In or Out? Should You Use Your Trust To Achieve IRA Stretch?

March 25, 2015 - Posted by: admin - In category:

taxes - No Responses

When done right, using your trust as a conduit for your retirement accounts can provide significant benefits.

There are many good reasons to make your revocable trust the beneficiary of your retirement account(s).  Be careful, however, because unless this is done correctly, it can lead to problems and fail to accomplish the desired benefits.

First, you should know that the average, run of the mill, revocable living trust that is 5-15 pages long and was drafted 30 years ago is not a “qualified designated beneficiary trust”.  What the heck does that mean?  Great question, glad you asked. In short, that means that unless you have the right kind of trust, with all of the requisite bells and whistles, your trust cannot be used as a beneficiary of your retirement account and at the same time accomplish “stretch” for your intended beneficiaries.  Rather, using the “generic” trust as a beneficiary for your retirement account will result in the IRS requiring that your retirement account is totally emptied within 5 years of your death (i.e. the dreaded “5 year rule”). Actually, the 5 year rule isn’t a problem if you understand it and if that is your objective. However, we find that more and more people who are naming beneficiaries for their retirement accounts desire that their children and/or other family members then use their portion of such retirement accounts as their own retirement savings vehicle. In other words, normally the intent is to have the person who inherits the retirement account realize the tremendous benefits of a “stretch IRA” by taking distributions from such inherited IRA over the course of such person’s life and thereby stretching out such tax benefits. To better understand what an amazing thing a “Stretch IRA” can be, just Google that term or click on this link to see a basic example.

Can you achieve the goal of a “Strech IRA” without using a qualified beneficiary trust?  Yes. The most common practice today is for people to name their spouse and/or their children as beneficiaries of their retirement accounts and such individuals then have the option to stretch such retirement account over their own lifespan.  However, it is my experience that the overwhelming majority of beneficiaries who receive an inherited IRA choose instead the “cash out” option, rather than leaving the money in the account and saving for retirement.  On the other hand, by using a qualified beneficiary trust, you can require that the beneficiaries of your retirement account retain the money in the their inherited IRA account and thereby save for their own retirement. Being able to “encourage” wise retirement planning is one of the main reasons why our clients choose to utilize a qualified beneficiary trust.  There are other benefits as well, which we will discuss in later blog posts.

Remember, in order to achieve this particular benefit, your trust must be designed in a specified manner, consistent with IRS regulations. Otherwise, by using a “generic” trust, you will not pass IRS scrutiny and will not be able to achieve your goal of using your qualified beneficiary trust as a conduit for your retirement account to ensure IRA stretch for your chosen beneficiaries

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