These days, it's become more important than ever to make the right plans for your IRAs and to have them integrated into your estate planning. With the right planning, you can maximize the benefit to your beneficiaries, while also providing significant protection from creditors, bankruptcy, or divorce.
Getting the “Stretch-out”
Under IRS rules, when a beneficiary inherits an IRA, they are allowed to take Required Minimum Distributions (RMDs) over their own life expectancy, instead of the original owner's. Take a look at this example:
Child, age 45 at the time of parent's passing, inherits a $200,000 IRA and withdraws only the RMDs (at Child's withdrawal rate instead of at parent's withdrawal rate). If the IRA grows at 6% per year, then when Child is 75, she will have taken over $400,000 in RMDs from the IRA, and the IRA will still have a value of over $300,000.
Unfortunately, the stretch-out is not automatic, and beneficiaries might instead decide to cash out the entire IRA (or it can happen by the beneficiary making the wrong initial decision). Pulling money out of the IRA too quickly can force the beneficiary to pay income taxes on the entire IRA all at once, resulting in a tremendous loss in the overall value of the IRA.
The Need for Protection
Even if your beneficiaries are aware of the ability to take advantage of the stretchout and make all the right decisions, the IRA can still be at risk. When a beneficiary receives the IRA directly and puts it into an Inherited IRA, that Inherited IRA can be exposed to the following types of problems:
The wrong people may later inherit the IRA. For example, your child would likely name their own spouse as their beneficiary, passing your IRA to their spouse instead of your grandchildren. If the spouse later remarries, then your IRA could go to that new spouse or their kids, leaving your family out entirely;
The beneficiary may have creditor issues, and the IRA could be subject to the claims of those creditors. The US Supreme Court ruled just last summer that Inherited IRAs are not protected in a bankruptcy; or
Your child's spouse could take some or all of the Inherited IRA in a divorce.
A Standalone Retirement Trust is a trust created to receive an IRA at the death of the IRA owner. It provides maximum income tax deferral and wealth accumulation for your IRAs, eventual distribution to your desired beneficiaries through several generations, and spendthrift, divorce and creditor protection for your beneficiaries. Even if you already have a Living Trust, the Standalone Retirement Trust provides additional valuable benefits and protections specifically for your retirement assets. You can add a Standalone Retirement Trust to your already existing planning, or you can design your Standalone Retirement Trust when you do your initial planning with us.
Who Should Consider a Standalone Retirement Trust?
While this is not an exhaustive list, you should consider a Standalone Retirement Trust if you fall into any one of these categories:
• If you have at least $200,000 in your retirement accounts (either you alone, or if you're married, you and your spouse combined);
• If you have any concern that your beneficiaries might not make good decisions regarding withdrawal of the funds out of the inherited IRA;
• If you're concerned that a beneficiary could lose all or part of the inherited IRA in a divorce, bankruptcy, or lawsuit;
• If you are married and want to make sure that your surviving spouse doesn't leave your IRA to a new spouse after you pass away (and instead you want to make sure that your IRA gets to your children after your spouse passes away); or
• You want to make sure that your IRA stays within your family (and doesn't pass to your child's spouse after your child passes, for example).
If you would like to speak with us about using a Standalone Retirement Trust to maximize the legacy from your retirement accounts and protecting them for your beneficiaries, you can call to schedule a consultation with one of our attorneys. Just call our office at 419-872-7670 and we'll schedule your no cost, no obligation appointment.