An IRA Inheritance TrustTM is a specific type of trust designed to inherit your IRA when you pass away. This option offers a number of benefits that help you transfer your retirement savings to others while protecting those assets.
An IRA Inheritance TrustTM is not the only way an IRA can be inherited, and it’s always important to consider all of your options. Learning about those options and other ways you can protect your assets now and in the future lets you enjoy peace of mind as you plan for your estate.
Find out more about an IRA Inheritance TrustTM below, and then learn how an estate planning lawyer can help you protect your financial future and better provide for your loved ones, even after you’re gone.
Potential Benefits of an IRA Inheritance TrustTM
When you create an IRA Inheritance TrustTM, you pave the way for your IRA to pass through a very special type of trust when you die. This provides you with a level of control you wouldn’t have if the IRA were inherited directly by a child, relative or other beneficiary. Here are just a few benefits you can gain from an IRA Inheritance TrustTM.
More Control Over Assets
If you want to control how assets are used after you’re gone, trusts are probably the best tool. You can define how beneficiaries of a trust can use assets you leave them, including how much they can withdraw in a given period.
When someone inherits an IRA directly, they can choose to take all of the money out at once. Or, they might simply take more than the required minimum distribution every year, moving through the money faster than you might have liked. When the IRA is inherited by a trust, the rules of the trust—that you define—dictate how much money can be withdrawn. You can use this provision to ensure someone is provided for over the long term or to combat poor spending habits. At the same time, a trust may be designed to be very flexible, allowing a mature beneficiary to control the trust and decide what distributions from the IRA make the most sense.
More Choices in Beneficiaries
If you choose to have an IRA Inheritance TrustTM inherit your IRA, you can ensure those assets are available for people who would not be able to inherit the IRA on their own. For example, it may not be wise to name a minor child or grandchild as an IRA beneficiary (because the minor may not understand how to wisely invest the inherited IRA or they might not use the proceeds for things that you intend – ie. a new car rather than education). They can, however, be the beneficiary of a trust that is named as beneficiary of an IRA. This way a trusted adult may manage the inherited IRA as a Trustee and make distributions consistent with your intent as the original IRA owner.
Another time that it can be beneficial to have the trust inherit an IRA is when you want to leave assets for someone who relies on government benefits. Perhaps it’s an older adult who relies on Medicaid or a dependent who gets SSI benefits. Leaving them an inherited IRA may cause them to lose those benefits. However, when the IRA is inherited by a properly drafted IRA Inheritance TrustTM, this is not the case.
Increased Protection From Creditors
Once ownership of your IRA passes from you to a beneficiary, the beneficiary’s creditors may be able to seize the IRA, often leaving the beneficiary with only a large income tax liability. Leaving an inherited IRA without any protection can put their inheritance at risk. If the IRA is inherited by an IRA Inheritance TrustTM instead, creditors may be denied access to the assets.
Ability to Leave a Legacy for Multiple Generations
If you have enough money in your IRA, you may want to ensure that some of it is left for future generations.
For example, say you have an adult child who is your closest living relative. That child has two children. You could leave your IRA to the adult child, but that doesn’t guarantee your grandchildren ever benefit from it. For example, if your child leaves the inherited IRA to a spouse, and later the spouse remarries, what’s left of your IRA could pass to someone you’ve never met – your in-law’s new spouse, and not to your grandchildren.
The alternative is leaving the IRA to an IRA Inheritance TrustTM and naming your adult child as the beneficiary. You can name your grandchildren as subsequent beneficiaries. This helps protect some of your legacy for the future.
Further Stretching of RMDs
Finally, depending on the type of trust you create, you may be able to stretch out the required minimum distributions for longer. In most cases, when someone inherits an IRA, they have to take all distributions within 10 years. That’s not the case with most trusts, which usually require a 5 year payout. But the IRA Inheritance TrustTM provides the benefit of using the same payout rules as an individual.
Is an IRA Inheritance TrustTM Right for You?
Generally, this type of trust is best for someone who has a significant amount in their IRA. If you have around $100,000 or more in your IRA, it may be worth considering.
What Other Ways Can You Protect Your Financial Legacy?
An estate planning attorney can help you consider all the types of trusts and which might be right for you. They can also help you create a will, ensure you have the right power of attorney forms in place, and offer guidance about topics ranging from long-term care planning to reducing estate tax burdens.
Find out more about the peace of mind an estate planning lawyer can help you cultivate by calling the Law Offices of Boyd & Boyd, P.C. today.