Free to Choose? Why This Might NOT Always Be a Good Thing With Inherited Retirement Accounts
April 17, 2015 - Posted by: admin - In category:
We all value freedom and the right to choose for ourselves. However, in the context of how to plan for the eventual transfer of your retirement accounts to others, freedom of choice may not be the best approach.
Consider the following hypothetical example, which is emblematic of a great many client situations I have had in the past. Mr. and Mrs. Jones are sitting in my office talking about how they want to design their estate plan, including what arrangements they would like to make for their retirement accounts. They are average middle class individuals who have lived a very frugal existence and have saved carefully for their retirement years. While we never know for sure, it seems quite likely that Mr. and Mrs. Jones will not spend all of their retirement savings during their lives and will instead end up transferring a minimum of $100,000 to each of their two adult children.
As we discuss this probable outcome, we talk about the various options these parents have with regard to naming beneficiaries for their IRA accounts, including the pros and cons of using an IRA Trust to serve as a conduit for the inherited IRA accounts following the passing of both spouses. While Mr. and Mrs. Jones are very much in favor of many of the benefits afforded by an IRA Trust, including asset protection in general, divorce protection, lawsuit protection and other protections and controls, this issue of “control” seems to hit a nerve with them and they respond in a very determined manner that they do NOT wish to take away the freedom of their children to choose what to do with their retirement accounts once such accounts are transferred to the children.
While I certainly respect these feelings and views, I do feel a responsibility to remind these good parents that if they leave IRA accounts to their children outright, it is almost certain that one of their two children (if not both), will elect to cash out such accounts immediately upon gaining access to the same. (By the way, I have never seen a scientific study on this point, but from interactions I have had with financial advisors myself and from information I have received through the various national organizations of estate planning attorneys of which I am a member, it is estimated that perhaps as much as 85% of recipients of inherited retirement accounts will choose to cash out 100% of such accounts within the first year of receipt of the same.) Given these statistics, far too often, the concept of “IRA Stretch” can become a myth, rather than a reality. It does NOT have to be this way. Rather, people like Mr. and Mrs. Jones are “free to choose” to properly utilize an IRA Trust to serve as a conduit for their retirement accounts at the appropriate time and thereby ensure that at least part of their hard-earned and carefully-saved retirement monies will become retirement funds for their two children. By thy way, this is NOT an all or nothing decision. Mr. and Mrs. Jones could elect to make 50% of the retirement monies that their children inherit restricted funds that must remain as retirement savings and then permit the children to have full choice with regard to the remaining 50%. Likewise, there is nothing magical about 50%–Mr. and Mrs. Jones could pick any allocation between restricted and unrestricted funds.
To summarize, as noted in the image and quote that accompanies this post–while you are free to choose what to do with your retirement accounts, including being free to give this same agency to your account beneficiaries, you should do so in the face of the reality that BY FAR the most likely outcome of giving such unrestricted freedom to your children or others is that such individuals will eventually utilize such freedom of choice to do something that you likely do not desire or intend and which is likely not the best decision for that person. In almost all cases, there are much better, wiser and more helpful ways to go about this process of passing your hard-earned retirement assets on to the next generation.
If you want to learn more about IRA Trusts, “IRA Stretch” and related concepts, please click here to read a post on that subject. Also, please remember that we are attorneys who can competently advise you with regard to an IRA Trust and the law aspects of the same. Please consult with your licensed and competent (and trustworthy) financial advisor to learn about IRA Stretch in general, including “the rule of 72” and other items related to financial planning. When done properly, estate planning (which includes financial planning, but is larger in diameter) is a team operation!