There are multiple approaches that you can take when it comes to managing money. Some Americans are simply looking for ways to organize their assets so as not to confuse their heirs. Others wish to help their heirs avoid conflict, and others are seeking to devise clever tax-avoidance strategies.
In addition to these, there is also a very substantial population of Americans who are looking to manage their money over the long run. This group wishes for their assets to become nest eggs for their progeny: grandchildren or even great-grandchildren. If you are looking to do this, you have a lot of careful planning to do, particularly if you happen to have a sizable IRA as part of your estate.
Choosing the right beneficiaries is vital to this process; however, you cannot necessarily count on your beneficiaries waiting years or potentially decades for your IRA's interest to compound. Some of your beneficiaries may wish to access the IRA right away, which can be to their severe detriment: many people are not aware that money taken from traditional IRAs is taxed the same way that ordinary income is (and so is income from Roth IRAs if the withdrawer isn't over 59.5 years old). Beneficiaries often lose hundreds of thousands of dollars to the IRS this way.
How can I protect my beneficiaries and my assets?
In response to this, many Americans decide to set up an IRA trust, which then operates as a beneficiary of the IRA. In this way, the distributions for the IRA go directly into this trust, rather than to the beneficiaries. In this situation, it is the trustee that controls the distributions, rather than the beneficiary. In turn, the trustee is then constrained by the rules of the trust, which directs how much the trustee can give to the beneficiary.
In most situations with an IRA trust, the trustee will pay out the minimum distributions until the beneficiary reaches a particular age or hits a particular milestone (usually the age of majority, but in some instances the age may be higher or there may be a benchmark life requirement, like marriage). At this point, the beneficiary takes control of the distributions.
Keep in mind that during this process the trustee must distribute the minimum required amount to the beneficiary, not keep it in the trust. If the trustee does not distribute the minimum required amount, the government will tart taxing the trust on the non-distributed monies. This can deplete the trust's income quickly.
What other possible advantages are there to an IRA trust?
One of the primary (and most common) reasons you may choose to do this is to prevent the beneficiary from wasting assets. However, a trust does do more than just this. Having the IRA trust could also protect the IRA from divorce, bankruptcy and creditors. However, it is important to work with professionals to keep abreast of changes to tax law. In 2020, the passage of The Secure Act ended up changing the rules that govern the “stretch IRA.” This meant that tax strategies had to evolve to address this, as well.
At AmeriEstate we educate our clients about new estate plan strategies and provided them with the most up-to-date estate planning information. Contact us to learn more about our strategies.