Revocable Living Trust Reason #3 – IRA Trusts | Estate Planning TV 053

Revocable Living Trust Reason #3 – IRA Protection and Legacy

Before we get going, the first thing I want to point out is that WHILE YOU ARE ALIVE keeping your IRA in your IRA account in your name is, in most cases, going to be the smart thing to do.

Your IRA, the one that you created with YOUR money, is very safe while you are alive.

If you think you might want to do something with your own IRA then please talk to your financial advisor first (and then come and talk to me).

Now that we have that out of the way, what I wanted to talk about was the benefits of using a trust to ensure that your retirement accounts aren’t wasted on taxes or frivolity after you are gone.

And, by the way, one more caveat. If you are married you should have your number one beneficiary be your spouse (assuming you want them to get your retirement account).

The reason for this is that spouses can roll over an IRA into their own and get all the same protections as if they’d created the IRA themselves.

Now that THAT is out of the way, let’s talk about inherited IRAs.

When you die your people are going to have one of three choices with what to do with your IRA:

FIRST CHOICE – cash it out right now.

There are a few downsides to this. First they are going to have to pay income tax on the whole thing.

So, just wipe out 40% or so of your IRA with that move.

The second downside is those funds now become accessible to the stupid moves of your heirs. Bankruptcy, divorce, accidents, etc. It can all be gone.

The third, and final, downside here is that they are free to spend the money however they want. And people are not good with found money.

SECOND CHOICE – take distributions over five years.

You have many of the same problems as option one, it just takes five years for everything to happen.

THIRD CHOICE – take distributions over the life of the beneficiary.

This is the best choice, no matter what. Here’s how it works. Let’s say you die at 80 and your 45 year old is the beneficiary. The actuarial table for your kid is 90.

In year one, they take 1/45 of the IRA. The rest sits there, GROWING.

Next year they take 2/45, and on and on. And the funds just keep growing.

There is only one downside to this – the funds are still at risk of liability, bankruptcy, divorce, etc.

The solution is to place the IRA in a trust for the benefit of the beneficiary. You get to dictate the terms of distribution, and because the funds are in a trust, they are protected from the bad choices and bad luck of your beneficiaries.

If you want to learn more about this, give me a call.


Christopher Small

If you have any more questions or think you might want some help, click the link below to schedule a phone or in person strategy session. Looking forward to it!