One of the main concerns our clients have while planning is how to preserve the inheritance they leave for their children. More specifically, how they can guarantee that a beneficiary won’t get a large sum and quickly spend it all.  How can the beneficiary be forced to stretch out their inheritance over their lifetime?  If the bulk of your estate is in your IRA or 401(k), then an IRA Trust could be a useful tool to accomplish your goals of inheritance preservation.  IRA Trusts are used to ensure that beneficiaries stretch-out payments from the IRA after they inherit their shares of the account by keeping the funds in the IRA account where they will continue to grow without being taxed.  By using the IRA Trust, the creator dictates the terms in which the funds will be paid out to beneficiaries. This works particularly well when the beneficiary is young or lacks good money management skills. 

There are two situations where we recommend IRA Trusts for clients.  First, where the beneficiary may not understand the tax consequences of withdrawing the funds.  The stretch-out technique in IRA Trusts shield the funds from threat of a misadvised beneficiary. If a beneficiary withdraws all of the funds from an IRA, he or she will be subject to significant income tax consequences.   This typically happens because a beneficiary is either unaware of the Required Minimum Distribution (RMD) rules; or, they are eager to move the money into their own accounts and trigger a significant taxable event.

The second situation where an IRA Trust is advisable is where the settlor is in a second marriage and wants to make sure that both the new spouse and children from a prior marriage receive funds.  The IRA Trust would provide income to the surviving spouse for his or her lifetime but would retain the remaining funds to be distributed to the settlor’s children after the death of the spouse. 

The IRA Trust serves as protection against bad decisions made with the inherited funds held within, maximizing the benefit for the beneficiary and contingent beneficiaries.

If most of your assets are held in an IRA or 401(k) account, contact our office to learn more about IRA Trusts.