Estate Planning Corner: Designate Retirement Account Beneficiaries to Protect Your Legacy

By John O’Grady, O’Grady Law Group

No one wants to pay more taxes than they owe, but your estate can wind up shelling out extra if you don’t clearly designate your retirement account beneficiaries.

This mistake recently cost the estate of John DiMarco a huge chunk of money as the retirement account went to his probate estate and not directly to his church. DiMarco’s will stated that his church should get all of his estate’s assets after administrative costs and taxes were paid: but then seven of his cousins petitioned for an inheritance.

When his probate estate reported a charitable income tax deduction of $314,942 on its income tax return, the IRS assessed a $108,588 deficiency because the funds could not timely be “permanently set aside” for the church as a result of the pending litigation. The cousins’ suit and other legal uncertainties, including even more potential heirs and missing witnesses to the will, kept DiMarco’s estate in litigation for years.

So the court ruled in the IRS’s favor, concluding that the funds set aside for the church might still go to other parties, and therefore did not meet the “so remote as to be negligible” criteria of the law. John DiMarco could have avoided this hefty estate tax by naming his church as his retirement plan beneficiary.

Talk with your clients about how best to meet their objectives. Encourage them to ensure that their favorite causes and individuals—and not the tax collector—get their valuable assets when they are gone.

And be sure that your own house is in order. Estate of John D. DiMarco v. Commissioner, United States Tax Court (2015).

 

John O’Grady leads a full service estate and trust law firm in San Francisco.  He served as the 2012 Chair of BASF’s Estate Planning, Trust & Probate Section His practice includes Estate Planning & Administration, Probate & Trust Litigation, Collaborative Practice, Mediation, Conflict Coaching, Elder Law & Taxation.