SENIOR SIGNALS: Retirement assets vs. other assets; how to make the most of your wealth

Published on Sunday, 17 April 2022 20:46
Written by DANIEL O. TULLY


As an elder law attorney and estate planner, I have noticed that a large percentage of the wealth of my clients is in retirement plans. I have reviewed many retirement plans with different sets of rules. These plans include pension, profit sharing, 401(k), IRA, Roth IRA, SEP-IRA (Simplified Employee Pension Plan), Simple IRA, 403(b) and 457.

It is important to remember when doing estate planning that retirement assets are different from other assets. There are seven reasons why retirement assets are different from other assets.

1) Retirement assets have never been taxed. While most of your assets, such as your home and your non-retirement investments, are purchased with after-tax dollars, retirement contributions are made with pre-tax dollars. Income tax is not paid on the money placed into the plan and year after year the retirement contributions grow tax-free.  However, this means that when distributions are taken from the plan, they are taxed as income.   

2) Your Will does not determine who receives your retirement assets.  Individuals execute Wills to ensure that their assets will pass to their heirs in accordance with their wishes.  This will not include all assets, however, because assets, such as retirement benefits, transfer by contract, not by Will.  The contract is the beneficiary designation form filled out for the qualified plan or IRA. As such, this form could be the most important component of your estate planning.

3) Retirement assets are not subject to probate. Because retirement assets transfer to the beneficiaries by this contract and not by the Will, they are not included in the probate process unless the participant fails to name a designated beneficiary other than the estate.

4) Retirement assets do not get a “step up” in basis at the death of the participant. As you may know, any non-retirement investments you own, including your house, are subject to capital gains tax when they are sold. If your heirs receive these assets at your death, they will receive the assets with a step up in basis to the fair market value on the date of your death. This is not the case with retirement benefits.  

5) Individuals generally pay higher tax rates on retirement assets. When your heirs subsequently sell your non-retirement assets, they will pay capital gains on any appreciation that occurs after you pass away. In other words, your heirs will pay tax on the difference between the sale price and the fair market value on your date of death.  

6) The owner of retirement assets cannot “gift” these assets during life without creating a tax. A common strategy to reduce an individual’s taxable estate is to make gifts during his or her lifetime, thereby reducing the overall size of the taxable estate. Thus, working within the limits of the gift-tax provisions, one can transfer a portion of an estate to future generations without incurring any tax. Retirement assets, on the other hand, cannot be transferred during life because all transfers are considered distributions and those distributions are taxed to the donor.

7) Participants are more emotionally invested in their retirement benefits. For retirees, retirement assets present the proceeds of a lifetime career. The retiree probably spent much of his lifetime building up these funds and holding them for retirement.  Owners sacrifice other immediate goals in favor of saving for retirement and watch their retirement assets closely as they grow over the course of a lifetime. As a result, retirees have high expectations for these funds - and big fears.  Will the money last as long as they do? What will they do if it doesn’t? In asset-protection planning, it is important to note that your retirement assets are not protected merely because it is the fruit of your hard work.  However, there are strategies that can be implemented to protect that for which you worked so hard.

Attorney Daniel O. Tully is a artner in the law firm of Kilbourne & Tully, P.C., members of the National Academy of Elder Law Attorneys Inc., with offices at 120 Laurel St., Bristol. (860) 5831341 or ktelderlaw. com.

Posted in The Bristol Press, Bristol on Sunday, 17 April 2022 20:46. Updated: Sunday, 17 April 2022 20:48.