IRA Trusts
We are experienced in preparing IRA Trusts. Here's why you should
consider one if your IRA or other retirement plan exceeds $200,000:
Individual Retirement Accounts (“IRAs”) were not originally designed
to be wealth transfer vehicles. But effective January 1, 2003, the
IRS issued final Regulations with respect to Internal Revenue Code
401(a)(9), the code section which creates IRAs. These Regulations
govern the calculation of required minimum distributions (“RMD”)
from IRAs.
These Regulations dramatically change the way that we now plan IRA
beneficiaries from tax, financial and estate planning viewpoints.
The key aspect of these Regulations is that they now permit a
non-spouse beneficiary to “stretch” the taxable RMDs over his or her
actuarial lifetime. The ability to compound the IRA investments, tax
free, over a much longer period of time makes IRAs now one of the
most valuable assets when passing wealth down from generation to
generation. A $200,000 IRA, inherited by a 50-year-old, could be
worth $1.5 million or more over his and his children’s lifetimes! In
other words, obtaining maximum income tax stretch is now a prime
planning objective.
This income tax stretch can be obtained either by naming individuals
as beneficiaries or by naming a trust as a beneficiary. However,
naming individuals as beneficiaries may create a host of other problems:
- The individual beneficiary may at any time decide to take out more
than the RMDs because he is not aware of the tax rules and the
choices he has, or he gets bad advice, or he simply wants to spend
the money (or his spouse or another party influences him to spend
it), and thereby cause the taxation to occur much earlier, lose
years of tax-free compounding, and essentially blow the stretch;
- The original account owner does not control who will eventually
inherit the IRA assets
after the primary beneficiary;
- The beneficiary may have poor money management skills, be a
spendthrift or too young or disabled to manage money;
- The IRA is exposed to the beneficiary’s spouse in a divorce;
- A beneficiary receiving government benefits could lose them;
- Lawsuits against the beneficiary and his creditors could grab the
IRA; and
- Even if none of the above occurs, what could represent a
substantial sum when the beneficiary dies may then be subject to
estate taxes when it passes to the next generation.
All of these problems may be dealt with naming, instead, a trust as
a beneficiary.
Unfortunately, under the IRS Regulations, a trust named as a
beneficiary must meet a number of requirements in order for the RMDs
to obtain maximum stretchout over the lifetime of the beneficiaries
of the trust. A Living Trust typically cannot meet all of these
requirements and, therefore, a separate trust, we call the IRA
Trust, is instead established as the IRA beneficiary. Our IRA Trust
is specially designed to not only meet the IRS requirements for a
“Designated Beneficiary Trust,” in order to obtain maximum income
tax stretchout, but it also provides protection against all of the
seven problems recited above that may occur when an individual is
named beneficiary.
What Sets Our IRA Trust Apart From Other Designated Beneficiary
Trusts?
Our trust offers some unique post-mortem flexibility, which permits
the trust to adapt to the conditions existing at the time of the IRA
owner’s/grantor’s death. If the beneficiary’s share of the IRA Trust
is a “Conduit,” trust, meaning that all of the IRA distributions
flow over into the trust and then are immediately distributed out to
the beneficiary, the beneficiary’s life expectancy can be used for
stretch purposes. On the other hand, there are a number of estate
planning reasons why we would prefer an “Accumulation” trust
instead, where the IRA distributions that flow into the trust are
distributed to the beneficiary only in the discretion of the
trustee. Unfortunately, an Accumulation trust may cause the maximum
stretch to be lost unless a whole number of requirements are met; if
any monies accumulated in that trust could ever, at any time in the
future, pass to someone older than the primary beneficiary, that
older person’s shorter life expectancy must be used and there are
even situations where no life expectancy can be used and the IRA
will have to be distributed for and all the tax paid in five years.
Since a discretionary trust is often designed for estate planning
purposes to benefit individuals other than just the primary
beneficiary, such as that beneficiary’s issues or others subject to
the beneficiary’s power of appointment, and we want to take
advantage of generation skipping for estate tax purposes, it may be
very difficult for the estate planner, at the time of drafting the
trust, to determine where to cut off future beneficiaries in order
to balance the desire for stretch with the desire to fulfill the
grantor’s dispositive intent. Also, it is difficult to determine at
the outset whether or not a beneficiary’s trust would best be a
Conduit or Accumulation trust, not knowing the circumstances of the
beneficiary that will exist at the time of death, and the amount of
protective features that will be appropriate for that beneficiary.
One of the unique features of our trust is what we call a “toggle
switch” which the Trust Protector can use, following the grantor’s
death, to convert between a Conduit and Accumulation Trust, as is appropriate given the circumstances of the beneficiary
and their need for protection.
The Trust Protector, armed with this toggle switch, can also
determine, for any beneficiary who will have an Accumulation trust,
which secondary or contingent beneficiaries should be kept in or
removed in a way that best balances the primary beneficiary’s desire
for stretch and fulfills the grantor’s dispositive intent when that
primary beneficiary passes away.
All of the features we have described have already been approved in
a Private Letter Ruling by the IRS. The IRA Trust can also be used
for employer provided retirement plans, such as 401(k)s, 403(b)s,
457 Plans, etc.
Please contact us today or call us at
800-201-0413
Email:
info@trustcounselpa.com
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