IRA Planning with Trusts

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IRA Planning with Trusts
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IRA Planning with Trusts

• Considerations

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IRA Planning with Trusts

• Considerations
• For many clients, their IRA is the major asset
  next to their residence (!!)

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IRA Planning with Trusts

• Considerations
• For many clients, their IRA is the major asset
  next to their residence (!!)
• Most clients trust their children, but also
  want to protect their grandchildren

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IRA Planning with Trusts

• Considerations
• For many clients, their IRA is the major asset
  next to their residence (!!)
• Most clients trust their children, but also
  want to protect their grandchildren
• Tax Deferred growth is better than After-Tax
  growth

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IRA Planning with Trusts

• Basic IRA Rules

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IRA Planning with Trusts

• Basic IRA Rules
• Assets contributed to an IRA are pre-tax.

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IRA Planning with Trusts

• Basic IRA Rules
• Assets contributed to an IRA are pre-tax.
• Assets inside an IRA compound income tax free.

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IRA Planning with Trusts

• Basic IRA Rules
• The IRA is really a tax deferral vehicle since
  eventually the assets in the IRA are subject to
  income tax.

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IRA Planning with Trusts

• Basic IRA Rules
• The IRA is really a tax deferral vehicle since
  eventually the assets in the IRA are subject to
  income tax.
• The question is when?

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IRA Planning with Trusts

• Basic IRA Rules
• An IRA owner must begin minimum withdrawals based
  on his/her life expectancy no later than April
  1st of the year after he/she attains age 70 ½.

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IRA Planning with Trusts

• Basic IRA Rules
• These withdrawals are known as required minimum
  distributions (RMDs)

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IRA Planning with Trusts

• Basic IRA Rules
• If the owner of an IRA dies before full
  distribution, there are different options if a
  spouse is the beneficiary of an IRA or if a
  non-spouse is the beneficiary(ies)

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IRA Planning with Trusts

• Basic IRA Rules
• If the spouse of an IRA owner is the beneficiary
  and inherits the IRA, he/she has the option to
  roll-over the original IRA into a new IRA owned
  by the spouse. The same RMD rules would then
  apply to the new IRA.

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IRA Planning with Trusts

• Basic IRA Rules
• Only a spouse can roll-over an IRA.

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IRA Planning with Trusts

• Basic IRA Rules
• Since 2003, the IRS changed its regs and now
  allows a non-spouse beneficiary (for example, a
  child) to take or "stretch-out" the taxable RMDs
  over a much longer period, using the
  beneficiarys life expectancy rather than the
  shorter life expectancy of the original IRA owner
  (e.g., the parent).  This means that money inside
  an inherited IRA may now compound much longer,
  tax-deferred.

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IRA Planning with Trusts

• For example, let's take a son age 45 (at the time
  of his mother's death) who inherits a 200,000
  IRA and withdraws only the RMDs. If the IRA
  grows, from both income and principal
  appreciation, at the rate of 6 a year, then 30
  years later when the son is age 75, the son will
  have taken over 400,000 in RMDs and still have
  almost 300,000 left in the IRA to use over his
  later years or pass down to his children (the
  original IRA owner's grandchildren).

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IRA Planning with Trusts

• To sum it up, the original 200,000 inherited IRA
  became worth over 700,000 to that family! (And
  that doesn't include the future value of the
  RMDs if they were placed into an investment
  account).  If we assume the IRA will be worth
  over 200,000 when the owner passes, or will earn
  a higher rate of annual return, or goes to a
  younger beneficiary, that 200,000 IRA could
  eventually be worth well over 1 Million!

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IRA Planning with Trusts

• Many IRA owners and their advisors assume that
  the IRA beneficiaries will make the right
  stretch-out decisions before they take
  withdrawals.   Unfortunately, that is not always
  the result when the IRA owner dies.

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IRA Planning with Trusts

• A beneficiary is not prohibited from withdrawing
  more than the RMDs and may instead decide to
  cash out the IRA earlier than required.

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IRA Planning with Trusts

• A beneficiary is not prohibited from withdrawing
  more than the RMDs and may instead decide to
  cash out the IRA earlier than required.
• This is often referred to as a blow-out.

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IRA Planning with Trusts

• This can happen because the beneficiary is
• Not aware of the RMD rules and choices.
•   The beneficiary sees her name on an account and
  immediately transfers it into her own name.
•   Wrongly thinks it is a tax-free rollover if put
  into her own IRA.
•   Just can't wait to get her hands on the IRA
  money or is influenced by a spouse or some other
  third-party to grab and spend it!

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IRA Planning with Trusts

• There are also other issues which make naming an
  individual (e.g., the child) as the beneficiary
  of an IRA unwise.

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IRA Planning with Trusts

• There are also other issues which make naming an
  individual (e.g., the child) as the beneficiary
  of an IRA unwise
• The child is a minor or young adult

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IRA Planning with Trusts

• There are also other issues which make naming an
  individual (e.g., the child) as the beneficiary
  of an IRA unwise
• The child is a minor or young adult
• The child is disabled

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IRA Planning with Trusts

• There are also other issues which make naming an
  individual (e.g., the child) as the beneficiary
  of an IRA unwise
• The child is a minor or young adult
• The child is disabled
• The child has creditor problems or is not good
  with money

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IRA Planning with Trusts

• There are also other issues which make naming an
  individual (e.g., the child) as the beneficiary
  of an IRA unwise
• The child is a minor or young adult
• The child is disabled
• The child has creditor problems or is not good
  with money
• The client does not like or trust the in-law

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IRA Planning with Trusts

• Along with the new regs on allowing the
  stretch-out, a trust can now be the beneficiary
  of an IRA.

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IRA Planning with Trusts

• Along with the new regs on allowing the
  stretch-out, a trust can now be the beneficiary
  of an IRA.
• As a result, it is now common to designate the
  revocable living trust (RLT) as the beneficiary
  of an IRA (or as the contingent beneficiary if
  the IRA owner is married)

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IRA Planning with Trusts

• Along with the new regs on allowing the
  stretch-out, a trust can now be the beneficiary
  of an IRA.
• However, to avoid having the RMD calculated based
  on the oldest age of all potential
  beneficiaries of the trust, the trust must be a
  conduit trust.

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IRA Planning with Trusts

• A conduit trust is a trust with specific
  language requiring the RMDs to be paid out by
  the trustee to the beneficiary on an annual basis
  regardless of any other provisions of the trust
  permitting accumulation of income and/or
  principal.

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IRA Planning with Trusts

• A conduit trust must use the oldest age of the
  current beneficiaries for the calculation of the
  RMDs for all of the beneficiaries.

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IRA Planning with Trusts

• A conduit trust must use the oldest age of the
  current beneficiaries for the calculation of the
  RMDs for all of the beneficiaries.
• This may not be a huge issue for a client with
  two children only 2-3 years apart in age
  however, it can be a substantial issue for
  families with a number of children of disparate
  ages or if a grandchild may be a beneficiary.

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IRA Planning with Trusts

• As mentioned, a conduit trust must distribute
  the RMDs to each beneficiary regardless of other
  circumstances existing at the time of death
  (e.g., disability, creditor issues, divorce, etc.)

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IRA Planning with Trusts

• To provide maximum benefits and flexibility,
  there is now a new type of trust.

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IRA Planning with Trusts

• To provide maximum benefits and flexibility,
  there is now a new type of trust
• The IRA Beneficiary Trust

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IRA Planning with Trusts

• To provide maximum benefits and flexibility,
  there is now a new type of trust
• The IRA Beneficiary Trust
• Sometimes referred to as an IRA Inheritors
  Trust or an IRA Inheritance Trust

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IRA Planning with Trusts

• To provide maximum benefits and flexibility,
  there is now a new type of trust
• The IRA Beneficiary Trust
• In 2005, the IRS issued a private letter ruling
  200537044 (the "PLR") that approved this new type
  of revocable trust created solely to be the
  beneficiary of an IRA account.

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IRA Planning with Trusts

• The IRA Beneficiary Trust
• Features

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IRA Planning with Trusts

• The IRA Beneficiary Trust
• Features
• The RMDs for each beneficiary is calculated on
  the age of each beneficiary

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IRA Planning with Trusts

• The IRA Beneficiary Trust
• Features
• Up to September 30th of the year following the
  IRA owners death, an election can be made to
  convert a beneficiarys trust from a conduit
  trust to a discretionary accumulation trust

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IRA Planning with Trusts

• The IRA Beneficiary Trust
• Features
• If a beneficiarys trust is converted, the
  potential beneficiaries of that trust can be
  limited to a designated class.

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IRA Planning with Trusts

• The IRA Beneficiary Trust
• Features
• If the IRA owner is married and does not want the
  spouse to be able roll-over the IRA (i.e., name
  new beneficiaries), the Trust can also be
  configured to hold the IRA for the benefit of the
  spouse.

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IRA Planning with Trusts

• The IRA Beneficiary Trust
• This is an extremely valuable estate planning
  tool for any client with IRA assets over 150,000!