. It would be best for you to seek the professional advice of an estate planner to determine whether trust beneficiaries are ideal for you. 

Call NCH today for expert advice on estate planning. NCH offers several legal services in Nevada, including estate planning. 

Our independent law firm will help you create a customized estate plan aligned with your needs and retirement goals. They will also help you draft wills, choose the right type of trust, and prepare healthcare directives and powers of attorney. 

To learn more about our estate planning services, visit our website here or call us at 1-800-508-1729 to schedule a consultation with one of our estate attorneys. 

Start estate planning today and protect your retirement accounts from probate. 

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

Estate planning is one excellent way to secure the future of you and your family. It involves several strategies for growing and preserving wealth, including setting up and contributing to an individual retirement account (IRA).

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IRAs are tax-advantaged retirement accounts designed to help individuals save and grow money for retirement. But what happens to all of your accounts once you pass away? Will it go straight to your beneficiaries, or will it go through probate?

In this blog, we’ll answer some of the most pressing questions and concerns about IRAs and discuss their role in estate planning

Read on to learn how to prevent your retirement accounts from going through probate. 

The Role of Individual Retirement Accounts (IRAs) in Estate Planning

IRAs are retirement accounts that allow owners to save money on a tax-deferred basis. They’re excellent tools for estate planning, allowing individuals to grow their wealth and diversify their investment portfolios.

They are typically used by self-employed workers who don’t have workplace retirement accounts like the 401(k). However, even those with a 401(k) can open an IRA through banks and investment companies. 

There are four primary types of IRAs: traditional, Roth, Simplified Employee Pension ISEP, and Savings Incentive Match Plan for Employees (SIMPLE) IRAs. Each type of IRA has its own rules and benefits. 

For example, contributions to traditional IRAs can be tax-deductible depending on the owner’s income level. Roth IRAs, on the other hand, don’t have tax deductions since they’re typically made with after-tax earnings. 

The right type of IRA for you will depend on your needs and goals. It would help if you also considered factors such as income levels, employment, and tax status.

Do Individual Retirement Accounts (IRAs) Go Through Probate?

The short answer is no; retirement accounts don’t go through probate if set up properly. 

Probate is the legal process of authenticating and validating someone’s will. It involves reviewing the deceased’s assets and distributing them to the beneficiaries as the will outlines.

They typically happen when the deceased’s estate is of great value or if they died intestate or without a will. 

How do IRAs bypass probate? When someone decides to open an IRA, they must name at least one or two beneficiaries who will inherit the account upon death. 

If the owner names their beneficiaries correctly, the IRA will no longer have to undergo probate. But, if they make a mistake in their beneficiary designation, the account may end up in probate. 

To prevent this from happening, you must avoid these three common mistakes when selecting your beneficiaries:

  • Not Naming Your Spouse: In community property states, a spouse is entitled to half of anything the other spouse puts into their retirement account during marriage. If the owner names other beneficiaries in addition to or instead of the spouse, the spouse has the right to file a claim on their portion of the IRA, sending it to probate. 
  • Naming a Minor: Minors cannot hold assets in their own names. So, if they’re named the beneficiary of an IRA, they will need someone to manage it. So, to avoid probate, you need to designate someone who will manage your account on behalf of your minor beneficiaries until they become adults.
  • Forgetting Alternate Beneficiaries: In some instances, the beneficiaries cannot receive the account, so IRA owners need to name alternate beneficiaries. 
  • Not Updating Beneficiaries: Who you want to be your beneficiaries will most likely change over time. We suggest you regularly update your list of beneficiary designations to ensure that your hard-earned savings go to the right beneficiary.

Can You Put Retirement Accounts into a Trust?

It is possible to transfer retirement accounts into a trust. However, most estate planners don’t recommend it. 

Since trusts are considered separate legal entities, the IRS treats any IRA asset transferred to them as a distribution and taxes it accordingly. This rule applies to all four IRA types. Moreover, the IRS will impose an early withdrawal penalty if the IRA owner is under 59½ during distribution. 

As an alternative, experts suggest naming a living trust as your beneficiary. This strategy is commonplace in retirement and estate planning. But like anything else, there are advantages and disadvantages to a trust beneficiary. 

Advantages of a Trust Beneficiary

For instance, trust beneficiaries are great if your beneficiaries are minors or have special needs. It allows you to dictate how they will use the benefits they receive from your IRAs. 

In addition, trust beneficiaries also help protect your IRA from creditors. According to a 2014 US Supreme Court ruling, inherited IRAs do not qualify as “retirement funds,” exempted from creditors’ claims under the Federal Bankruptcy Code. 

Disadvantages of a Trust Beneficiary

One primary disadvantage of having trust beneficiaries is that it subjects your IRA to a required minimum distribution calculated based on the oldest beneficiary’s life expectancy. 

This rule won’t affect you if you only have one beneficiary. However, having multiple beneficiaries of varying ages can complicate things.

Moreover, the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 requires non-spouse beneficiaries of IRAs to take full distribution of all the amounts held in the account within ten years after the owner’s death.

Get Expert Advice Today

While trusts can be an excellent tool in estate planning, there are several factors you must consider before using it. It would be best for you to seek the professional advice of an estate planner to determine whether trust beneficiaries are ideal for you. 

Call NCH today for expert advice on estate planning. NCH offers several legal services in Nevada, including estate planning. 

Our independent law firm will help you create a customized estate plan aligned with your needs and retirement goals. They will also help you draft wills, choose the right type of trust, and prepare healthcare directives and powers of attorney. 

To learn more about our estate planning services, visit our website here or call us at 1-800-508-1729 to schedule a consultation with one of our estate attorneys. 

Start estate planning today and protect your retirement accounts from probate. 

Disclaimer: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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