Powerful Opportunities to Plan with IRAs and other Retirement Assets

The primary benefit of an IRA is its internal tax-deferred growth. The longer the taxpayer is able to stretchout this tax-free growth, the greater the benefit. Required minimum distributions (RMDs) from IRAs start the year after the taxpayer attains age 70½ and are based on the taxpayer’s life expectancy.

After the taxpayer’s death, with careful planning, IRAs, then known asinherited IRAs, can then be distributed based upon the life expectancy of the beneficiary. We call this IRA Stretchout. Note, the IRS reports that on average an IRA is withdrawn within six months of its being inherited – so much for tax-deferred growth. The quicker the Inherited IRA is liquidated, the less economic benefit is passed to the beneficiary. he difference can be millions of dollars of increased benefits!

The ability to compound IRAs, and now other qualified plans, income tax free, over a much longer period in time make these assets very valuable when passing wealth down from generation to generation. For example, a $200,000 IRA, inherited by a 50 year old, could be worth $1.5 million or more over his and his children’s lifetimes!
Until recently, the desire to stretch IRA payments created issues and conflicts with other client planning objectives since clients were unable to control the beneficiary’s rights to take distributions from the inherited IRA.

How many beneficiaries will limit themselves to their RMDs over their lifetimes? The individual beneficiary may at any time decide to take out more than the tax laws require because the beneficiary is not aware of the tax rules and choices he has, or the beneficiary gets bad advice, or the beneficiary simply wants to spend money (or the spouse or another party influences the beneficiary to spend it), and thereby causes taxation to occur much earlier, loses years of tax free compounding, and essentially blows the stretchout. The beneficiary may also be too young or disabled to manage money, and a beneficiary receiving government benefits could lose them. Many clients are concerned about Divorce Protection, Creditor Protection, and Bankruptcy Protection for their loved ones.

Federal Law provides protection for most qualified plans. Protections for IRAs are a matter of state law. Most, if not all, states, provided that IRAs are exempt. However, there is a growing body of law questioning the exemption of inherited IRAs.

Recent IRS regulations, recent IRS rulings, and the Pension Protection Act of 2006 mean that for the first time you can create a Trust and name it the beneficiary of an IRA!

IRA Trusts, also known as Retirement Plan Trust, allow clients to combine IRA Stretchouts with the many benefits and protections of trusts! The Retirement Plan Trust is superior to just putting the IRA into a revocable living trust (RLT) with beneficiary designation language since it is harder to violate the tax-free growth status of the IRA, which can happen in an RLT if, a non-individual beneficiary (e.g. a charity) is named, if certain formula language is built into the trust, if powers of appointment are built into the trust, or if certain language regarding the payment of debts, expenses, and taxes of the estate is built into the RLT.

Properly designed Retirement Plan Trusts can be split into subtrusts for separate beneficiaries, such as for several children or grandchildren, and they can each maximize their own stretchout based on their individual life expectancies. These Retirement Plan Trusts can provide very powerful stretchouts.

The Retirement Plan Trusts can also provide a number of powerful estate tax planning opportunities.

Finally, creditors, predators, and former spouses of your children and grandchildren will find it more difficult to penetrate the Retirement Plan Trust than the typical IRA and its beneficiary designation.

Important Note: Whether you designate individuals or designate a Retirement Plan Trust as the beneficiary of your retirement assets, properly drafted beneficiary designations are crucial to ensure that your retirement assets are distributed in ways that are consistent with your estate plan.

This information was prepared by Lena Barnett & Associates, LLC and is intended only to provide general information.
It is neither offered nor intended for use as legal advice, nor is it a substitute for a consultation with an attorney.

© 2008 Lena Barnett & Associates, L.L.C. All Rights Reserved


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