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Do 401Ks and Retirement Accounts Need to Go Through Probate?

You’re proud of all the money you’ve saved, right? You should be. No matter how much the sum is, you have the discipline to save a portion of your gross income and minimize early withdrawals. You understand that by age 70.5, you are subject to the required minimum distributions. While you’ve made many plans for this money as the account holder, specific beneficiary designations for the funds were made in the event of your death. So to the question of whether 401ks or retirement accounts go through probate, the answer is, hopefully, no. The point of a designated beneficiary is to avoid having these funds fall to your estate and get eaten up by estate tax. However, without an experienced North Carolina estate planning attorney on deck to fine-tune an estate plan, your retirement account could fall into the pool of assets that must go through probate.

Scenarios You Should Avoid

Depending on whether the account owner named a legal beneficiary before passing away, retirement assets like 401Ks, IRAs, and annuities may or may not go through the probate procedure upon the account holder’s death. Although retirement savings seldom end up in probate, there are a few scenarios in which you might suffer the misfortune of having to go through the probate process. Misfortune may sound a bit drastic, but trust us when we say that you should avoid probate court wherever you can. For example, your creditors might also be able to get money owed from your retirement account. There are tax implications, as well. It would be regrettable to have your funds disappear due to poor planning.

Here are some instances to avoid.

There is No Back-up Beneficiary

Consider having multiple designated beneficiaries. If your primary beneficiary was the sole beneficiary of your retirement funds, and they passed away without an alternative beneficiary, probate will be required. The estate must cash out on this account by the fifth year. The tax imposed could drastically impact your savings. The money is subsequently divided among the other beneficiaries as part of the estate.

The Estate is the Designated Beneficiary

The money will go through the probate process if you designate the estate as beneficiary. We don’t advise this course of action, as this can result in tax and creditor problems. You would be surprised to see creditors popping out of the woodwork upon seeing the Notice of Creditors, a necessary step in estate administration. Your estate plan administrator will be constrained to pay these creditors before even paying you.

Minor Children Were Appointed

It’s natural to want to ensure that your children are provided for. However, money directly from your retirement account cannot be given to minor children. This inherited account won’t benefit a minor immediately. Minor beneficiaries’ accounts will need to be handled by someone until they reach adulthood. If you don’t appoint someone for the job, the Probate Court will do it for you. This person may not be your first choice.

Naming Your Surviving Spouse as Beneficiary

Your spouse is typically a more tax-efficient option for a primary beneficiary than non-spouse beneficiaries. The surviving spouse has the most discretion over when to delay taxable payouts. A surviving spouse can treat your IRA as their own IRA. They can also transfer your 401(k) or IRA to their own IRA. Different options in terms of tax and planning may be offered as a result. The proceeds from the account holder’s regular IRA are not necessarily subject to automatic distribution to the surviving spouse in North Carolina. Someone else might be eligible to receive the funds if they were named as the beneficiary by the account owner. An inheritance from a deceased spouse’s estate is always guaranteed to the surviving spouse, even in a non-community property state like North Carolina. Unless the spouse explicitly waives any inheritance rights in writing, no married individual can completely disinherit their spouse. If surviving spouses don’t like what they get as an inheritance under their spouse’s will, they can file a lawsuit to get the state-mandated share of the deceased spouse’s assets that they are entitled to receive. A ruling by probate court may take into account retirement accounts.

Frequently Asked Questions

Do IRS rules force me to withdraw from my 401k?
According to the Internal Revenue Service, at age 70.5, a required minimum distribution that you withdraw from your account every year per their withdrawal rules. This amount is determined based on life expectancy.

What requirements exist for spouses who are not beneficiaries?
Different rules will apply. By the tenth year, non-spousal designated beneficiaries must withdraw all the proceeds of an inherited IRA.
The following are exceptions:

  1. The beneficiary is chronically ill
  2. The person is, at most, ten years younger than the account holder
  3. The loved one is a minor

A Cary Estate Planning Attorney You Can Trust

There are many moving parts to your retirement plan—deciding how the proceeds will be distributed, keeping track of distribution rules, estimating the taxes due, and keeping track of state law. You don’t have to do it all on your own. Schedule a free consultation with a North Carolina estate planning attorney at Cary Estate Planning. We can remove any confusion regarding a Roth IRA in the context of your estate plan.

Author Bio

Paul Yokabitus

Paul Yokabitus is the CEO and Managing Partner of Cary Estate Planning, a Cary, NC, estate planning law firm. With years of experience in estate and elder law, he has zealously represented clients in various legal matters, including estate planning, guardianship, Medicaid planning, estate administration, and other cases.

Paul received his Juris Doctor from the Campbell University School of Law and is a North Carolina Bar Association member. He has received numerous accolades for his work, including being named among the “Best Attorney in Cary” in 2016 and 2017 by Cary News and Rising Star in 2020-2023 by Super Lawyers.

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