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The Law Offices Of Kyle Robbins, PLLC

How Your Pension Fits Into Your Estate Planning

  • Published: April 10, 2018
How Your Pension Fits into Your Estate Planning

Pensions, unlike property, can be inherited tax-free. That means savers are increasingly looking to pass on their policies, according to Morningstar’s recent article, “Why Pensions are Vital to Estate Planning.”

Company pensions—whether defined benefit or defined contribution—have different rules as to who can inherit in the event of a member’s death, as well as how much can be passed on to the next generation. A common misconception is that all inherited pensions, whether cash that’s been drawn down, an unused sum, or an annuity, are all tax free.

If a pension owner dies before they reach 75, this is generally the case. However, if you have questions about pensions and estate planning, talk to an experienced estate planning attorney.

It’s a common misconception that a spouse is the only person who can inherit their partner’s pension. Children can also be named as beneficiaries for pensions. This is frequently used as part of estate planning.

Make sure that your beneficiary form is up-to-date. This is because pension trustees without a beneficiary form or up-to-date information, often use wills to guide them when a member dies. That’s why it’s critical to update your will, when you experience a life-changing event, like divorce, bereavement, or the birth of a child.

Without a completed beneficiary form or a surviving spouse, trustees will use their discretion when determining whether to pay out to children. They often look for “financial dependency”, like a joint bank account.

Many folks have now opted to take a 25% lump sum from their pot. However, experts caution that if any of this withdrawn money is left over when you die, it may be taxed.

Money left within the pension isn’t subject to tax, if you die before 75. If you die when older than 75, the person who inherits it must pay tax at their rate.

ReferenceMorningstar (March 9, 2018) “Why Pensions are Vital to Estate Planning”

Kyle Robbins

About the Author Kyle Robbins is the founder and sole owner of The Law
Offices of Kyle Robbins. He received his J.D. with honors from
the University of Texas School of Law and his B.S. in Food
Chemistry and Microbiology from Oklahoma State University.