Colorado Estate Planning Blog

Thursday, March 30, 2017

Why consider an IRA trust?

Individual Retirement Accounts (“IRAs”) were not originally designed to be wealth transfer vehicles. But effective January 1, 2003, the IRS issued Regulations with respect to the IRS code sections which create IRAs. The key aspect of the Regulations is that they now permit a non-spouse beneficiary to “stretch-out” the taxable required minimum distributions over his or her actuarial lifetime. The ability to compound the IRA investments, tax free, over a much longer period of time makes IRA’s now one of the most valuable assets when passing wealth down from generation to generation. This income tax stretchout can be obtained either by naming individuals as beneficiaries or by naming a trust as a beneficiary. A Living Trust typically cannot meet the requirements set out by the IRS, therefore a separate IRA Trust is created and is specially designed to not only meet the IRS requirements for a “Designated Beneficiary Trust”, but it also provides protection against the most common problems that may occur when an individual is named as beneficiary. A common concern for naming an individual rather than a trust is the beneficiary’s ability to withdraw more than the required minimum distributions, which causes taxation issues and loss of tax free compounding. A beneficiary’s poor money management skills, age or disability are also common problems faced when naming them directly. If an individual is named as a beneficiary, the IRA is exposed to the beneficiary’s spouse in a divorce and lawsuits against the beneficiary could expose the assets to creditors. All of these problems may be dealt with by naming an IRA Trust as a beneficiary. 

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