IRA Planning with Trusts
IRA Planning with Trusts
Considerations
IRA Planning with Trusts
Considerations
• For many clients, their IRA is the major asset
next to their residence (!!)
IRA Planning with Trusts
Considerations
• For many clients, their IRA is the major asset
next to their residence (!!)
• Most clients “trust” their children, but also
want to protect their grandchildren
IRA Planning with Trusts
Considerations
• For many clients, their IRA is the major asset
next to their residence (!!)
• Most clients “trust” their children, but also
want to protect their grandchildren
• Tax Deferred growth is better than After-Tax
growth
IRA Planning with Trusts
Basic IRA Rules
IRA Planning with Trusts
Basic IRA Rules
•Assets contributed to an IRA are “pre-tax”.
IRA Planning with Trusts
Basic IRA Rules
•Assets contributed to an IRA are “pre-tax”.
•Assets inside an IRA “compound” income tax
free.
IRA Planning with Trusts
Basic IRA Rules
The IRA is really a “tax deferral” vehicle since
eventually the assets in the IRA are subject to
income tax.
IRA Planning with Trusts
Basic IRA Rules
The IRA is really a “tax deferral” vehicle since
eventually the assets in the IRA are subject to
income tax.
The question is when?
IRA Planning with Trusts
Basic IRA Rules
An IRA owner must begin minimum withdrawals
based on his/her life expectancy no later than
April 1st of the year after he/she attains age 70
½.
IRA Planning with Trusts
Basic IRA Rules
These withdrawals are known as “required
minimum distributions” (“RMD’s”)
IRA Planning with Trusts
Basic IRA Rules
If the owner of an IRA dies before full
distribution, there are different options if a
spouse is the beneficiary of an IRA or if a nonspouse is the beneficiary(ies)
IRA Planning with Trusts
Basic IRA Rules
If the spouse of an IRA owner is the beneficiary
and “inherits” the IRA, he/she has the option to
“roll-over” the original IRA into a new IRA
owned by the spouse. The same RMD rules
would then apply to the new IRA.
IRA Planning with Trusts
Basic IRA Rules
Only a spouse can “roll-over” an IRA.
IRA Planning with Trusts
Basic IRA Rules
Since 2003, the IRS changed its regs and now
allows a non-spouse beneficiary (for example, a
child) to take or "stretch-out" the taxable RMDs
over a much longer period, using the
beneficiary’s life expectancy rather than the
shorter life expectancy of the original IRA owner
(e.g., the parent). This means that money inside
an inherited IRA may now compound much
longer, tax-deferred.
IRA Planning with Trusts
For example, let's take a son age 45 (at the time
of his mother's death) who inherits a $200,000
IRA and withdraws only the RMD’s. If the IRA
grows, from both income and principal
appreciation, at the rate of 6% a year, then 30
years later when the son is age 75, the son will
have taken over $400,000 in RMD’s and still
have almost $300,000 left in the IRA to use over
his later years or pass down to his children (the
original IRA owner's grandchildren).
IRA Planning with Trusts
To sum it up, the original $200,000 inherited IRA
became worth over $700,000 to that family!
(And that doesn't include the future value of the
RMD’s if they were placed into an investment
account). If we assume the IRA will be worth
over $200,000 when the owner passes, or will
earn a higher rate of annual return, or goes to a
younger beneficiary, that $200,000 IRA could
eventually be worth well over $1 Million!
IRA Planning with Trusts
Many IRA owners and their advisors “assume”
that the IRA beneficiaries will make the right
“stretch-out” decisions before they take
withdrawals. Unfortunately, that is not always
the result when the IRA owner dies.
IRA Planning with Trusts
A beneficiary is not prohibited from withdrawing
more than the RMD’s and may instead decide to
cash out the IRA earlier than required.
IRA Planning with Trusts
A beneficiary is not prohibited from withdrawing
more than the RMD’s and may instead decide to
cash out the IRA earlier than required.
This is often referred to as a “blow-out”.
IRA Planning with Trusts
This can happen because the beneficiary is:
• Not aware of the RMD rules and choices.
• The beneficiary sees her name on an account
and immediately transfers it into her own name.
• Wrongly thinks it is a tax-free rollover if put
into her own IRA.
• Just can't wait to get her hands on the IRA
money or is influenced by a spouse or some
other third-party to grab and spend it!
IRA Planning with Trusts
There are also other issues which make naming
an individual (e.g., the child) as the beneficiary
of an IRA unwise.
IRA Planning with Trusts
There are also other issues which make naming
an individual (e.g., the child) as the beneficiary
of an IRA unwise:
•The child is a minor or young adult
IRA Planning with Trusts
There are also other issues which make naming
an individual (e.g., the child) as the beneficiary
of an IRA unwise:
•The child is a minor or young adult
•The child is disabled
IRA Planning with Trusts
There are also other issues which make naming
an individual (e.g., the child) as the beneficiary
of an IRA unwise:
•The child is a minor or young adult
•The child is disabled
•The child has creditor problems or is not “good
with money”
IRA Planning with Trusts
There are also other issues which make naming
an individual (e.g., the child) as the beneficiary
of an IRA unwise:
•The child is a minor or young adult
•The child is disabled
•The child has creditor problems or is not “good
with money”
•The client does not like or trust the “in-law”
IRA Planning with Trusts
Along with the new regs on allowing the
“stretch-out”, a trust can now be the beneficiary
of an IRA.
IRA Planning with Trusts
Along with the new regs on allowing the
“stretch-out”, a trust can now be the beneficiary
of an IRA.
As a result, it is now common to designate the
revocable living trust (“RLT”) as the beneficiary
of an IRA (or as the contingent beneficiary if
the IRA owner is married)
IRA Planning with Trusts
Along with the new regs on allowing the
“stretch-out”, a trust can now be the beneficiary
of an IRA.
However, to avoid having the RMD calculated
based on the oldest age of all “potential
beneficiaries” of the trust, the trust must be a
“conduit trust”.
IRA Planning with Trusts
A “conduit trust” is a trust with specific language
requiring the RMD’s to be paid out by the
trustee to the beneficiary on an annual basis
regardless of any other provisions of the trust
permitting accumulation of income and/or
principal.
IRA Planning with Trusts
A “conduit trust” must use the oldest age of the
current beneficiaries for the calculation of the
RMD’s for all of the beneficiaries.
IRA Planning with Trusts
A “conduit trust” must use the oldest age of the
current beneficiaries for the calculation of the
RMD’s for all of the beneficiaries.
This may not be a huge issue for a client with
two children only 2-3 years apart in age;
however, it can be a substantial issue for
families with a number of children of disparate
ages or if a grandchild may be a beneficiary.
IRA Planning with Trusts
As mentioned, a “conduit trust” must distribute
the RMD’s to each beneficiary regardless of
other circumstances existing at the time of
death (e.g., disability, creditor issues, divorce,
etc.)
IRA Planning with Trusts
To provide maximum benefits and flexibility,
there is now a new type of trust.
IRA Planning with Trusts
To provide maximum benefits and flexibility,
there is now a new type of trust:
The IRA Beneficiary Trust
IRA Planning with Trusts
To provide maximum benefits and flexibility,
there is now a new type of trust:
The IRA Beneficiary Trust
Sometimes referred to as an “IRA Inheritor’s
Trust” or an “IRA Inheritance Trust”
IRA Planning with Trusts
To provide maximum benefits and flexibility,
there is now a new type of trust:
The IRA Beneficiary Trust
In 2005, the IRS issued a private letter ruling
200537044 (the "PLR") that approved this new
type of revocable trust created solely to be the
beneficiary of an IRA account.
IRA Planning with Trusts
The IRA Beneficiary Trust
Features
IRA Planning with Trusts
The IRA Beneficiary Trust
Features:
•The RMD’s for each beneficiary is calculated
on the age of each beneficiary
IRA Planning with Trusts
The IRA Beneficiary Trust
Features:
•Up to September 30th of the year following the
IRA owner’s death, an election can be made to
convert a beneficiary’s trust from a “conduit
trust” to a discretionary “accumulation trust”
IRA Planning with Trusts
The IRA Beneficiary Trust
Features:
•If a beneficiary’s trust is converted, the
“potential beneficiaries” of that trust can be
limited to a designated class.
IRA Planning with Trusts
The IRA Beneficiary Trust
Features:
•If the IRA owner is married and does not want
the spouse to be able “roll-over” the IRA (i.e.,
name new beneficiaries), the Trust can also be
configured to hold the IRA for the benefit of
the spouse.
IRA Planning with Trusts
The IRA Beneficiary Trust
•This is an extremely valuable estate planning
tool for any client with IRA assets over
$150,000!