Part of an estate plan is how to transition IRAs, 401k and other retirement accounts to loved ones. The most overlooked area in estate planning today is how we transition our retirement accounts to our loved ones, due to a couple of different reasons:

  1. We have to realize that wills typically have nothing to do with who is going to get what because when we open up a retirement account, we are asked to name a beneficiary. That beneficiary designation supersedes anything in a will. Any time this has ever been tried in courts it has been summarily defeated. It’s very clear that beneficiary designations supersede wills. Think of all the legal language you have in a will. Most wills are around 8-12 pages long and full of legalese. That legal language is in there for important reasons.


In contrast, you have a little box on a form that you probably didn’t even give a second thought to in your retirement accounts. Maybe you named your spouse, if you’re married, and then you named your kids. You’ve got a potential land mine things that could happen if people don’t pass away in the right order. You could disinherit grandkids and all kinds of things could come up.


  1. The other issue that could come up is the income tax time bomb of your retirement accounts. You’ve never paid the income tax on most, if not all, of your retirement funds. The IRS is going to make sure they get their taxes from those accounts. So if you didn’t pay the tax and your funds pass to your kids, who do you think is going to pay the income tax? Your beneficiaries, your kids, and your grandkids. There is no exemption for this. If you have one dollar in your retirement account, your kids are going to pay income tax on that dollar.


According to the IRS, over 90% of all IRAs are cashed in when the second spouse dies. So, you’ve got this income tax time bomb and over 90% of the time, that income tax time bomb goes off. Now there’s a lot of ways to address that, but that is the missing estate plan.


A lot of estate planning attorneys don’t properly prepare for this retirement account issue. There are plenty that do, but many don’t. You may not have used an attorney for your estate planning and think people use all kinds of time and money on creating legal documents but they haven’t even addressed the retirement account beneficiary designations, which for many is the largest or second largest asset you have. That means one of your biggest assets is being completely governed by this little box on a form that can create a hornet’s nest of things that could happen. Either the money is inherited by somebody you don’t want to inherit it, or you disinherit people that you wanted to get your money.


Don’t get caught with a missing estate plan.