Planning with Retirement Plans, Annuities and Life Insurance

Retirement plans, annuities, and life insurance policies are great tools to accumulate and protect wealth for some people. However, all investments require some attention to details regarding beneficiary designations and ownership choices. None of these tools fits everyone and some tools can be inappropriate for some people. A knowledgeable estate planning attorney uses these financial tools can help accomplish positive results and avoid problems.

Retirement Plans

Most retirement plans, such as IRAs, 403(b) plans, and 401(k) plans, contain pre-tax income that owners invested without paying income taxes (but not Roth IRAs). All plan owners must begin taking annual withdrawals of pre-tax funds from their retirement plans and paying taxes on the withdrawals by April 1 of the year after they reach age 70 ½.

Most married owners of retirement plans should name their spouses as their primary beneficiaries of their retirement plans. A spousal roll over gives the surviving spouse valuable flexibility to preserve wealth and live comfortably after the first spouse's death. Unfortunately, too few people think beyond a spousal rollover and forget to make secondary beneficiary designations. If the surviving spouse forgets to change beneficiary designations, his or her entire retirement plan will pass through a probate estate, forcing family members to withdraw the entire plan and pay expensive income taxes on it within 5 years after the surviving spouse's death instead of withdrawing gradually over the beneficiaries' lifetimes.

We encourage clients to designate primary and secondary retirement plan beneficiaries on a beneficiary designation form provided by their retirement plan administrators. There are several ways to make mistakes on beneficiary designations, so we encourage clients to let us help them. For example, if a plan owner has several beneficiaries, it would be a mistake to list only one beneficiary unless that beneficiary should receive and keep the whole plan without sharing it with others.

If beneficiaries are young or irresponsible, it may be helpful to set up trusts to manage their inherited shares of the retirement plan so that they will not waste their inheritance and rack up huge tax bills.

Life Insurance

Life insurance is a wonderful way to put cash in the hands of your family members and business partners when they need cash to pay your debts or taxes. Not all life insurance is a good investment and much life insurance advertised on television is a poor investment. As with the retirement plan, a primary and secondary beneficiary should be identified to prevent the life insurance policy from becoming an asset of your probate estate.

People with wealth over $5.43 million, business partners, or family members who might take over the family business need to consider special life insurance plans to help pay costs of ownership changes after they die. Business partners should consider "cross-purchase" agreements that direct what surviving partners must do to buy out their deceased partners' shares.

Annuities

Annuities resemble life insurance policies, but most annuities offer more profitable investment features. A "deferred" annuity owner's investment grows over time and pays a death benefit to the owner's named beneficiaries. Some people transfer retirement assets into annuities that follow the retirement plan withdrawal rules. Annuities used to offer great benefits for long-term care (nursing home) planning, but current Medicaid law makes most annuities terrible asset protection tools for nursing home pre-planning in all 50 states (if you hear otherwise, consider the advice questionable). As with life insurance, make and update beneficiary designations from time to time as circumstances change. If an annuity owner expects to enter a nursing home, he or his family should speak with an attorney knowledgeable about elder law issues to make appropriate adjustments to annuity plan. Inappropriate choices can destroy wealth unnecessarily.

Jeff R. Hawkins and Jennifer J. Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers and Jeff is a Fellow of the American College of Trust and Estate Counsel. Both lawyers are admitted to practice law by the State Bar of Indiana, and Jeff Hawkins is admitted to practice law by the State Bar of Illinois. Jeff is also a registered civil mediator and the 2014-15 President of the Indiana State Bar Association.