Retirement Plan Proceeds

May 1, 1997
What becomes of my retirement plan if both my wife and I die at the same time? Also, when would I need a marital deduction trust?

Charles Blair, DDS and

John McGill, MBA, CPA, JD


What becomes of my retirement plan if both my wife and I die at the same time? Also, when would I need a marital deduction trust?


Benefits under an individual retirement account (IRA), Keogh retirement plan, and corporate retirement plans generally are not governed by a doctor`s will, but are paid out in accordance with the beneficiary designation form executed by the doctor or other plan participant.

As a general rule, most doctors name their spouse as primary beneficiary under their IRA and retirement-plan accounts to provide the maximum flexibility for income and death-tax planning purposes. Most doctors would name their children as contingent beneficiaries, and they would take the proceeds in the event of a simultaneous death.

We generally advise against naming your estate, or a revocable trust, as beneficiary under retirement-plan and IRA accounts. Doing so forces the plan benefits to be distributed over a five-year period, bunching the income into higher tax brackets and possibly resulting in the application of the 15-percent excise tax on excess distributions.

Doctors, who are not comfortable in leaving their retirement-plan proceeds directly to their children, can establish an irrevocable trust for their benefit, which will allow the trustee to maintain control over the funds and pay them out over a reasonable period. This avoids the stringent five-year payout limitation otherwise imposed.

If the doctor has no children or does not wish to leave the proceeds to them as contingent beneficiaries, he may name any other person or a charitable organization as contingent beneficiary.

Under the typical estate plan, the $600,000 in a doctor`s estate is left in a family credit shelter trust (otherwise known as a by-pass trust) in order to avoid federal death taxes. The balance of the doctor`s estate typically is left to the surviving spouse, either outright, or in a trust which qualifies for the marital deduction. Using a marital deduction trust allows the doctor to maintain control over the proceeds, following his or her death.

This technique is particularly important in second marriages to assure that, upon the death of the surviving second wife or husband, the proceeds are available for the benefit of the doctor`s children.


I have asked my accountant and two different attorneys about incorporation and how it will affect my existing retirement plans. I have gotten different answers. Perhaps you can help.

I am a 36-year-old general practitioner, who has been practicing for 10 years in solo practice. Currently, I have a Keogh money-purchase pension plan, to which I contribute 10 percent of pay, and a separate Keogh profit-sharing plan, into which I can contribute up to 15 percent of pay annually.

I have contributed the maximum 25 percent of pay every year and have the goal of retiring, or at least slowing down, in 15 years.

In your November 1996 issue of The Blair/McGill Advisory, you outlined the benefits of Subchapter S corporations. If I incorporate my practice and make a Subchapter S election, will I still be able to contribute as generously to my retirement plans as I have in my unincorporated practice?

Although other tax savings are important, I want to make sure that I can continue to maximize my retirement-plan contributions. Would I be able to continue my existing Keogh plans, or will that change once I am incorporated?

In addition, one attorney suggested a limited liability company instead of a Sub-chapter S corporation. What do you think of that? From all that I have read, an S corporation seems to be most preferable.

Please note that, from a liability standpoint, I do not have an associate or partner at this point, which I need to take into consideration.


Incorporation of your professional practice, followed by making a Subchapter S election, will in no way adversely affect your ability to continue to fund retirement plans. You can continue to fund the plans at the maximum level of 25 percent of compensation, in order to achieve the maximum annual contribution of $30,000.

Once incorporated, your new professional corporation can simply adopt your existing Keogh plans. So, it is not necessary to terminate those plans and set up new ones.

In most states, a limited liability company would not be an option for you, since it requires at least two owners. Since a limited liability company would provide no additional liability protection or tax benefits not otherwise found with an S corporation, we would not favor that approach.

Rather, the decision regarding whether to incorporate or not - and what type of corporation will prove most beneficial for you - must be based upon a review of all of your facts and circumstances. If the payroll and income-tax savings achieved exceed the additional costs involved, incorporation would prove beneficial to you.


Some time ago, I set up a domestic grantor trust to hold both my term and whole life insurance policies as part of my estate-planning strategy. Obviously, only my whole-life insurance policy earns any tax-deferred interest on the accumulation with the policy.

As a result of these tax-deferred earnings, must I file Form 1041 (which is required by the IRS in the event that the trust has income of $600 or more annually)? Does the tax-deferred earnings on the life insurance policy count as income for purposes of the filing requirement?


No. As you have correctly pointed out, the earnings on cash values accumulated within a whole life policy grow tax-deferred within the policy. Accordingly, if the only assets in the trust are these policies, there would be no annual income in the trust requiring the filing of Form 1041.

You should keep several other points in mind to make sure that your estate-planning strategy is optimized. First, the type of trust that holds these policies is critical. If the trust is simply a revocable grantor trust, the life insurance proceeds will be subject to federal and state death taxes at your death. However, if you have established an irrevocable grantor trust, as we recommend, the life insurance proceeds would avoid the federal and state death taxes (as well as probate fees and expenses, maintain privacy, and avoid the claims of creditors).

If the irrevocable grantor life insurance trust takes out new policies on you, the death taxes are avoided immediately. If, however, existing policies are transferred into the life insurance trust, you must survive at least three years following the date of transfer to avoid death taxes on the life insurance proceeds.

Is there a certain point when I would be losing value from my a practice sale if I reduce my work schedule too much? About five years ago, I was told that 21U2 days a week should be the minimum time spent in the office prior to an outright sale. Have business conditions changed to affect that formula.

We posed your question to transitions expert Roger K. Hill, president of Business and Professional Associates, Inc., (704) 523-7815. Because of many buy-sell agreements, Hill recommends that doctors avoid the trap many fall into by reducing their practice production and level of income in the years preceding the sale, since this adversely affects the practice value that the doctor will receive.

Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($130 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217; or call (704) 523-5882.

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