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 you 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. 

We know you may have more questions about this type of trust. To find out if an IRA Inheritance Trust® is right for you, call us at 870-275-4304 or book an appointment here