IRA Inheritance Trusts - Memphis, Tennessee, Attorney
Maximizing the Benefits of an IRA Inheritance
IRA Management trusts are a relatively new tool available for individuals interested in leaving a durable legacy behind to benefit their heirs. With an IRA Management trust, you can make an inheritance that might have lasted only a few years last for a lifetime.
If you are interested in creating an IRA Management trust, Windsor Law Firm, can help. We offer professional, dedicated services to clients throughout the Mid-South, North Mississippi and Western Tennessee, located in East Memphis, Tennessee. Attorney John R. Windsor Jr. has a Masters in Taxation and has been a licensed attorney since 1991. We handle estate planning for simple and complex estates.
To schedule an appointment with an experienced lawyer, call us today at (901) 680-0101 or contact our offices online. We look forward to learning about your goals and finding a solution to produce the results you need.
How Does an IRA Management Trust Work?
Imagine you are leaving behind a $100,000 inheritance to one heir, and that currently that $100,000 is invested in an IRA. Without proper planning, your heir would have the right to receive that inheritance in a lump sum. After paying estate taxes, your heir could end up with as little as $55,000 — which is not what you may have intended.
An IRA Management trust allows you to space out the payments made to your heir. The IRA is made payable to a specialized trust at the IRA owner's death. While receiving the benefits in trust, at the IRA owner's death, a "Trust Protector" named by the owner of the IRA decides whether a beneficiary is best served by inheriting via a "conduit" trust, taking the required minimum distributions ("RMD") and passing these out each year, or due to financial, health, marital or emotional issues is better served with their benefit being held in an Accumulation Trust. An Accumulation trust can receive the RMD, then hold some or all of it, so as not to allow creditors, divorce or bankruptcy wipe out their benefit. With the power of compound interest, this can greatly increase the value of the trust over time. If you arrange for your heir to receive one $8,000 payment each year, the trust could last for decades and ultimately pay out hundreds of thousands of dollars.
We can help you create an IRA Management trust and we also provide trust management services to ensure that the trust is managed properly over time.
Some of the other benefits we provide people seeking to create an IRA Management Trust, include:
To schedule an initial consultation, call us today at (901) 680-0101 or contact us online. We look forward to hearing from you. For a more detailed, in-depth discussion of IRA inheritance trusts, continue reading below...
Detailed Information About IRA Inheritance Trusts
If you or someone in your family has accumulated substantial retirement savings either via a workplace retirement plan or IRA, you may be leaving substantial benefits untapped, by not properly planning for the distribution of these funds. Failing to do so, can accelerate the taxation of these funds, shorten the length of time they last, and reduce the amount benefitting your loved ones.
Funds accumulated in retirement plans through work such as a 401(k), rolled over to an IRA, or in a traditional IRA, are almost always (subject to exceptions for after-tax contributions) fully income taxable when amounts are received. The results in the taxation of the funds as ordinary income in the year received. These distributions can therefore increase the amount of taxable income, and potentially push you into a higher bracket for the year.
If you have an IRA (used generically for all pre-tax retirement savings, hereafter), and pass away, the funds in the account(s) become what is called "Income in Respect of a Decedent" or "IRD". Depending on whether you did proper planning, these sums can be subject to a host of variable and complex rules on distributions. Additionally, the rules on distributions and income tax are further complicated when attempting to satisfy the requirements and plan your estate, or protect heirs from simply spending everything.
Following the death of the account owner, the ability to defer distributions and thus the income tax thereon depends on the planning done and decisions made. If no planning or incorrect planning is done, it is possible the entire amount will have to be distributed and thus taxed (at ordinary income tax rates of the recipient) within five years of the owner's death. Compare this to the situation where planning was implemented, allowing the IRA to continue to make payments based on a younger heirs life expectancy, thus continuing the tax deferral on a considerable portion of the IRA for twenty, thirty, or more years. This can turn a $500,000 IRA into a multi-million dollar account in terms of total payout to heirs, if properly structured.
Because of technical IRS rules, potential traps may require your beneficiaries to take distributions using the age of the oldest beneficiary for all recipients. (A surviving spouse, if named as a beneficiary can treat the account, as an inherited IRA.) Otherwise, a properly structured plan can allow each beneficiary to use their own life expectancy to determine the required distributions.
What happens if you are unsure of the situation your heir or heirs might face when the point of inheritance is reached? If an heir is a spendthrift, has creditor issues, or a medical situation that may worsen over time, or there are relatively substantial differences in their ages, different solutions may be desired.
Naming trusts as beneficiary, if properly structured, can allow you to maximize the deferral of income taxes, using the ages of each beneficiary for distributions. This can greatly increase the amount your heir(s) receive over time, in effect increasing the size of your IRA. It also may provide the opportunity to prevent the unwise expenditure of these funds by someone not equipped to handle the funds directly, whether due to age, personality, education, or illness.
A trust as beneficiary of the IRA may be part of the solution. But, what happens if one heir needs protection and the other is best benefitted by receiving the annual flow? How do you know at the time of planning which will best fit an individual beneficiary?
A trust receiving IRA proceeds can be a "Conduit" trust, meaning the full amount required to meet the annual "required minimum distribution" ("RMD") is taken into the trust then paid out by the trustee. (If the RMD is not taken in a given year, a penalty on amount that should have been taken, is due.) However, this type arrangement does not provide protection from creditors or over-spending if the RMD is greater than the needs of that person in a given year.
If an heir has potential creditors or other issues, an "Accumulation" trust may be a better option. It allows the RMD to be satisfied, but accumulate the funds in the trust rather than simply pay out the full RMD each year to the heir. This discretion in the trustee permits greater protection of the funds to the heir.
Through proper planning, an overall plan to allow a one-time determination at your death as to who benefits under either a "conduit" trust or an "accumulation" trust can be made so that the benefit to your heirs is greatly enhanced[i].
We can help you plan for extended deferral of retirement savings amounts, make use of trust vehicles to extend deferral, increase the total payout, and provide individualized terms so that the heirs you choose can either receive ongoing payments or accumulation depending on their situation at your death. Contact us to schedule a meeting to determine how you might best extend the deferral on IRA funds and benefit your heirs, without subjecting them to unneeded risk.