Does My Estate Plan Need to Be Updated?
Apr 12, 2013 | Posted By Moynihan_Lyons 0 Comments[...]
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Moynihan Lyons ensures that maximum stretch-out capabilities are contemplated and preserved for IRA beneficiaries. Sophisticated planning incorporates protection to fulfill the settlor’s intent even when the primary beneficiary passes away.
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IRA Changes & Complexities
In recent years, IRS rules have expanded the period over which an IRA owner and his or her spouse may take Required Minimum Distributions (RMD’s) and greatly lengthen the period over which a non-spouse beneficiary may now stretch out RMD’s after the owner’s death. The stretch out of RMD’s results in longer tax-deferred compounding inside the IRA and much greater potential family wealth accumulation making IRAs one of your most valuable assets for passing wealth down from generation to generation.
Many parents, and their financial advisors, believe that naming the children as IRA beneficiaries is sufficient to assure the stretch out. They assume the children will properly take only RMD’s or seek assistance from the parent’s financial advisor to make sure the stretch out occurs. However, many beneficiaries decide to cash out the inherited IRA earlier than required, “blowing” the stretch out entirely.
One solution is to use a trust as beneficiary instead of the IRA being paid directly to a beneficiary. Unfortunately, IRS rules make it difficult for the typical family revocable living trust to take advantage of the maximum stretch out based on each beneficiary’s life expectancy, requiring all to use the shortest life expectancy or to cash out in 5 years. Further, there may be, now or in the future, situations when protection is more important for a beneficiary than income-tax stretch out, e.g., a beneficiary undergoing divorce or receiving needs-based government benefits. Attempting to solve these problems with special language in a living trust is rarely satisfactory.
Since September, 2005, a properly drafted stand-alone IRA Designated Beneficiary Trust can be utilized for income-tax stretch out and asset protection. These trusts help maximize family wealth accumulation and enhance protection for the client’s beneficiaries against divorce, lawsuits, creditors, loss of government benefits, and additional estate taxes when the remaining IRA is passed down to the next generation.
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