Posted On: June 3rd 2014
Although flexibility is important in estate planning, some areas have little flexibility, including IRAs. Our estate planning lawyers are available to discuss with you the many options when considering an IRA Trust. Here is some general information we would like to provide about why you may need an IRA trust.
Income tax deferral is a heavily favored option selected in estate planning. The theory is it is better to grow assets while not being taxed rather than have assets reduced by tax each year. This deferral of income tax is exemplified in traditional IRAs. Payments made over as long as possible time period, are commonly referred to as the stretch. Rules about stretching IRA are very strict.
By keeping your IRA separate in its own trust helps to be quite clear and certain who your designated beneficiaries are, as opposed to having a sub-trust under a one master Living Revocable Trust or under a Will. Uncertainty as to a designated beneficiary, could cause problems for the stretch IRA payments.
An IRA Trust can have its own ID number and tax schedule. An IRA Trust helps separate IRA assets from other assets in estate disputes. It lessens the likelihood that debts and taxes would be paid from the retirement plan sub trust.
While IRA Trusts can be complex, if you want to name younger beneficiaries, such as children or grandchildren, and have beneficiaries stretch the payments in separate accounts or sub-trusts, an IRA Trust offers the ability to do so. Separate IRA Trust can simplify income tax planning for the trust and beneficiaries because planning becomes easier to plan how much IRD is left and where the code 691© deduction will be used. Also a separate IRA Trust may make more efficient use of the GST exclusion as a GST allocation is less valuable to retirement asset trust due to heavier taxation as RMD increases.
Further, in New York, IRA Trusts also offer creditor and divorce claim protection. When an IRA is named for beneficiaries “per stirpes”, the direction of the assets can change once in the hands of the beneficiaries. However, in trust, the IRA stays in the bloodline. Often people may not want a 50% chance of a 50% loss (in divorce) where half or part of an individual’s IRA, go to an ex-in-law of your IRA beneficiary.
Finally, the IRA Trust is managed by a fiduciary, who is often a professional money manager. The overall performance helps the trust grow and stay in compliance with the many legal requirements. Further, a trust protector allows a family to control over the fiduciary, without the duties and responsibilities of a trustee.
Each person is different should have tailored estate plans. There are a number of reasons to consider using an IRA Trust. The estate planning attorneys from Inherit Lawyers can help you with a custom designed estate plan.
When building an estate plan with traditional IRA assets, there are a number of mistakes commonly made. Some mistakes are not correctible. Therefore, it may be advantageous to have an IRA Trust and work with an experienced Trustee, who can guide through the complex process.
1. Not titling the asset properly – the account should be “Julie Doe IRA (deceased 2013) FBO John Beta”, and NOT “John Beta”. There is no correction mechanism for this mistake.
2. A rollover – there is a significant difference between a trustee to trustee transfer of an IRA to an Inherited IRA and a rollover (where the beneficiary takes a distribution and then puts it back to the IRA), which destroys the stretch. This mistake cannot be corrected.
3. Timely transfer – accounts should be titled by end of year of death, but IRS permits retitling by September 1 of the year following death of decedent.
4. Failure to take a required minimum distribution (RMD) in year of death of decedent is 50% of RMD that should have been taken.
5. Failure to take a required minimum distribution (RMD) at all => 50% penalty for each RMD not taken.
6. Not properly identifying / designating beneficiaries – should specifically name on the account or in an IRA Trust, otherwise there are issues with the stretch payout.
7. Transferring the balance to a Trust – instead transfer the IRA directly to a “properly titled inherited IRA” and RMDs are taken from the IRA and paid to the trust.
An experienced trustee of an IRA Trust will help IRA owners avoid these mistakes.