Not a lot of assets?
Got a big IRA account?
No use for a Trust? Wrong!
Most everyone is familiar with the rule that you must take an actuarially determined “required minimum distribution” from your Individual Retirement Account” in the year you turn age 701/2 and each year thereafter.
If you die and your spouse is the beneficiary of your IRA and is alive at the time of the transfer, the distributions follow the same age 701/2 rule. If you die, and your spouse has predeceased you and your children (or someone else) are the beneficiaries, passage directly to your children or others is not protected by the minimum distribution rule and the distributed funds are automatically fully subject to federal and state income taxation. The kicker could be failure to withhold with notice of taxes due showing up months later – after the funds have been spent.
This can be solved by making the spouse beneficiary of the IRA and a specialized trust for children the contingent beneficiary. The trust then makes required minimum distributions over the lives of each beneficiary (if each has his/her own account in the trust) or over the life of the oldest beneficiary if there is a single account. The Trustee can and should be given the power to make additional taxable distributions for the health, maintenance, education and support of the beneficiaries. This stretches the required taxable amounts for a significant period of time while providing the flexibility to make additional distributions as needed for appropriate expenses.
Another technique would be to provide life insurance for the surviving spouse – which would be received free from income tax while directing IRA assets to a Trust for children which in most cases would significantly defer income taxes related to the IRA.
Side benefits include the ability to protect the children from creditors, ex-spouses and others, as well as the ability to provide for a special needs beneficiary.
As simple as this technique might sound, it is important to have such a trust planned and executed by an experience attorney with significant estate planning experience. Such a trust can be amended and revoked before it becomes operative at the death of the IRA holder.
Finally, check the beneficiaries of all of your qualified plans, non-qualified plans and your life insurance. Over the years, things change and at the end of the day, quite often the named beneficiaries are ex-spouses, deceased spouses, defunct trusts, sold businesses or others that will at least lead to heavy discussion if not litigation.
If you would like more information on this subject, or have a client who might benefit from a discussion about it, please contact Barry Koslow at bkoslow@mkaplanners.com or (781) 939-6050.
Securities offered through Advisory Group Equity Services, Ltd., Member FINRA/SIPC. 444 Washington Street, Woburn, MA 01801 (781) 933-6100.
This article should not be considered as providing accounting, business, financial, investment, legal, tax, or other professional advice or services. It is not a substitute for such professional advice or services, nor should it be used as the basis for any decisions or actions that may affect your business or you personally. This should only be one part of your research. You should seek authoritative guidance from a qualified accountant or attorney before taking any action.
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