IRA Planning with Trusts

1. IRA Planning with Trusts

2. IRA Planning with Trusts Considerations

3. IRA Planning with Trusts Considerations • For many clients, their IRA is the major asset next to their residence (!!)

4. IRA Planning with Trusts Considerations • For many clients, their IRA is the major asset next to their residence (!!) • Most clients “trust” their children, but also want to protect their grandchildren

5. IRA Planning with Trusts Considerations • For many clients, their IRA is the major asset next to their residence (!!) • Most clients “trust” their children, but also want to protect their grandchildren • Tax Deferred growth is better than After-Tax growth

6. IRA Planning with Trusts Basic IRA Rules

7. IRA Planning with Trusts Basic IRA Rules Assets contributed to an IRA are “pre-tax”.

8. IRA Planning with Trusts Basic IRA Rules Assets contributed to an IRA are “pre-tax”. Assets inside an IRA “compound” income tax free.

9. IRA Planning with Trusts Basic IRA Rules The IRA is really a “tax deferral” vehicle since eventually the assets in the IRA are subject to income tax.

10. IRA Planning with Trusts Basic IRA Rules The IRA is really a “tax deferral” vehicle since eventually the assets in the IRA are subject to income tax. The question is when?

11. IRA Planning with Trusts Basic IRA Rules An IRA owner must begin minimum withdrawals based on his/her life expectancy no later than April 1st of the year after he/she attains age 70 ½.

12. IRA Planning with Trusts Basic IRA Rules These withdrawals are known as “required minimum distributions” (“RMD’s”)

13. IRA Planning with Trusts Basic IRA Rules If the owner of an IRA dies before full distribution, there are different options if a spouse is the beneficiary of an IRA or if a non-spouse is the beneficiary(ies)

14. IRA Planning with Trusts Basic IRA Rules If the spouse of an IRA owner is the beneficiary and “inherits” the IRA, he/she has the option to “roll-over” the original IRA into a new IRA owned by the spouse. The same RMD rules would then apply to the new IRA.

15. IRA Planning with Trusts Basic IRA Rules Only a spouse can “roll-over” an IRA.

16. IRA Planning with Trusts Basic IRA Rules Since 2003, the IRS changed its regs and now allows a non-spouse beneficiary (for example, a child) to take or "stretch-out" the taxable RMDs over a much longer period, using the beneficiary’s life expectancy rather than the shorter life expectancy of the original IRA owner (e.g., the parent).  This means that money inside an inherited IRA may now compound much longer, tax-deferred.

17. IRA Planning with Trusts For example, let's take a son age 45 (at the time of his mother's death) who inherits a $200,000 IRA and withdraws only the RMD’s. If the IRA grows, from both income and principal appreciation, at the rate of 6% a year, then 30 years later when the son is age 75, the son will have taken over $400,000 in RMD’s and still have almost $300,000 left in the IRA to use over his later years or pass down to his children (the original IRA owner's grandchildren).

18. IRA Planning with Trusts To sum it up, the original $200,000 inherited IRA became worth over $700,000 to that family! (And that doesn't include the future value of the RMD’s if they were placed into an investment account).  If we assume the IRA will be worth over $200,000 when the owner passes, or will earn a higher rate of annual return, or goes to a younger beneficiary, that $200,000 IRA could eventually be worth well over $1 Million!

19. IRA Planning with Trusts Many IRA owners and their advisors “assume” that the IRA beneficiaries will make the right “stretch-out” decisions before they take withdrawals.   Unfortunately, that is not always the result when the IRA owner dies.

20. IRA Planning with Trusts A beneficiary is not prohibited from withdrawing more than the RMD’s and may instead decide to cash out the IRA earlier than required.

21. IRA Planning with Trusts A beneficiary is not prohibited from withdrawing more than the RMD’s and may instead decide to cash out the IRA earlier than required. This is often referred to as a “blow-out”.

22. IRA Planning with Trusts This can happen because the beneficiary is: Not aware of the RMD rules and choices.   The beneficiary sees her name on an account and immediately transfers it into her own name.   Wrongly thinks it is a tax-free rollover if put into her own IRA.   Just can't wait to get her hands on the IRA money or is influenced by a spouse or some other third-party to grab and spend it!

23. IRA Planning with Trusts There are also other issues which make naming an individual (e.g., the child) as the beneficiary of an IRA unwise.

24. IRA Planning with Trusts There are also other issues which make naming an individual (e.g., the child) as the beneficiary of an IRA unwise: The child is a minor or young adult

25. IRA Planning with Trusts There are also other issues which make naming an individual (e.g., the child) as the beneficiary of an IRA unwise: The child is a minor or young adult The child is disabled

26. IRA Planning with Trusts There are also other issues which make naming an individual (e.g., the child) as the beneficiary of an IRA unwise: The child is a minor or young adult The child is disabled The child has creditor problems or is not “good with money”

27. IRA Planning with Trusts There are also other issues which make naming an individual (e.g., the child) as the beneficiary of an IRA unwise: The child is a minor or young adult The child is disabled The child has creditor problems or is not “good with money” The client does not like or trust the “in-law”

28. IRA Planning with Trusts Along with the new regs on allowing the “stretch-out”, a trust can now be the beneficiary of an IRA.

29. IRA Planning with Trusts Along with the new regs on allowing the “stretch-out”, a trust can now be the beneficiary of an IRA. As a result, it is now common to designate the revocable living trust (“RLT”) as the beneficiary of an IRA (or as the contingent beneficiary if the IRA owner is married)

30. IRA Planning with Trusts Along with the new regs on allowing the “stretch-out”, a trust can now be the beneficiary of an IRA. However, to avoid having the RMD calculated based on the oldest age of all “potential beneficiaries” of the trust, the trust must be a “conduit trust”.

31. IRA Planning with Trusts A “conduit trust” is a trust with specific language requiring the RMD’s to be paid out by the trustee to the beneficiary on an annual basis regardless of any other provisions of the trust permitting accumulation of income and/or principal.

32. IRA Planning with Trusts A “conduit trust” must use the oldest age of the current beneficiaries for the calculation of the RMD’s for all of the beneficiaries.

33. IRA Planning with Trusts A “conduit trust” must use the oldest age of the current beneficiaries for the calculation of the RMD’s for all of the beneficiaries. This may not be a huge issue for a client with two children only 2-3 years apart in age; however, it can be a substantial issue for families with a number of children of disparate ages or if a grandchild may be a beneficiary.

34. IRA Planning with Trusts As mentioned, a “conduit trust” must distribute the RMD’s to each beneficiary regardless of other circumstances existing at the time of death (e.g., disability, creditor issues, divorce, etc.)

35. IRA Planning with Trusts To provide maximum benefits and flexibility, there is now a new type of trust.

36. IRA Planning with Trusts To provide maximum benefits and flexibility, there is now a new type of trust: The IRA Beneficiary Trust

37. IRA Planning with Trusts To provide maximum benefits and flexibility, there is now a new type of trust: The IRA Beneficiary Trust Sometimes referred to as an “IRA Inheritor’s Trust” or an “IRA Inheritance Trust”

38. IRA Planning with Trusts To provide maximum benefits and flexibility, there is now a new type of trust: The IRA Beneficiary Trust In 2005, the IRS issued a private letter ruling 200537044 (the "PLR") that approved this new type of revocable trust created solely to be the beneficiary of an IRA account.

39. IRA Planning with Trusts The IRA Beneficiary Trust Features

40. IRA Planning with Trusts The IRA Beneficiary Trust Features: The RMD’s for each beneficiary is calculated on the age of each beneficiary

41. IRA Planning with Trusts The IRA Beneficiary Trust Features: Up to September 30th of the year following the IRA owner’s death, an election can be made to convert a beneficiary’s trust from a “conduit trust” to a discretionary “accumulation trust”

42. IRA Planning with Trusts The IRA Beneficiary Trust Features: If a beneficiary’s trust is converted, the “potential beneficiaries” of that trust can be limited to a designated class.

43. IRA Planning with Trusts The IRA Beneficiary Trust Features: If the IRA owner is married and does not want the spouse to be able “roll-over” the IRA (i.e., name new beneficiaries), the Trust can also be configured to hold the IRA for the benefit of the spouse.

44. IRA Planning with Trusts The IRA Beneficiary Trust This is an extremely valuable estate planning tool for any client with IRA assets over $150,000!