Retirement Accounts and Disclaimers

In yesterday’s post, I mentioned a TV show I saw on PBS presented by Ed Slott, noted authority on retirement planning. Buried in the two-hour show was a little gem of advice about leaving your retirement accounts to your kids. Here it is in a nutshell.

As I’ve mentioned before in March 20’s post, it’s almost inevitable that your children will inherit some meaningful retirement assets from you. Why? Because with all of life’s uncertainties, it’s hard to die broke. So whatever’s left usually goes to the kids.

But what if things go well for you, and after the first spouse dies, the surviving spouse feels like she’s got more than enough to sustain her for the rest of her life? Then the surviving spouse can make the decision to leave the deceased spouse’s retirement accounts—or some appropriate fraction of them—to the kids. How? By executing a proper “disclaimer.” What’s that, you ask. It’s a refusal to take what’s coming to her as a result of the death of her spouse. Then the disclaimed property goes to the next in line, which, if you’ve set it up properly, is the kids.

If your surviving spouse is feeling flush, and wants the kids to get a little inheritance today, rather than waiting for the next death, your retirement accounts make an excellent vehicle for this largesse. Why? Because with their longer life expectancies, they can turbo-charge the tax benefits of your retirement accounts, as pointed out in March 20’s post.

How do you set up this play for your surviving spouse and children? It turns out it’s not only easy, but it fits well with what you’re no doubt planning to do anyway: Name your spouse as your primary beneficiary on the Beneficiary Designation Form that comes along with your retirement accounts. In the space for “contingent beneficiary” (you know, the person who gets the dough if your named primary beneficiary has predeceased you), name your children equally per stirpes. Then when the grim reaper comes for you, your spouse (the one you really want to provide for) can accept her inheritance; or if she feels she can afford it, she can disclaim part of it and allow the kids to enjoy part of their inheritance while they’re in their high-maintenance years. Thanks for the good idea, Ed.

But wait, there’s more! What if one of your kids is also feeling pretty flush and would rather his inheritance goes to his own children, your grandchildren? Your child can also execute a disclaimer, allowing all or a part of his inherited retirement account to pass just as if he too had predeceased you. Then it goes to his kids. With their very long life expectancies, the value of those retirement accounts just got bigger. (See March 21’s post.) A good idea just got even better!

And the beauty of it is that the decision is not made by you today, but rather by those who survive you, and therefore have better knowledge of whether they can afford to be generous.

A word of caution. Disclaimers are tricky, and must be executed properly and promptly (within nine months of death) for them to work. So be sure your survivors consult with a competent and knowledgeable lawyer before trying to implement this idea. I know, you’d rather stick your left thumb in a wood chipper than get a lawyer involved, but this is an area where that’s the prudent thing to do. I mean involving a lawyer.