The biggest retirement asset for most people other than their primary residence is their retirement plans. One way to ensure that your children do not mishandle your retirement funds after you and your spouse pass away is to set up an IRA trust as your Plan’s contingent beneficiary. This ensures an orderly transfer of wealth from one generation to the next.
The advantages of an IRA trust are as follows:
1. It allows you to control when distributions are made and the circumstances when they should be made. This also allows the beneficiary to stretch out the payments and pay the least amount of income tax over his or her lifetime. This also allows the IRA Assets to continue growing tax free inside the trust over the beneficiary’s lifetime.
2. The IRA trust assets would be protected from creditors so if your beneficiary is sued the assets in the IRA trust would not be subject to any creditor claims. In addition if your beneficiary gets divorced the IRA trust assets would not be part of the marital estate and not subject to claims by the ex-spouse.
3. You can select an investment advisor to ensure the IRA portfolio remains diversified to maximize the investment returns over your beneficiary’s lifetime.
4. If your beneficiary is disabled and receiving government medical benefits the IRA Trust would not disqualify him or her from continuing to receive benefits.
From a procedural perspective you would name the IRA Trust as a beneficiary of your IRA, and upon your passing the IRA trust would distribute the proceeds of your IRA to your beneficiaries over their lifetimes based on the IRS tables for required minimum distributions. If you were married, you may want to have your spouse be the primary beneficiary of your IRA and the IRA trust could be a contingent beneficiary of your IRA.
The reason this is so important is because a nonspouse beneficiary may not receive funds directly from an inherited IRA and roll them over tax free to another inherited IRA within 60 days, as a surviving beneficiary can. Therefore they must use a direct trustee to trustee transfer to avoid income tax on the distribution. Many beneficiaries do not realize once they take the distribution they will be taxed on the entire amount in the year they receive it. This would be disastrous from an income tax perspective because they will lose the power of tax deferred compounding over their lifetime. Therefore setting up the IRA trust as the Beneficiary avoids this problem.
If your IRA assets exceed $250,000 you should consider setting up an IRA trust to ensure your legacy is are protected and your beneficiaries are taken care of after your gone. Contact Gregory J. Spadea at 610-521-0604 if you would like more information.