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Retirement Benefit Planning

An integral part of any estate plan is the complete analysis of an individual’s retirement accounts, including benefits available to them through their employer’s qualified plans and tax-sheltered annuities, and through the individual’s own Individual Retirement Accounts (IRAs). Qualified plans are generally governed by the federal pension law known as ERISA, which imposes minimum standards on plan eligibility, accrual and vesting of benefits, company and participant contributions, and the payout of benefits from the plan. Many of the federal rules vary, depending on the specific type of plan being considered. Those plans include 401(k) plans, profit sharing plans, stock bonus plans, ESOPs, money purchase plans, target benefit plans and new comparability plans. Each of those plans are defined contribution plans, in that in each of those plans, each participant has an account balance, which is credited each year with employer and participant contributions, if applicable, and the participant’s allocable share of the plan’s yearly earnings, gains and/or losses, and with the participant generally being entitled to the amount in their account, upon their retirement, disability, death or other termination of employment. In the case of most 401(k) plans, the participant is typically offered a number of investment vehicles to choose from, with the individual’s account balance credited each year with the participant’s pro rata share of the earnings, gains and losses attributable to their particular investment choices. Another type of plan is a defined benefit plan, in which there are no individual accounts, but in which instead, each participant is promised an ultimate yearly retirement benefit, should they continue full time employment with the employer until the plan’s normal retirement age, and with the participant typically being able to earn or accrue, a portion of that ultimate benefit each year. The portion of the ultimate benefit which the participant has earned is then paid to them upon their retirement, disability, death or other termination of employment.

As you can see, this is a highly technical and complicated aspect of estate planning, with Cullen and Dykman placing special emphasis on this phase of the process.

Your employer’s qualified plan, tax-sheltered annuity, and your own IRAs are essential components of your financial assets. In many cases, these assets may constitute the majority of an individual’s net worth. It is therefore important to understand the benefits which you are entitled to from each of those types of retirement arrangements, and how those benefits can be paid. At Cullen and Dykman, we take great pains to fully integrate the payout of benefits from those retirement vehicles with the client’s overall estate plan, so that the tax deferred nature of those assets can be continued for the longest possible period of time. Since the terms of an individual’s will do not generally govern the disposition of retirement assets upon an individual’s death, designation of beneficiaries forms covering each of the individual’s retirement assets, must usually be prepared, Those designation of beneficiary forms will typically contain provisions mirroring the various outright and “in trust for” bequests contained in the client’s will, and are coordinated with the will document, so that upon the individual’s death, each beneficiary will be entitled to the proper total amount, to be paid in the proper form (ie. outright or in trust), when both the client’s will bequests and the various beneficiary designations governing their retirement assets have been taken into account.

Roth IRAs have recently become a much more important estate planning vehicle. Since January 1, 2010, high income individuals (those earning over $100,000 per year) for the first time, are permitted to convert their qualified plan, tax-sheltered annuity and traditional IRA assets into Roth IRAs. The principal benefit of a Roth IRA is that once assets have been contributed into a Roth IRA, distributions from the Roth IRA can be recovered free from any further federal or state income taxation, regardless of the amounts received, provided that certain rules have been followed. The principal disadvantage to converting a qualified plan, tax-sheltered annuity benefit or a traditional IRA into a Roth IRA is the requirement that the individual pay current federal and state income taxes on the amounts converted into the Roth IRA. We advise clients on the pros and cons of making Roth IRA conversions, and on how to structure the Roth IRAs so as to be able to maximize the tax benefit, should the assets in the Roth IRAs which had been established, go down in value by the October 15th of the year following the year of the Roth IRA conversion, and should the client therefore want to undo or “recharacterize” the Roth IRA conversion. In this way, the client is able to retroactively eliminate any federal or state income taxation on the portion of the prior Roth IRA conversion which the client had then “recharacterized”.

Questions you should be asking:

The attorneys at Cullen and Dykman can answer these questions and more.

A case in point

Adam and Amy Forrest have over $800,000 in assets, which consist of their home, worth $350,000, savings and brokerage accounts totaling $160,000.00, life insurance of $50,000, $70,000 in their IRAs, and $170,000 in benefits due from the 401(k) plan in which Adam now participates. In their wills, they have provided that after the death of the second of them to die, their remaining estate assets are to be transferred into trusts established for the benefit of their three children, Max, Molly and Maggie, with Amy’s brother, David, serving as the trustee. The trusts are designed to continue in effect until each child reaches age 30. The children are now ages 8, 10 and 13.

Adam and Amy will name each other as the primary beneficiary of both their qualified plan and IRA benefits, and will name the trusts for the benefit of their three children in their wills, as the contingent beneficiary of each of those benefits. In this way, upon the death of each of them, the $240,000 in qualified plan and IRA assets, will be held in trust and administered by Amy’s brother, David, for the benefit of Max, Molly and Maggie, until each have reached age 30. At that time, in the opinion of Adam and Amy, each of them should be sufficiently mature enough to be able to competently manage those assets for themselves.

As trustee of each of the three children’s trusts, David will see to it that both the 401(k) plan and IRA benefits are rolled over into inherited IRAs for the benefit of Max, Molly and Maggie, with each of those inherited IRAs then paying out only the Required Minimum Distribution amount each year into each of the three children trusts (unless a larger distribution is needed in one or more years for any of them), but with the rest of the assets in each inherited IRA being allowed to continue to remain in each inherited IRA, continuing to enjoy tax-sheltered growth each year. If all goes as planned, by the time Max, Molly and Maggie have each reached age 30, each of their inherited IRAs will be worth far more than their initial $80,000 value (one-third of the total $240,000 amount in qualified plan and IRA assets, measured at the time of the death of the second to die of Adam and Amy). In addition, once Max, Molly and Maggie each reach age 30 and are in complete control of their own inherited IRAs, each of them could decide to continue to take only the Required Minimum Distribution amounts from their inherited IRAs in each subsequent year. In this way, Max, Molly and Maggie will likely be able to receive yearly distributions from their respective inherited IRAs for the rest of their lives, with the yearly payout amounts actually increasing each year, as Max, Molly and Maggie get older. Depending on their ages at the time of the death of their two parents, and depending on how successful first David, and then Max, Molly and Maggie are in investing their inherited IRA assets, during their lifetimes, the $80,000 in retirement assets which they each had inherited, could have paid them each between $300,000 and $1,000,000. Moreover, had Adam and Amy, prior to their death, converted all of their $240,000 in qualified plan and IRA assets into Roth IRAs, the entire $300,000 to $1,000,000 payout which Max, Molly and Maggie will each have received during their lifetimes, could have been paid to them entirely free from any federal or state income taxes.


  • “Unique Roth IRA Planning Opportunities for 2010 and Beyond,” Cullen and Dykman LLP and Ultimate Abstract of New York, Inc.
    June 2010
  • “2010 Roth IRAs: The Perfect Storm - The Legacy Gift Planning Opportunity,” Ameriprise Financial Services, Inc.
    January 2010
  • “Life Insurance and Other Insurance Issues” and “ERISA and Qualified Plan Benefits” New York State Bar Association – Committee on Continuing Legal Education – Trusts and Estates Law Section
    October 2009