What is the right way to leave your individual retirement account (IRA), 401(k), 403(b) or other qualified plan? Many people choose the wrong way. Do not be one of them. Instead, with help from a Cape Cod estate planning attorney, name an IRA Inheritance Trust™ as your IRA’s beneficiary.
If you’ll keep reading, you will learn about the advantages that an IRA Inheritance Trust™ provides.
Neglecting to name the right beneficiary for your individual retirement account can be a quite costly mistake. When you don’t designate a beneficiary, your retirement plan goes directly to your personal (probate) estate at the time of your death, and this can create a sizable tax burden.
You shouldn’t transfer your individual retirement account into a trust while you are still alive, but you can designate an IRA Inheritance Trust™ as the beneficiary of your IRA to provide asset protection for the retirement plan and allow for the longest stretch-out allowed by law.
How Does an IRA Inheritance Trust™ Work?
Trusts are excellent estate planning tools for protecting and preserving personal wealth and passing that wealth to the next generation. Qualified retirement accounts (IRAs, 401(k)s, 403(b), and Roth IRAs) allow you to save for retirement while allowing your savings to grow income tax deferred (or income tax free in a Roth). If you don’t use all of the savings in your qualified retirement plan you may eventually transfer those assets to heirs as beneficiaries.
When you designate a trust as the beneficiary of a qualified retirement account, like an individual retirement account (IRA), the trust inherits that IRA at the time of your death. Then the IRA is maintained as a separate account (an inherited IRA) that is an asset of the trust. This can be done for any qualified retirement plan, like Roth IRAs, 401(k)s and 403(b)s.
The IRA Inheritance Trust™ has been reviewed and accepted by the IRS as complying with all its regulatory requirements, as a tool for protecting inherited qualified retirement account funds. An IRA Inheritance Trust™ protects your beneficiaries from divorces, creditors, lawsuits, and estate taxes at the death of the beneficiaries.
Additionally, an IRA Inheritance Trust™ “stretches out” the required minimum distributions (RMDs) over the maximum term allowed for each separate beneficiary (typically this is ten years, but may be longer).
How Does an IRA Inheritance Trust™ Help You Avoid Risks?
If your beneficiary directly inherits your retirement account, there are potential disadvantages and risks. Instead of leaving your IRA, 401(k), or 403(b) retirement account funds directly to your children, create an IRA Inheritance Trust™ and make that trust the beneficiary.
You will need the guidance and insights of a Massachusetts estate planning attorney who is familiar with inherited IRAs.
What are the risks when beneficiaries directly inherit retirement account funds? Retirement accounts are protected from your creditors, but when the funds transfer to an individual beneficiary, that protection ceases. A direct inheritance from an IRA has no protection from divorces, lawsuits, creditors, or bankruptcy experienced by the beneficiary.
In fact, those threats could erode most if not all of the wealth you’ve labored to earn and leave to your loved ones, but by preparing an IRA Inheritance Trust™ with help from a Massachusetts IRA Inheritance TrustTM attorney, your beneficiaries may access their funds without those risks.
What Other Advantages Does an IRA Inheritance Trust™ Provide?
Because an inherited qualified retirement account that names an IRA Inheritance Trust™ as beneficiary is not considered an asset belonging to your beneficiary, it is protected from divorces, lawsuits, creditors, or a bankruptcy of that beneficiary.
Additionally, by naming a trust that allows for the longest deferral allowed by law, your individual retirement account funds will continue to grow tax-deferred and to compound over time.
Someone who inherits an individual retirement account has a right to larger distributions and may even withdraw the entire balance of the IRA as soon as it is inherited. On the other hand, when an IRA Inheritance Trust™ is the beneficiary, it is designed to encourage, but not force, a beneficiary of the trust to defer distributions.
What Can You Include in Your IRA Inheritance Trust™?
You may include provisions for special needs beneficiaries (for example, for someone receiving needs based government benefits, like SSI or Medicaid). Your Successor Trustee will decide when and how funds in your individual retirement account will be distributed. This lets you protect your beneficiaries and maximize their “stretch-out” benefits.
How Will an Estate Planning Attorney Help?
Anyone with retirement accounts currently worth at or above $150,000 should learn more about an IRA Inheritance Trust™. Especially if you are concerned about what may happen to your wealth after you’re gone, schedule a consultation with a Cape Cod estate planning attorney to learn more about establishing an IRA Inheritance Trust™ – or to begin the process.
Once your IRA Inheritance Trust™ has been prepared, you should review it with your attorney at least every three years. You may also need to update your trust immediately if you divorce, remarry, have a child, sustain a long-term or permanent disability, or suffer a death in the family.
Here’s another reason why your trust needs to be regularly updated. The laws that govern trusts are frequently changed. There were changes in 2019 and more changes are imminent. Changes in the law can affect the provisions of your trust, so those changes cannot be ignored or overlooked.
Have You Prepared Your Estate Plan?
An IRA Inheritance Trust™ is only one part of a comprehensive estate plan. If you do not already have a comprehensive estate plan in place, now is the time to begin the estate planning process. It can’t be done in haste, and you will need an attorney’s guidance and advice.
If you have a family, own a business, own significant assets, or if others count on you, your estate plan assures that your finances and assets will be handled properly after your death.
Without the right estate plan, there is no way to guarantee that your instructions will be followed after your death or that your assets will be distributed according to your wishes. Your estate plan also leaves instructions for your loved ones if you become incapacitated while you are still alive.
When Should You Schedule a Consultation?
After reviewing your assets, properties, liabilities, and your current financial situation, a Cape Cod estate planning lawyer can recommend a specific, comprehensive estate plan that will protect your assets – and more importantly, protect your loved ones – for many years to come.
A good estate planning lawyer will ensure that your estate plan is easy to understand, that nothing has been overlooked, and that you have the time and information you need to consider and review your estate planning options and make informed estate planning decisions.
Whether you need to prepare an IRA Inheritance Trust™, begin the estate planning process, update your estate plan, or if you simply need to learn more, make the call – right away – and schedule a consultation with a Massachusetts estate planning lawyer.
