How to Protect Your IRA with Estate Planning | Estate Planning TV 012

For many people their IRA is the biggest asset that will be given to their family when they die.

What most people don’t know is that for many families, inheriting an IRA is the worst thing that can happen to them.

Today I wanted to talk about why that is, the options that exist for an inherited IRA, and some ways to ensure that your hard earned money isn’t wasted via taxes or frivolous spending.

Why Inheriting an IRA is Hard

Inheriting an IRA is hard because the rules around what to do are complicated and most people aren’t equipped to make the right decisions.

What makes an IRA unique is the ability to accept a lump sum payment out of the IRA.

This can be good in some situations but is often not good.

First, there is the income tax that is paid on the distribution (there is no estate tax but remember you deferred your income tax – that still has to be paid).

A lump sum distribution will likely put your beneficiary in the top tax bracket for you in that year (at a 39.6% rate).

That means almost 40% of your hard earned money could go right back to the government.

Add to that fact that now your beneficiary has all of this money to spend and things usually don’t turn out for the best.

Inherited IRA Options

When someone inherits an IRA they have three main options.

[1] They can take a lump sum.

This is bad for all of the reasons we discussed above.

[2] They can take a full distribution over 5 years.

This is a little bit better but probably results in similar problems to the first option.

[3] They can take IRA-like distributions off of their lifetime.

This option is a game-changer. Imagine being able to leave a pseudo-retirement for your family when you are gone.

When this option is used the IRA is reinvested and distributions are taken off of their lifetime.

For example, if your beneficiary is 30 and chooses this option, they would have 60 years of growth and distributions.

In year 1 they would take 1/60 as a distribution. In year 2 they’d take 2/60.

Can you see how this can create huge returns over time?

The only drawback to a lifetime distribution IRA inheritance options

The only drawback to that third option is the continued lack of protection from bankruptcy, divorce, etc.

If you would ever file bankruptcy, get in a car accident, etc. and owe a lot of money, these funds would be eligible for taking by those people.

But there is a solution.

Estate Planning and the IRA Trust

You have the ability to take the decision making process out of the hands of your family and help them do the right thing.

It’s called an IRA Trust, and it gives you everything you need to protect your family for the long term.

First, it will require the long-term distribution of funds. No huge tax losses here.

Second, it will protect the money from being attached for bankruptcy, liability, divorce, etc. It is protected just like your funds are now.

Third, it funds the long-term needs of your family. In 30 years when those funds are helping them in retirement their lives are going to be changed forever.

If you want to know more click here to book a strategy session and we’ll talk.