Dealing with the death of a loved one is a major emotional challenge. The grieving process can be made significantly more difficult when faced with the task of sorting through the deceased’s personal and financial affairs. In the following article, we will offer a brief overview of what to expect in the event your loved one owned a retirement account and the process that could determine how the funds in it would be distributed.
Determine Who Is The Beneficiary
In many instances, retirement accounts such as the Individual Retirement Account (IRA) or the 401K Retirement Plan allow the account holder to set up a designation known as a “Transfer Upon Death” arrangement. Retirement accounts given such a designation may also be referred to in terms such as “Paid On Death” and “Transfer On Death” accounts. This means the beneficiary, typically the deceased’s spouse, can take ownership of the funds without them being subject to the probate process in which their loved one’s will would need to be reviewed and be approved by a probate court judge.
Though the deceased’s spouse is the most common retirement account beneficiary, it is not a requirement. Others whom the account holder may designate to receive these funds includes:
- A Parent
Once the beneficiary is established, the process by which he or she can take ownership of the account is typically very simple. Most often, the beneficiary will have to provide the necessary paperwork. Required documents are usually the following:
- Your loved one’s death certificate.
- Documentation, such as a signed card, which designated you as the beneficiary.
- A government-issued photo identification: a driver’s license, identification card, passport, or military identification card.
- Proof of residence. This could be established by presenting a recent bill, or important mail sent to your home address.
Should more than one beneficiary be designated and established, funds will be split in accordance with how many beneficiaries are named. It is also important to note that, if the account holder wants to ensure his or her loved ones receive these funds, a beneficiary must be designated. If not, the account will most surely be subjected to probate and a court will determine how the money is allocated, or worse, be claimed by creditors if the deceased had significant debts.
Are Retirement Accounts Subject To Taxes?
This depends on the designation of your beneficiary status. If you are the deceased’s surviving spouse, the answer is no. When a surviving spouse inherits his or her significant other’s retirement account funds, the money is not subjected to either income or estate taxation. On the other hand, if you are not the account holder’s surviving spouse, you will be subject to both income and estate taxes.Taxation involving retirement account inheritance can be complicated and it is strongly recommended those in doubt speak with an accountant or an estate planning attorney Scottsdale AZ relies on for clarification.
Handling the financial matters of a recently departed loved one can be a daunting task. Our firm can help you better understand how a deceased’s retirement accounts are distributed after his or her death, as well as any other related issue. We can also help you formulate an estate plan designed to help your relatives navigate through the process of sorting through your affairs with greater ease and knowledge.
Thanks to our friends and contributors from Hildebrand Law for their insight into estate planning practice.