Frequently Asked Questions about
Estate Planning, Wills, Trusts, and Probate

• Will my IRA, 401(k), and other retirement plan accounts be taxed at my death?

Special tax problems can complicate estate planning for any Virginian with a tax-deferred retirement account, such as a traditional IRA, SEP, 401(k), 403(b), Keough, MSA, or other pension or non-Roth retirement account.

Because no income taxes have been paid on the money in retirement accounts such as these, the person who receives the account at death will have to pay the income tax as money is withdrawn -- and withdrawal cannot be deferred indefinitely. An estate tax may also be owed on the same account, if the deceased person’s total estate was worth more than $2 million.

A surviving spouse (and certain trusts for the benefit of a surviving spouse) can roll over such accounts into another tax-deferred IRA, but no other beneficiary can do this. Thus, children who inherit a non-Roth IRA or other retirement account will usually need to withdraw the money (either in any manner within 5 years, or in equal installments over their lifetimes). Special rules apply if the deceased person was already taking distributions from the account. Other special rules apply to the unused proceeds of a decedent's tax-deferred Medical Savings Account.

If tax-deferred accounts will pass to beneficiaries other than spouses, you must carefully consider the beneficiaries’ tax situations, since it may be possible to reduce income taxes (and thus increase the amount ultimately passing to the beneficiaries) by allocating tax-deferred accounts to low-income beneficiaries, and other assets to high-income beneficiaries. Be sure to seek legal advice if you wish to name a trust as a beneficiary rather than a specific individual, as the deferred-withdrawal options available to the trust may differ from those available to an individual person.

Tax-deferred retirement accounts are usually ideal first choices for bequests to charity: the full amount of such gifts will be tax-exempt.

Estate planning where tax-deferred accounts are a factor is always complicated, both because of their special tax treatment and because these accounts pass according to their beneficiary designations, rather than being directly controlled by the terms of a will or living trust. Unless Congress decides to simplify the laws, or the I.R.S. decides to simplify the rules, the presence of such accounts will continue to add to the expense and bother of estate planning and of estate and trust administration.

“All money nowadays seems to be produced with a natural homing instinct for the Treasury.” –Prince Philip