Happy Mother’s Day!

Now, time to get down to business. :)

I’d like to give you a few strategies for handling the closing inherited IRA stretch loophole.

When it comes to passing down an IRA to the next generation there are generally three things you can do:

Important Note: there may be some things you can do while you are alive to change the character of your IRA for more benefits while you are alive and when you are gone, but I’m going to leave that to the people that focus on that – financial advisors. If you don’t know anyone and you want a couple of names, let me know.

1. Do Nothing (but actually do something).

If you have not created a trust to house your IRA after you are gone this is essentially what you were doing before.

The something you can do is let your beneficiaries know they will be inheriting and IRA some day and they will have some options in front of them – and help them to figure out what the best options are (or who to talk to for help).

2. Direct within your trust how the Trustee is to make withdrawals and distributions.

This can be as simple as “Trustee shall withdraw and distribute one-tenth of all retirement accounts each year…” to whatever specific system you can come up with to leaving it to the discretion of the Trustee to pay as little tax as possible.

Important note, however, if you decide to leave it in the hands of the Trustee, it is important to understand that they will be making their best educated guess as to the distribution schedule and that may result in more income tax being paid than if the strategy were perfectly executed.

3. Force a “stretch.”

This one might sting a bit up front but can provide many of the long lasting benefits to your beneficiaries as the traditional stretched inherited IRA.

In this circumstance you might have the Trustee withdraw one-tenth of all retirement accounts each year but instead of distributing them to beneficiaries keep the assets in trust, reinvest them, and hold them until a specified age in the future, creating a pseudo-retirement account for the beneficiary.

To give you a very specific and straightforward example, the Trustee would withdraw the funds at one-tenth of the account balance per year for 10 years (hopefully minimizing any income taxes that need to be paid) and then reinvest those assets in an account specifically identified as the “retirement investment account.”

This account would not actually be a retirement account the way we think of them, but it will act as one (and it will have many of the same protections and characteristics, particularly if the beneficiary is not also the Trustee).

The trust then directs payments made out of the “retirement investment account” starting at age 65 for the beneficiary in increments of 1/35th of the account. This ensures the beneficiary some income through the age of 100 (hence the retirement account-like nature of the distribution).

Hopefully that made sense.

Have a great week, and if you know anyone that might be interested in this information, please forward it to them!

Cheers,

Christopher Small
CMS Law Firm LLC

PS – of course we’re here if you need estate planning or probate help. Click here to talk estate planning. Click here to talk probate.