You work your entire life, saving your money, developing a nice nest egg of savings, and then you provide a nice inheritance for your children that you leave behind. Then, in one moment, everything changes. Your adult child is divorced and loses half of their inheritance to a former spouse. Your adult child is sued and the inheritance is seized by a lawsuit judgment creditor. Your child doesn’t understand the tax implications of their inheritance, takes their inheritance all at once, and incurs significant and unnecessary tax obligations. There isn’t any one of these situations that we would want to have happen to our children and surviving family when we pass away. However, without proper advanced planning there is a risk that this can and will happen when you pass away.
I was speaking with a family from Nashville about this topic recently. This couple wanted to protect their children’s inheritance from unnecessary costs and expenses. Specifically, this family had a large IRA account that they were pretty sure would still be around when they had both passed away. The couple’s proper plan was to name the surviving spouse as the beneficiary of their respective IRA accounts. However, the planning that we discussed together was to name their IRA Trust as the contingent beneficiary of their respective IRA accounts when they both pass away.
I explained that all too frequently when an IRA is left at death, by way of a beneficiary designation, to the surviving child or children, the adult children withdrawal the IRA in a lump sum thereby exposing the asset to creditor claims, divorce claims, lawsuits, and unnecessary income tax obligations. I discussed with this family that the better option is to create an IRA Trust and name the trust as the contingent beneficiary of their IRAs. The IRA Trust would allow them to create a mandatory stretch out of the distributions from the IRA to their adult children, thereby saving and deferring a considerable amount of income tax liability, as well as allowing the IRA to grow over the course of their children’s lifetime.
Furthermore, I explained, that the IRA Trust can provide a significant amount of asset protection for the IRA. For instance, so long as the withdrawals from the IRA are non-discretionary (meaning that their adult child does not have the authority to withdrawal funds from the IRA whenever he or she sees fit), then the IRA may be protected from creditor claims, spousal claims in divorce, and even certain types of lawsuits initiated against their children.
As you can imagine, the IRA Trust can be a very beneficial planning vehicle for families looking to transfer wealth from their IRA to their children or grandchildren, while limiting tax consequences, providing the children or grandchildren with an asset that can grow during their lifetime, and protecting that asset from creditors, lawsuits, and divorce claims.
If you have questions or concerns regarding the proper comprehensive estate plan to put in place for your family to ensure a smooth transition of your wealth to the next generation, then please contact our office for a complimentary visit and conversation so that we can discuss your estate planning needs in further detail.
We look forward to hearing from you!