The United States created the first private pension plan in the late 1800’s. Through 1980, traditional employer-funded pensions covered nearly 40 percent of Americans. But employer-provided retirement plans have now largely shifted to retirement savings vehicles like 401(k) plans and Individual Retirement Accounts (IRAs) that place most of the savings onus on the employee.
Pension & Retirement Account Explanation
Pension and retirement accounts form a large portion of an individual’s wealth. Thus, make sure you account for them in your estate plan. If a retirement account holder completes a proper beneficiary designation, their account assets will bypass probate. Account holders often designate a surviving spouse or children as beneficiary, but they could also name a trust or a charity.
Pension Beneficiaries
The benefit and beneficiary rules applicable to different types of retirement accounts vary and should be discussed with an estate planning attorney, especially with the recent passage of the SECURE Act. In 2020, 18.2 percent of Americans were covered by an IRA-style retirement account, 34.6 percent had a 401(k)-style account, and 13.5 percent had a DB plan, reports the U.S. Census Bureau. The median value of a retirement account in 2020 was about $30,000.[1]
Private Pension Plans
Congress passed the Employee Retirement Income Security Act (ERISA) in 1974 to guarantee workers’ benefits in private pension plans. Before then, pensions had little or no protection, and there were incidents of workers losing their earned retirement benefits. ERISA covers most employer-sponsored DB plans and DC plans, but not government employee plans or IRAs.
DB Plans, DC Plans, and Beneficiaries
The only estate planning tool applicable to retirement accounts is the beneficiary designation. Retirement accounts must be owned by an individual, so they cannot be transferred into a revocable living trust during the participant’s lifetime like most other financial accounts or property. Further, they cannot be jointly owned. Thus, the only way to control how these accounts transfer at the time of the participant’s death is using properly designated beneficiaries. In general, participants in an ERISA-covered plan can select anyone to be the plan’s beneficiary when they die
The SECURE Act and Inherited Retirement Accounts
Passed in 2019 and effective in 2020, the Setting Every Community Up for Retirement Enhancement (SECURE) Act affects DC plans like 401(k)s and IRAs and has implications for estate planning.
Under the SECURE Act, the age at which retirees must make annual withdrawals, called minimum required distributions (RMDs), increased from 70.5 to 72. In 2023, that age was raised to 73. A retiree who lives a long life might deplete a large portion of their retirement account due to RMDs and have little left in the account to give to heirs. But the SECURE Act also affects those who inherit an IRA or 401(k) in a more direct way.
Retirement Accounts and Estate Planning
You saved hard for your retirement. The money you set aside could benefit more than just you. Most retirement accounts can be transferred to your heirs when you die, enabling them to supplement their own savings goals.
Retirement assets can transfer directly to properly designated beneficiaries outside of probate. But these assets will be subject to federal and state income tax, and possibly even estate taxes. The SECURE Act could further impact your estate planning efforts.
Your retirement accounts could be the single largest store of economic value that you leave behind. To maximize their value to loved ones after you are gone, be sure that you understand the different inheritance and tax rules that may apply, review beneficiary designations regularly, and speak to an estate planning attorney about how to best provide for your family’s future.
About Skvarna Law Firm in Glendora and Upland, California
Skvarna Law Firm operates offices in Glendora and Upland, California. We provide legal services. We cover San Bernardino, Los Angeles, Orange, and Riverside Counties. This includes several cities. Upland, Ontario, Rancho Cucamonga, Fontana, Colton, Rialto, Chino, Chino Hills, Glendora, Claremont, Pomona, La Verne, Montclair, San Dimas, Azusa, Covina, West Covina, Diamond Bar, Walnut, La Puente, Corona, Norco & Mira Loma. Visit SkvarnaLaw.com to learn more.
