Understanding Tax Requirements On A 401k That Is Being Left To A Family Member

On behalf of The Law Office of Wickersham and Bowers posted in Estate Planning on Tuesday November 9th, 2021.

While it can be difficult to focus on your finances after the death of a loved one, there are tax planning issues that need to be sorted out. This is especially true if you are your loved one’s 401k beneficiary.

401k and Taxes

Upon a person’s death, their 401k plan transfers to their taxable estate. If there is a living beneficiary, the money can probably be disbursed without waiting for probate unlike the rest of the estate.

Taxes will be due on any monies received from a 401k, in addition to estate taxes. However, a few strategies can be used to delay the burden or spread it out. 

Understand the Rules

Many people do not realize that different 401k plans can have different rules. While the IRS does have a set number of limits, a plan can ultimately be more restrictive. For instance, the IRS allows you to leave the money alone without paying taxes, for up to 10 years. But, the plan itself may not allow that length of time.

There may be other rules regarding who inherits the plan. For instance, a surviving spouse may have different restrictions than a surviving child. 

For most people, the 401k will need to be taken out all at once in a lump sum distribution. If this happens, then you will need to pay state and federal income taxes. However, you may not be subject to the early withdrawal penalty.

A surviving spouse may have the option to roll the money over into a different retirement account such as an IRA.

Periodic Payments

Some plans will allow you to spread payments out over the course of a few years to prevent a significant tax burden all at once. This isn’t always allowed by the plan because there is an administrative cost involved for them.

It is more likely to be allowed if the original account holder was already receiving payments before their death.

Estate Planning and Saving For a Child’s College Education

On behalf of The Law Office of Wickersham and Bowers posted in Estate Planning on Tuesday November 9th, 2021.

According to the Education Data Initiative, the cost of higher education in the U.S. has tripled in the last 20 years. In Florida, the average cost of tuition and fees for a four-year institution is $15,511 and the national average for student loan debt is $37,584.

Have you considered the cost of higher education for your children in your estate planning? Here are a few options that can help you plan for their future.

529 Plans

Savings plans called 529 plans are intended for educational purposes and they come in two different types. The first type is a prepaid tuition plan, which allows for the purchase of future tuition fees at the current price. The money is meant for college or university tuition only and cannot be used for room and board.

The second is an education savings plan which allows for investment accounts that can be used for higher education expenses. This plan allows the money to be used for room and board and school supplies like laptops or books. 

Revocable Living Trust

With a revocable living trust, the provisions can be changed as often as you want while alive and define how the money should be spent. Should you wish some or all of the trust to be dedicated to education, you can define what is eligible in terms that you like. These provisions for education will stand even after your death, ensuring that your child’s education needs are met.

HEET: Health and Education Exclusion Trust

There is an irrevocable trust that can help you avoid paying a gift tax called a health and education trust or HEET. This trust is meant for your younger relatives, two or more generations after you. Any payments made to an educational institution from a HEET are not subject to gift taxes. 

Irrevocable Gifting Trust

If you want your gifts to extend beyond education, an irrevocable gifting trust may be the right option. You can shelter your gifts to beneficiaries with the annual gift exclusion if you include a Crummey power that allows gifts that normally wouldn’t be eligible for the exclusion.