The Importance of IRAs in Estate Planning:

An Individual Retirement Account (IRA) is often a large part of any given estate. This concentration of wealth can play a vital role in estate planning. That being the case, providing for loved ones in a meaningful way is of the utmost importance in IRA planning. Though an IRA owner may designate to whom the account is to go to upon death, there are required minimum distributions (RMDs). In calculating these distributions, the law requires them be based upon the life expectancy of the beneficiary. At first glance, this does not appear to be problematic. However, the beneficiary has the ability to take more than this distribution, and even drain the account immediately. This can result in unintended income tax consequences, as well as destroy the long term tax deferral benefits that could otherwise provide substantial wealth preservation. Furthermore, inherited IRAs do not afford the beneficiary protection from creditor claims, spendthrift concerns, nor divorce proceedings. In all, much like a lump sum cash inheritance, there are risks associated that may ultimately defeat the account owners intent.

IRA Planning with Trusts:

Though a trust by itself cannot generally take advantage of IRA tax deferral benefits, an IRA Beneficiary Trust can. With proper planning and drafting, a trust may “designate” the beneficiary. By qualifying for “look through” treatment of the trust, the beneficiary becomes the measuring life for purposes of required minimum distributions (RMDs). This allows for distributions to “stretch out” for the life expectancy of the beneficiary.

When utilizing an IRA Beneficiary Trust, there are two types to consider: (1) conduit trusts, and (2) accumulation trusts. The first provides for favorable treatment in the “stretch out” of the required minimum distributions (RMDs), but lacks certain asset protection qualities. The latter provides certain protections, but at the expense of “stretch out” distribution flexibility — namely the measuring life becomes the oldest beneficiary (contingent or not). Fortunately, the IRA Beneficiary Trust contains a “toggle switch” whereby the Trust Protector may elect which type of trust to establish based on the given circumstances. Regardless of type, Treasury Regulation 1.401(a)(9)-4) “look through” treatment requires the following be met:

(1) The trust is valid under state law,
(2) The trust is irrevocable upon the death of the retirement account owner,
(3) The beneficiaries of the trust are identifiable for purposes of beneficiary designation, and
(4) The trust agreement has been provided to the IRA plan administrator.

An IRA Beneficiary Trust can be a great tool for purposes of estate planning — providing financial security and long-term wealth preservation for those you care about. It is important to discuss your options with an attorney to see if this type of trust is right for you.

Attorney Joseph C. Jones advises clients on estate planning, asset protection, business law, and real estate law matters. Joe can be reached at (906) 914-4181 or Jones Law PLC is a Michigan & Wisconsin based provider of legal services.