One of the most common questions that we get regarding attorney fee deferred compensation plans is: “What happens to my plan once I pass away?” This article discusses some of the options available in the event that you pass away while funds are still in your deferred compensation plan.
One of the options available to you when you set up your deferred compensation plan is to name beneficiaries. Naming beneficiaries on your plan is essentially the same process as naming beneficiaries in a 401(k) plan or other retirement plan.
For deferred compensation plan, in the event that you pass away, your beneficiaries essentially step into your shoes and have all the same rights that you did in the plan, including the right to start receiving payments or continue to defer them just like you had the right to do.
If you want to transfer wealth to your spouse or to your heirs after you pass away, this is a great planning strategy that you could look into.
Discount on Total Estate Tax Liability
The other benefit that you get out of a deferred compensation plan — where the funds are not immediately accessible and the distribution schedule outlined in the plan must be followed — is a discount for valuation purposes on your total estate tax liability. So, if you are in a situation where you may need to pay estate taxes, a discount is typically applied to the value in the deferred compensation plan. This results in lower estate taxes due to the present value calculation used to determine the value of your future payment streams.
In addition to the benefits that deferred compensation plans offer in terms of wealth transfer planning purposes, there are some liquidity benefits available as well. For example, if your estate needs liquidity after you pass away, the deferred compensation plan administrator can offer a loan to the estate representative or to the trustee of your estate so they can pay for those types of expenses.
While we often focus on the immediate tax benefits of using a deferred compensation plan, the wealth transfer planning benefits are yet another reason to consider setting up your own deferred compensation plan.
In addition to the ability to transfer significant wealth to your heirs, deferred compensation plans also give your beneficiaries significant flexibility and freedom in how they use those payments after you have passed away.
If you have any questions about deferred compensation plans and how you can use it as an effective wealth transfer tool, give us a call. We have helped attorneys nationwide develop a strategy to maximize the value of deferred compensation plans.