IRA Trusts

If you have named your children as beneficiaries of your qualified plans (IRA, ROTH, 401k, TIAA-CREF, etc.), you have likely made a mistake. An outright beneficiary designation needlessly exposes the IRA to your children’s spouses, to their creditors and future inheritance and estate taxes. Since 2006 Congress has provided the tools necessary to protect your children.

In 2006 Congress required that all qualified retirement plans—including IRAs, SEP-IRAs, 401(k) plans, and 403(b) plans—must allow naming an IRA Trust as a beneficiary. By doing so, Congress allows you to form an IRA Trust for your child that allows the Inherited plan to remain tax-deferred.

Because your child does not own the Inherited IRA, the trust provides shelter from your child’s creditors as well and divorce complications. Further, the IRA Trust excludes the IRA from your child’s estate for death tax purposes. As a bonus, you may dictate that any amount remaining at your child’s death passes to your grandchildren, thereby avoiding your daughter-in-law or son-in-law.

The IRA Trust provides tremendous benefits for your kids with little ongoing costs if the child serves as the trustee.

If your IRA passes into a properly drafted IRA Trust for your child at your death, here are some of the many advantages:

1. Divorce Protection: The trust owns the IRA, not your child. The IRA is not included as marital property in your child’s divorce to be divided as part of the divorce proceedings.
2. Creditor Protection: According to the Supreme Court, if your child owns the Inherited IRA, it is not protected from the creditors. If you use an IRA Trust, the trust is the owner, not your child. The IRA Trust shelters the IRA from your child’s creditors.
3. Estate and Inheritance Tax Protection: If you leave your IRA to your child, then it is included as part of your child’s assets for inheritance and estate tax purposes. By using the IRA Trust, the trust is the owner, not your child. At your child’s death, the child’s taxable estate doesn’t include the IRA.
4. Low Cost: If you name your child as the trustee, your child will not charge a fee, so there is no trustee cost.
5. “Stretching” the IRA: If drafted correctly, the trustee can stretch the IRA over the beneficiary’s lifetime, securing all the same tax deferral benefits that the beneficiary would have had if the beneficiary held the Inherited IRA in his or her name.
6. Keeping the Money in the Family: If you give your IRA to your child, then your child selects who receives the remainder at your child’s death. This will likely be your child’s spouse. By using an IRA Trust, you choose the successor beneficiaries. You can keep the money in your family by naming your grandchildren as the successor beneficiaries.
7. Special Needs Planning: An IRA Trust allows you to preserve an IRA’s tax deferral, but still provide assistance to a Special Needs person without disqualifying them from needs-based government benefits.

In short, IRA Trusts provide huge benefits at low cost. The reason you have not heard about them is likely because the rules surrounding IRAs are very involved, which cause many professionals to avoid the issue. This avoidance could cost your family dearly.

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If you have any questions about IRA Trusts or any other estate planning topics, please contact our office to schedule a free consultation. For more than two decades Klenk Law has focused only on Estate Law. We’ve seen it all, and this experience allows us to explain complex estate planning techniques clearly and concisely. We make it easy for you to understand IRA Trusts and estate planning so you can make the best decisions for yourself and your family.