18 January

Is an IRA and Life Insurance Part of Probate?

QUESTION

Most of my estate consists of money I have in my IRA and 401(k) at work and in a life insurance policy which will pay out at my death.

What is my best course of action in providing for transfer of my estate to my heirs in the most efficient manner?
Do I really need a living trust to avoid probate if I have named beneficiaries of my retirement accounts and life insurance policies?

ANSWER

With the tax act which went into effect back in 2013, four years before Donald Trump came on the scene, the estate tax was eliminated for most people. This is because there is no estate tax unless your estate exceeds $11.2 million.

Needless to say, this exempts most of us from an concern for the estate tax.

So this leaves you with deciding on whether it is better to use a will or a revocable living trust.

Most people understand that a will is essentially a ticket to the probate court.

What is Probate? Probate is a court-supervised process which oversees, directs and ultimately authorizes distribution of the estate of a deceased person.

If an IRA or 401(K) Has a Beneficiary Named

However, if a retirement account, such as an IRA or 401(k) has a beneficiary named, that beneficiary need only provide a death certificate to the administrator of the IRA or 401(k), upon which the administrator will transfer ownership of the account to the named beneficiary, thereby avoiding probate.

If an IRA or 401(K) Does Not Have a Beneficiary Named

However, if the IRA or 401(k) does not have a beneficiary named, or if the beneficiary is the deceased’s “estate”, or if the named beneficiary died before the owner of the account, then the IRA or 401(k) will be subject to probate.

As long as you are careful to name the proper person as beneficiary of your IRA or 401(k), the account will not go through probate, so the revocable living trust may not be necessary.

The same considerations apply to proceeds from a life insurance policy upon the death of the insured: if the named beneficiary survives the decedent, the insurance proceeds are payable directly to the beneficiary without probate; so again, the revocable living trust may not be needed to avoid probate on the policy proceeds.

When Naming Beneficiaries is Not the Best Option

But merely relying upon naming beneficiaries may not be the best course. For example, what if the beneficiaries are young and should not be receiving large inheritances directly?

In many cases, you will want the retirement accounts and insurance proceeds to be held in trust until the beneficiaries attain an age and level of maturity where they would be capable of properly handling a large inheritance.

Where this is the case, it is best to create a trust which will hold the proceeds from the retirement accounts and life insurance, under the control of a capable trustee, and the trustee may then invest and distribute the funds to the beneficiaries until such time as the beneficiaries attain an age at which they would be expected to be capable of handling larger suns of money.

So, even though probate may be avoided, in these circumstances, it will often be best to create a revocable living trust to hold the inheritance until such time as the beneficiary becomes more mature.