Over the last 20+ years of practicing law, I have been frustrated by the lack of thought given to beneficiary form planning regarding retirement assets such as IRAs, 401ks, 403bs, etc. We are programmed to contribute the “max” to our retirement accounts and we disregard, or do not understand, the pitfalls of an improperly filled-out beneficiary forms. This piece deals with how parents of minor children should be thinking about this important issue. 

Many clients ask me, “how should I title the beneficiary forms of my retirement account when I have minor children?” The most common solution is to name your spouse as the primary beneficiary and your minor children as the contingent beneficiary. But, is this the best way to deal with your retirement asset? 

Keep in mind that retirement assets are different than your taxable accounts. That is, when distributions are made from your retirement account, they are treated as Ordinary Income (“OI”) and thus, subject to the OI tax rate. Also, retirement plans have beneficiary forms, which overrule whatever your will documents may say. Because these plans have beneficiary forms, they pass outside of your Estate and are governed by their own rules and regulations. 

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As such, how we deal with these accounts is very different than how we deal with a standard brokerage account or real property that are covered under your will. 

Here are your options:

  1. Simply name your spouse as the primary beneficiary and minor children as contingent beneficiaries: While this is the simplest choice, the concern is that if the minor children inherit the retirement asset, they will need a Guardian over that specific asset. The Guardian under the will does not automatically apply because, as stated above, this asset passes outside (1) of the Estate. Therefore, the Court may appoint a Guardian Ad Litem (“GAL”) to represent the children’s interests for this asset. The GAL would, in effect, be a paid stranger appointed by the Court until the child reaches the age of adulthood (18 in most States).

  2. Elect a Guardian in the retirement plan beneficiary form: Some custodians have a section of their beneficiary form to choose a Guardian for the minor children. Unfortunately, most forms do not have this option. 

  3. Make your Estate the contingent beneficiary of the retirement account: While this would solve the problem of not having a Guardian for the minor children, because it would kick the retirement plan into your Estate, it may have adverse income tax consequences. Because an Estate does not have a measuring life, the retirement asset would have to be fully distributed within 5 years. As stated above, since the retirement asset is treated as OI, it would subject the entire plan to ordinary income taxes and create an unintended and possibly large tax consequence upon distribution.

  4. Leave the assets to the minor children in trust: This is the most effective way to deal with leaving retirement assets to minor children. Your attorney would either create a separate trust for the minor children or build a conduit trust under your will or revocable trust to hold this specific type of asset. You would then change your beneficiary form to make said trust or sub-trusts for each minor child, the contingent beneficiary of your retirement plan. This way you can control who the Guardian is for this asset for your minor children and be tax-efficient in how you do so. If the trust is drafted properly, the child could stretchout (2) the inherited retirement plan (typically converted to an inherited IRA) for their lifetime, under the current laws. 

Whatever your decision, it should be an informed one. Please take the time to discuss your options with your attorney or financial advisor when making your choice. You should be in control of who is the Guardian for your children’s retirement plan inheritance, not the Courts and it should be done in the most tax efficient manner possible.

 (1) A contingent beneficiary takes if the primary beneficiary has predeceased or does not want the asset.

 (2) Please refer to inherited IRA strechout rules.

Avelino & Hartlaub, LLP is a boutique firm with primary practice areas that include: Real Estate; Wills, Trusts and Estates; Elder Law; Corporate Law; Land Use & Zoning; and Litigation. While the scope of the firm's services is wide, a key differentiator of the new firm is the insight, dedication to excellence, and commitment to client service within each area.

Avelino & Hartlaub, LLP has offices in Summit, at 47 River Road, and in Manhattan at 11 Park Place, Suite 1715. For more information, including a free and private consultation, call 908-273-5730 or contact lawyers@avelinohartlaub.com.