Can you and your family benefit from having an IRA trust as part of your overall plan?
An IRA trust can help you better control distributions after you pass away and restrict access to beneficiaries who might squander the funds of a large IRA. How? Let’s say your IRA is left directly to your beneficiaries outside of a trust. In this situation, your beneficiaries can immediately cash out your IRA and spend the money however they choose. The trouble is, when the IRA is cashed out, not only is the ability to stretch the required minimum distributions (RMDs) over the beneficiary’s lifetime lost, but all of the amount withdrawn will be taxable in the withdrawal year.
Or consider this scenario: If you name a minor grandchild as the direct beneficiary of your IRA, a guardianship or conservatorship will need to be established to manage the IRA until he or she reaches the age of 18. Then, when the grandchild reaches 18, he or she can withdraw all of what remains in the IRA. An IRA trust can put restrictions on how your IRA is spent, as well as when and how much a beneficiary can withdraw. This can provide important tax benefits if, for example, the beneficiary already has a taxable estate, since the IRA trust can be drafted to minimize or even eliminate estate taxes in the beneficiary’s own estate. In addition, the IRA trust has the potential to create an ongoing legacy for your family, because the IRA assets not used during a beneficiary’s lifetime can continue in trust for the benefit of the beneficiary’s descendants.
If you are in a second marriage, an IRA trust can prove particularly valuable. In a typical second marriage situation, you’ll want to leave your spouse the annual IRA income, but after his or her death you may well want to make sure that the IRA goes only to your children, not the children from the spouse’s first marriage. An IRA trust can help you accomplish this. Or what about a situation in which you dislike or do not trust your son or daughter in law? If you leave your IRA outright to your child, his or her spouse may be able to talk them into liquidating it. However, if you name a trust as the IRA beneficiary, your child won’t be able to liquidate the IRA—and suffer the potentially painful financial consequences.
Similarly, if you fear that your son or daughter is not yet mature enough to handle the money in your IRA, but you hope one day they will be, an IRA trust can allow you to name them as beneficiaries but put restrictions on how they can utilize the money.
Finally, even though IRAs are protected from the claims of creditors in many states, when the IRA account owner dies and the assets go to an individual beneficiary, the IRA loses its protected status. By putting these assets into a subtrust created for an individual beneficiary under the terms of an IRA trust, the assets will continue to be protected. The result? The IRA assets can remain intact for the benefit of the beneficiary in the event a lawsuit is filed against the beneficiary, if a married beneficiary later divorces, or if a single beneficiary gets married and later divorces.
To determine whether you and your family would benefit from having an IRA trust as part of your overall plan, please contact us for an initial consultation.