I am routinely asked by many families regarding the use of proper beneficiaries of their IRAs and financial accounts. Many of these families simply name their spouse as the primary beneficiary and their children as equal contingent beneficiaries. In fact, for many years, this has been the manner which many people have disposed of their assets at death.
In addition, there continues to be misinformation that your estate settlement will be simple, you can avoid probate, your children’s inheritance will be protected, you will avoid costs, and you will avoid a number of other issues at death by simply “naming beneficiaries on all of your financial accounts.”
However, there are a number of reasons why naming your family as beneficiaries on your financial accounts, especially your IRA, can result is significant financial harm:
- Secure Your Heirs’ Inheritance with Thoughtful Estate Planning, a Study Published in the Texas A&M Foundation on July 8, 2015 Provided that Most Inheritances Are Spent Within 17 Months!
- Naming Your Children as Outright Beneficiaries of Your IRA and Other Financial Accounts May Subject That Inheritance to Claims by Divorcing Spouses, Creditor Claims, Lawsuits, and Other Predators.
- Clark v. Rameker, a 2014 United States Supreme Court Decision Provided that Inherited IRAs are Not Protected From Creditors in a Bankruptcy Case. Therefore, If You Leave Your IRA Directly to your Adult Children, and They File for Bankruptcy Later in Life, this Inheritance is Subject to Seizure by the Bankruptcy Court.
There are some of you who may be reading this who say … “I Understand the Risk and I Want to Protect My Children and Family. However, Why Don’t I Just Name Our Family Living Trust as the Beneficiary of the IRA?”
Great Question! However, many times, this may not be the most appropriate and beneficial strategy. When you name an individual as a beneficiary, there are favorable minimum distribution rules that apply. However, when you name a family trust that does not contain the proper see through trust language, it can result in affecting the minimum distribution rules and requiring your beneficiaries to withdraw the money from the IRA within a shorter period of time, resulting higher income taxes and sacrificing the potential investment growth on the IRA.
The Solution is the Stand-Alone IRA Trust!
How Does This Work? See Bob’s Example
Bob has saved all of his life and saved into the company 401(k) plan. Now that Bob was retired, he had a 401(k), that was now rolled over into an IRA, with a value of $550,000. However, Bob knew that he was going to have to take required minimum distributions from the IRA when he reached the age of 70 and ½.
Bob’s wife predeceased him and he had two grown children, Ben and Dan. However, Bob understood the importance of estate planning and providing a legacy for his children and family. When Bob visited with his attorney, the attorney recommended a Stand-Alone IRA Trust. The attorney mentioned the risks in leaving the IRA directly to his two adult children, and more importantly, most beneficiaries will spend through their inheritance in the first 17 months. The attorney explained that this would allow him to leave a lasting legacy for his children. Bob agreed, and set up the Stand-Alone IRA Trust.
When Bob was 82, he died following a short illness. At age 70 and ½, Bob was required to withdraw required minimum distributions from his IRA under the tax laws. In this 12-year period, Bob withdrew $316,550.03 from his IRA. However, because Bob had established a Stand-Alone IRA Trust, his children’s distributions were stretched out over the course of their lifetime. This Resulted in Total Distributions to His Children of $1,183,203.19! All From an IRA of $550,000 when Bob was 70!
In addition, Bob’s children were allowed to leave their distributions inside of the Stand-Alone IRA Trust, and this way their IRA inheritance was protected from claims by divorcing spouses, creditor claims, lawsuits, other predators, and even bankruptcy!
As I tell every client that has a nest egg that they will be passing on to their children, think twice before naming outright beneficiaries to your adult children! In my experience, the Stand-Alone IRA Trust is an extremely necessary and beneficial planning strategy that can protect your children’s inheritance from themselves, divorcing spouses, creditor claims, lawsuits, and other predators … and most importantly, allows you to leave a lasting legacy for your family!
If you have questions regarding Stand-Alone IRA Trusts, please call our office at (615) 472-2482 or you can e-mail us at [email protected]. In addition, you can fill out the contact form here on this screen to schedule an appointment.
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