The IRA Inheritor's Trust
There is an estimated $13 trillion held in Individual Retirement Accounts and other qualified retirement plans in the United States. The owners of these plans are faced with a great challenge: How to best “stretch out” the distributions from these plans in order to minimize income taxation and also how to provide asset protection for their loved ones.
Proper planning can provide staggering results. A large fortune can be amassed by allowing the assets in the plan to grow tax free over the life expectancy of your beneficiaries.
Take the following example: Grandfather dies at age 80 with a $100,000 IRA. Grandfather names his grandson, Charlie (age 5), as the designated beneficiary. If Charlie takes only the required minimum distributions over his lifetime (a “stretch out”), and we assume an 8% rate of return on the IRA, Charlie can expect to receive a total of $7.3 million in annual distributions over his 76 year life expectancy (as taken from the IRS life expectancy tables).
Many parents and their advisors mistakenly believe that such a “stretch out” will occur automatically. They assume that their children will take only the required minimum distributions and will seek professional advice to make the stretch out happen.
Unfortunately, this is not always the case. Often, beneficiaries mistakenly cash out the plan earlier than required. This can happen for two reasons: Lack of financial discipline or simply not understanding the benefits of deferring withdrawals. When an IRA is cashed out too early, a “blow out” occurs (rather than a stretch out) and this can be a huge family disaster.
A better alternative is the IRA Inheritor’s Trust. Instead of your IRA being paid directly to your children, the IRA Inheritor’s Trust is named as the beneficiary. The trustee of the trust can then ensure a proper stretch out by taking only the required minimum distributions.
The IRA Inheritor’s Trust can also provide your children with protection from the loss of the IRA to a spouse in divorce, or to lawsuits and creditors, or even the beneficiary’s poor spending habits.
Until recently, it was not clear that the IRS would allow the use of such a trust as a beneficiary of an IRA. Fortunately, the IRS recently issued a ruling (called PLR 200537044) that approved of the use of a trust as the beneficiary of an IRA. This ruling provides a roadmap that tax professionals can follow in drafting trusts as the beneficiary of an IRA.
In summary, the benefits of the IRA Inheritor’s Trust are two fold: First, the trust allows for the “stretch out” of your IRA distributions, and second, it allows you to provide your loved ones with protection from creditors, divorce or improvidence.
About the Author : Steven M. Ratner is an attorney who practices law with offices in San Diego. Mr. Ratner can be contacted at (800) 836-1124 or by email.
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