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IRA Inheritance Trusts

The Levin Law Firm is experienced in working with clients to create IRA Inheritance Trusts, which are also referred to as Retirement Plan Trusts and IRA Legacy Trusts. Here is why you should consider establishing an IRA Trust if your IRA and other retirement plan accounts collectively exceed $200,000:

Individual Retirement Accounts (“IRAs”) were designed by Congress to be wealth accumulation vehicles, not wealth transfer vehicles. Effective January 1, 2003, the IRS issued final Regulations with respect to Internal Revenue Code 401(a)(9), the code section which created IRAs. These Regulations govern the calculation of required minimum distributions (“RMD”) from IRAs.

These Regulations dramatically changed the way financial, legal and tax advisors advise their clients about the beneficiary designations of an IRA. Under current law, a non-spouse beneficiary is permitted to “stretch-out” the taxable RMDs over his or her actuarial life expectancy. The ability to for IRA investments to compound, income tax free, over a much longer period of time, now makes your IRA now one of the most valuable assets when planning for intergenerational transfers of property. For example, a $200,000 IRA, inherited by a 50-year-old, could be worth $1.5 million or more over the lifetime of the beneficiary and your client’s grandchildren! In other words, obtaining maximum income tax “stretch-out” is now a critical planning objective for many clients.

This income tax “stretch-out” can be obtained either by naming individuals as beneficiaries of IRAs or by naming a trust as beneficiary. Many of our clients have found that naming one or more individuals as beneficiaries, with no safeguards in place to protect their IRAs, often creates a host of problems, some of which are detailed below:

  • The individual beneficiary may at any time decide to take out more than the RMDs because the beneficiary is not aware of the income tax rules and available options, receives bad advice, or the beneficiary (or person who may influence the beneficiary) wants to spend the money. As a result, significant income taxes are imposed much earlier than required, losing years of income tax-free compounding, essentially losing the opportunity to “stretch-out” RMDs over the lifetime of the IRA beneficiary;
  • When an IRA is distributed outright in one lump sum, even if the beneficiary decides to “stretch-out” RMDs over his or her lifetime, the original IRA owner does not control who will eventually inherit the IRA assets after the death of the primary beneficiary;
  • The IRA beneficiary may have poor money management skills, be a spendthrift, or too young, or suffer from an illness or incapacity which impairs the ability of the beneficiary to manage a modest amount of money or a significant investment portfolio;
  • When a trust is not used to protect the IRA from the claims of third-parties, account balances are exposed to the beneficiary’s spouse in a divorce;
  • A beneficiary who has a mental and/or physical disability, could lose state and federal government benefits;
  • In the absence designating an IRA trust as beneficiary, lawsuits filed against the beneficiary could result in the lose of some or all of the inherited IRA;
  • Even if none of the above events occur, without an IRA Trust, upon the death of the IRA beneficiary, a substantial sum of money accumulated in the IRA over the beneficiary’s lifetime may be fully exposed to confiscatory levels of federal estate and state inheritance taxes when the client’s IRA passes from the IRA beneficiary to the next generation.

Without exception, all of these serious concerns for many of our clients can be properly handled by designating a trust as beneficiary for the client’s children.
Under specific IRS Regulations, when a trust is designated as the beneficiary of an IRA, the terms of the trust must adhere to a number of requirements in order for the beneficiary to obtain maximum “stretch-out” of the IRA over the lifetime of the beneficiaries of the trust. A typical living trust cannot meet all of these requirements and, therefore, a separate revocable trust, which we call an IRA Trust, is designated as the IRA beneficiary.

Our IRA Trust is specially designed to meet all of the IRS requirements for a “Designated Beneficiary Trust,” (in order to obtain maximum income tax “stretch-out”), and also provides the trust beneficiaries with financial protection against all seven (7) problems detailed above, which often occur when individuals are directly named as the IRA beneficiary.

What Sets Our IRA Trust Apart From Other Designated Beneficiary Trusts?

Our IRA Trust offers unique post-mortem flexibility, permitting the trustee to adapt to the conditions existing at the time of the IRA owner’s death. If the beneficiary’s share of the IRA Trust is structured as a “Conduit,” trust, (meaning that all IRA distributions flow over into the trust and then are immediately distributed out to the beneficiary), the beneficiary’s life expectancy can be used to “stretch-out” the RMDs, reducing the income tax liability.

In the alternative, for a variety of personal, family and financial reasons, many clients prefer the IRA Trust to be originally established as an “Accumulation” trust, (where IRA distributions flowing into the trust are distributed to the beneficiary), but only at the discretion of the trustee.

It is often difficult to determine, at the time that an IRA Trust is created, whether or not a beneficiary’s trust should be drafted as a “Conduit” or “Accumulation” trust, since it could be many years before the IRA Trust actually becomes operative. For example, the family dynamics, needs and circumstances of the beneficiaries that exist at the time of death, may be quite different compared to the circumstances that existed at the time that the IRA Trust was created.

Since it is very difficult to determine the extent of protective features that will be appropriate for a particular beneficiary at an undetermined point in the future (upon the death of the IRA owner), one of the unique features of our IRA trust is the inclusion of what we call a “toggle switch”, which the Trust Protector can use, following the grantor’s death, to convert the trust between a Conduit and Accumulation Trust, as is appropriate when the trust becomes operative and which will be based upon the beneficiary’s personal, family and financial circumstances, along with the need for financial protection.

All of the features we have detailed above in IRA Trusts created for clients by The Levin Law Firm have been documented and approved in a IRS Private Letter Ruling. The IRA Trust can also be used for employer provided retirement plans, such as 401(k), 403(b), and 457 Plans.

For additional information about the flexibility and financial protection which you can achieve for your family with an IRA Trust, please call our office today to arrange a Complimentary Consultation at (610) 977-2443.  Email: