Monday, February 07, 2011

IRA Inheritance Trusts

The most substantial asset in someone’s portfolio is often their IRA. An IRA (Individual Retirement Account) is a tax-deferment or savings device. Whatever is left over is then passed on to the beneficiaries you designated on a form attached to the IRA.

Here’s a typical scenario… Mom wants to leave her $300,000 IRA to her child, who is 25 years old. Mom dies and child receives the IRA, since the child is the designated beneficiary. In this scenario, the child now has the option to let the IRA continue to grow tax-deferred (or tax-free if it’s a Roth IRA). By doing this, the child allows the account to grow substantially, because the younger you are, the smaller the required distributions. However, the child could cash the IRA out at this point, and spend all of the funds on foolish things.

Establishing an IRA trust is the best way to allow the IRA investments to grow substantially, control the distribution of your beneficiary so he or she can’t withdraw all of it at once, and also protect the asset from the beneficiary’s creditors, predators, divorcing spouses, etc. Also, if two or more beneficiaries are dividing the one IRA, an IRA trust can be set up so that each beneficiary uses his or her own life expectancy. A 3 year old grand-child will have to withdraw a lot less on an annual basis than a 25 year old child.

A will or even a standard living trust does not protect one’s IRA from any of the above. A stand-alone retirement trust, or IRA Inheritance Trust, is necessary. It must be designed carefully to comply with the IRS rules.

If you are interested in learning more about the IRA Inheritance Trust, please contact my office today at (215) 706-0200.