More IRA Trust Stuff

March 27, 2017 - Posted by: admin - In category:

taxes - No Responses

I was just referred to an article on this very topic, which is very much related to our blog post yesterday.

I am happy to report that although the article I am referencing is not written by an attorney, it is quite good and although it contains a few points that should be clarified, it is a helpful contribution to this very important and very timely topic.  Here is a link to the article by Kenneth Roberts, published today on MarketWatch.com (click here to read the article).  Now, lets discuss a few points raised in the article that need to be clarified, along with a few more points raised in the comments to the article (many of which comments are totally off base and incorrect).

  • just any trust (i.e. “a trust”) will NOT do the trick.  Throughout the article, the author seems to refer generically to trusts and does not seem to make clear the VERY important point that in order to accomplish the desired objectives, a specialized trust must be used, namely a “qualified designated beneficiary trust” (hereinafter, we will simply refer to this special type of trust as an “IRA trust”).
  • The article states that one of the potential problems with using a trust as a beneficiary of your retirement account is the expense of a professional trustee.  While this can be true in some instances, the important point to make here is that you are NOT required to use a professional trustee for an IRA trust.  I understand that there are times when it might be desirable to use a professional trustee for an IRA trust, just as there are times when it is desirable and correct to use a professional trustee for other types of trusts, but again, it is never a requirement to use a professional trustee.
  • The author in that article suggests that perhaps a minimum of $500,000 in retirement account savings is necessary before it makes sense to utilize an IRA trust structure. While this may be a helpful rule of thumb, it is certainly NOT correct advice in many instances.  For example, consider an elderly widow who has plenty of other assets to live on and who has $250,000 in her IRA.  For many different reasons, this widow does not wish to leave that IRA outright to her only son.  The son is totally irresponsible, has been married 3 times and is on the verge of bankruptcy.  In this hypothetical, it might be very wise for the widow to utilize an IRA trust structure to serve as a conduit for her IRA so that when she is gone, these retirement funds can be used for the benefit of her wayward son, but without exposing the same to the son’s creditor’s and/or his unwise decisions. To summarize, these are not “one size fits all” matters and what makes sense for one person is not advisable for another.
  • One of the comments to the article talks about just purchasing a variable annuity instead of doing any work with an IRA trust, as if such a variable annuity is a panacea.  The author of that comment is likely an annuity salesman/saleswoman…:)  Regardless, whenever you hear the word annuity, you should understand that such things are so commonly advertised and sold because in most instances there are very high commissions that come along with such things.  Whenever people talk about expensive fees for attorneys, it causes me to consider how many annuity salesman make FAR, FAR more by selling a single annuity (even a “small” annuity) than most attorneys make in a month or two of full time employment.  In addition, there are MANY potential negative consequences associated with using an annuity of any kind as your main investment, retirement and “planning” tool. That being said, sometimes annuities are very appropriate and helpful, but it all depends on the person, the situation, the objectives and the type of annuity.
  • Another comment points out that you do not need an IRA trust to keep your IRA out of a possible probate.  This is correct. As with life insurance and other types of financial products, because you have an ability to name a beneficiary of your retirement accounts, if you actually name such beneficiary (or a number of them) and if this is done correctly, probate will be avoided for such financial accounts.  However, following that path will result in such beneficiary obtaining immediate and complete access to the proceeds of such account, with no asset protection and no protection from unwise spending tendencies.  There is nothing wrong with this approach if this is what you are seeking to accomplish, but many people actually do NOT want to follow this path, for the reasons noted above.  Even so, probate avoidance is usually not part of the consideration for using an IRA trust, so that particular comment is spot on.
  • Yet another comment asks about not being able to transfer ownership of an IRA into a trust and the answer to this point is that regardless of whether you CAN transfer ownership, you almost certainly will NOT want to do so. Rather, the owner of a retirement account should retain such ownership during that person’s life and simply be sure to set up proper beneficiary designations for said account. Upon the death of such account owner, the account will then be payable according to such beneficiary designations. By the way, even when an IRA trust is used, the IRA is “connected” to the IRA trust through this same beneficiary designation. We typically do a “two step” beneficiary designation, making the surviving spouse (if applicable) the first or primary beneficiary of the retirement account and then making the IRA trust the secondary beneficiary.
  • The last comments that we will touch on relate to the higher tax rates applicable when a trust is involved.  It is true that retained income or net income (i.e. income that is kept within the trust as of the end of the trust’s fiscal year) is taxed at a very high tax rate. This is true for all trusts, whether dealing with an IRA trust or any other type of trust. However, most IRA trusts are designed as “conduit trusts” and actually require that all income is distributed out to the beneficiary on a yearly basis, which then causes such income to be taxed to the individual at the much lower (in most cases) tax rates.

As with just about every other aspect of estate planning, financial planning and tax planning, this is NOT “do it yourself” stuff. Make no mistake, an IRA trust can be a wonderful thing and can provide many valuable benefits in the right situation. Even so, I readily acknowledge that an IRA trust is not always warranted or appropriate. Please contact us to learn more.

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