Enhancing Your Legacy: The IRA Inheritance Trust

For many people, their IRA is their largest asset other than their home. Thanks to tax-free compounding, an IRA tends to grow more rapidly over time than any other asset.

The Long-Term Value of a Properly Planned IRA

If you have an IRA (or other company retirement plan), you can stretch out the income taxable minimum distributions over a very long period—not only over your lifetime but, after you’re gone, for at least another 10 years (and in some cases, the lifetime of your surviving spouse or other beneficiaries).

As an example:  Let’s assume you have an IRA valued at $250,000 at the time of your death. It is inherited by your child when she is 50.  If the IRA continues to grow an average of 7% per year, and your child allows the money to compound for 10 years, it will grow to about $500,000. If your child qualifies for a stretch-out of minimum distributions over her lifetime, the total value could be well over $1 million.  In other words, the inherited IRA could represent much more of a financial legacy than you may have anticipated.

The Challenges: Tax Reduction and Asset Protection

When your IRA goes directly to your child (or whoever you name as the beneficiary) there is nothing to protect it from lurking income tax and asset protection problems.  Unfortunately, the distributions from the inherited IRA that your child takes out will likely be taxed at her highest combined federal and state rates unless you take steps to minimize the tax rate on distributions. The inherited IRA may also be at risk of being frivolously spent by a financially careless beneficiary, or even worse, subject to her creditors (including a divorcing spouse, medical bills related to a catastrophic illness like cancer, lawsuits related to an accident, and ordinary money problems). The inherited IRA could also disqualify your child from disability or nursing care benefits. When your child passes away, your IRA could then pass to unintended beneficiaries, like the child’s spouse or some other third party rather than to your grandchildren.

The Solution: The IRA Inheritance Trust

The good news is that you can take steps during your lifetime to minimize income taxes on the IRAs your loved ones will later inherit, as well as maximize its protection against bad habits and creditor claims.  There is a cutting-edge and powerful legal tool called an IRA Inheritance Trust that, when drafted properly, complies with IRS regulations and rulings to enhance the IRA that you pass on to your heirs. Despite limitations to inherited retirement accounts due to the SECURE Act (a federal law passed that went into effect on Jan. 1, 2020), the IRA Inheritance Trust is still a viable estate planning strategy.  In fact, it can actually help your beneficiaries regain some of the flexibility they lost regarding inherited IRAs due to the changes in distribution rules within the SECURE Act.

How the Trust Works

The IRA Inheritance Trust is not a substitute for your foundational estate plan.  Most people who utilize this strategy still need a revocable living trust.  The IRA Inheritance Trust is a separate legal tool that once in effect is named either the primary or secondary beneficiary of your IRAs, depending on your circumstances and goals.  Upon your death, your IRA distributions pour-over into the IRA Inheritance Trust that benefits your spouse, your children, or other named beneficiaries. The terms of the IRA Inheritance Trust can then help assure the maximum tax “stretch out” period, minimize the income taxes paid on distributions, and better protect your spouse, children, and grandchildren from the influence and claims of spouses, caretakers, unwanted third parties, lawsuits and creditors.  If you have a blended family, it is also an effective way to make sure your second spouse receives the benefit of your retirement income during their lifetime without risking that your children will later be (intentionally or accidentally) disinherited by their stepparent.

You owe it to yourself and your loved ones to determine if an IRA Inheritance Trust will help your family save and protect potentially hundreds of thousands of dollars and preserve their future quality of life.  Before setting up an IRA Inheritance Trust, call the qualified estate planning attorneys at Littleton Legal PLLC to find out if this strategy makes sense for you. You can contact us at 918-608-1836 or schedule a free initial consultation by clicking HERE.