New Flexibilities for Partners, Children, and Others
Colleen
Sinclair Prosser, Attorney
SinclairProsser Law, LLC
In many
ways, planning for non-traditional families is much more problematic
than for traditional families. The tax system is geared towards
traditional families and many things that are simply taken for
granted with traditional families can become major issues with
non-traditional families.
Usually,
non-traditional families get the short end of the stick when it
comes to tax planning. For example, there is no gift or estate tax
marital deduction available for non-traditional families, whereas
spouses can give or leave each other an unlimited amount without
facing tax. Further, retirement plans such as a 401(k) that are
made payable to a non-spouse beneficiary do not qualify for a
spousal rollover.
The term
“rollover” can be confusing because it is used in two very different
situations. First, after your death, a spouse can “rollover” your
IRA or retirement plan assets into his or her own IRA. Essentially,
the retirement assets become as though the spouse had contributed
the assets himself or herself. For example, while other
beneficiaries must start taking minimum required distributions
shortly after the plan owner’s death, the spouse can wait to take
distributions until after reaching age 70 ½ . Only a spouse can do
this type of rollover.
There is
another type of rollover, too: a rollover from one plan to another
plan. For example, after termination of your employment, with most
plans you can “rollover” your employer retirement account, such as
your 401(k), into an IRA. This is sometimes called a “rollout.” A
surviving spouse can do this type of rollover, too. Beginning
January 1, 2007, non-spouse beneficiaries can also rollover
retirement assets to an IRA.
While the
distinction between different types of retirement plans often seems
meaningless, after death it can make a big difference. As a result,
the ability to rollover assets from an employer plan to an IRA can
be quite important. Many employer plans require that all funds must
be distributed within a few years of the employee’s death. This
allows the employer’s plan to keep its administration costs lower.
However, this would not allow anyone but a very old beneficiary to
stretch out retirement plan distributions for their life
expectancy. Now, thanks to the Pension Protection Act of 2006,
beginning January 1, 2007, any beneficiary, not just a spouse, can
force the employer’s plan to roll the money to an IRA in the name of
the decedent. From there, the beneficiary can take the
distributions over his or her life expectancy.
This new
“non-spousal rollover” does not allow a non-spousal beneficiary to
roll the assets into his or her own account. However, it does allow
them to move them to an IRA where they can stretch out
distributions. This change helps non-traditional families take
advantage of the income tax-deferral benefits of retirement
benefits.
Whatever
your family’s situation, a qualified estate planning and retirement
benefits planning attorney can help you plan for the future and walk
you through the process when the time comes.
Colleen Sinclair Prosser
is a member of the American Academy of Estate Planning Attorneys and
concentrates her practice on estate planning and elder law. She is
sensitive to challenges presented by lifestyle and circumstance and
addresses each situation with personal attention, wisdom and skill.
For more information and our upcoming seminar schedule call
800-336-0891 or visit
www.sinclairprosserlaw.com
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