An individual retirement account (IRA) is an important part of many retirement portfolios. If you have contributed the annual maximum over your adult life, you’ve probably grown a nice nest egg for your golden years.

When you die, however, that nest egg breaks open and passes to your listed beneficiaries. The two most common scenarios are (a) the kids spend it freely and get stuck with a huge tax bill or (b) creditors descend on the unprotected money.

What Can an IRA Inheritance Trust® Do?

Upon your death, the assets in your IRA can be protected from your beneficiaries’ creditors, and the annual distributions may be distributed over your beneficiaries’ lifetime, if desired. For example, what starts as a $200,000 IRA can become literally worth millions.

Nonspouse beneficiaries (i.e., children) generally withdraw the entire amount of the IRA upon the death of the parent. The benefits of the IRA trust are that the children will have creditor protection for the IRA, and they have the option of withdrawing the annual distributions over their lifetime. A further benefit is that you can require the children to take distributions over their lifetime. The principal continues to grow and provides a predictable income stream, and only the annual distributions are taxed. If you have faith in your child’s fiscal restraint and financial sense, we can also establish the IRA inheritance trust as a beneficiary-controlled trust.

Case Study:

Say that Joe’s daughter inherits his $200,000 IRA. Whether she spends it or reinvests, there will be a big tax bill the following year. With an IRA inheritance trust, the money stays put — the government, creditors and the beneficiaries themselves can’t get at it. Assuming an 8% annual return, Joe’s daughter would take out some $700,000 in minimum distributions if she lived another 30 years and still leave $300,000 to Joe’s grandchildren when she dies!

What Are the Benefits of An IRA Inheritance Trust®?

One advantage of having an IRA Inheritance Trust® is that the trust will protect your beneficiaries and assets from unwanted creditors. They will also be well protected from increased tax exposure. 

When owning an IRA, the owner has to start taking required minimum withdrawals (RMD's) at age 72 and pay state and federal income taxes on those withdrawals.  With the passage of the SECURE Act, the IRS now requires most non-spouse beneficiaries (including children) to take the RMD's over a ten year period, instead of allowing for the RMD's to be "stretched out" over the beneficiary's life expectancy under the old rules.  This creates more income tax to be paid on the IRA early on and less opportunity for the beneficiary to benefit from tax-deferred growth.

An IRA Inheritance Trust® has the ability to give your heirs the benefit of that “stretchout.” Taking into consideration income and principal appreciation, and the longer time period, an IRA could be a tremendous part of the financial future of your family and give that protection that you need. 

How It’s Different From Your Living Trust

An IRA Inheritance Trust® that has specific provisions for administering retirement accounts that are separate and distinct from a client’s revocable living trust. Your living trust has been drafted to address the entire range of non-retirement assets. The IRA Inheritance Trust® incorporates some very specific IRS requirements that allow for the accumulation of assets inside the trust. This can be critical if the beneficiary is abusing drugs or alcohol, has a judgment outstanding or is spending money unwisely. This is why we like the IRA Inheritance Trust® as the preferable type of IRA trust beneficiary.

Using an IRA Inheritance Trust® to Protect a Spouse

It’s important to note that provisions can be made in an IRA Inheritance Trust® for a spouse. This is important for creditor protection for the spouse, but for other reasons as well. Many of our clients would like their IRA account to be protected from their spouse’s next spouse if the spouse remarries after the account holder dies. It’s also important in a blended family or if the spouse eventually needs nursing home care and seeks to qualify for Medicaid. A layered IRA beneficiary designation which includes an IRA Inheritance Trust® and disclaimer planning can offer a great deal of flexibility for clients who want to ensure that their hard-saved retirement funds stay in their family’s hands and out of the hands of creditors or predators.

Are You Ready to Provide Total Protection for Your IRA Accounts?

Our mission is to provide total protection and peace of mind to our clients. For many, their retirement account is a significant asset and sometimes the only asset with significant value. Ensuring the retirement account is properly protected is something that matters to the team at Quraishi Law & Wealth. We are here to answer all of your questions about protecting beneficiaries of retirement accounts through IRA Inheritance Trusts®, disclaimer planning, and layered beneficiary designations.

To find out if an IRA Inheritance Trust® is right for you, call us at 870-275-4304 or book an appointment here

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Carrie Russom Quraishi, JD, CAPP
Carrie provides personalized wealth management, tax and estate planning services to clients in AR, TX & TN.