You would think simply naming a beneficiary of your IRA is the only thing you need to do but is that the only thing that the owner of the IRA should consider or think about?

Here are several planning considerations so that your beneficiaries can benefit or be protected by your designation:

  1. Protect Beneficiary From Self. If your beneficiary is not good with money or spends it as fast as they receive it, then the owner of the IRA should consider a Trusteed IRA or an IRA stretch-out trust (i.e., with controls on the amount that can be distributed such as the required minimum distribution) as the beneficiary (for the benefit of the individual beneficiary). If the trust is properly drafted, taxation can be deferred just as if the beneficiary is an individual (normally naming a trust as a beneficiary would result in immediate taxation). You can decide who is in charge (the trustee) of distribution of the funds held in trust.
  2. Protect Children if Your Spouse Remarries. An IRA stretch-out trust or Trusteed IRA can also be used to make sure your surviving spouse can benefit from your IRA during the surviving spouse’s life to the extent you desire, but require the balance held in the trust be distributed to the beneficiaries that you chose (i.e., your children) after the death of the surviving spouse. Thus, if your surviving spouse remarries, the funds held in the IRA stretch-out trust should be protected for your beneficiaries. Otherwise if the surviving spouse inherited the IRA directly, then the spouse could give the balance of the IRA to whomever he or she desired.
  3. Protect Grandchildren if Beneficiary Child has Marital Problems or Beneficiary Child’s Spouse Remarries. Similarly if a child of yours is a beneficiary of a properly drafted IRA stretch-out trust or Trusteed IRA, the inherited funds could be protected from a divorce of your beneficiary (child) or the beneficiary’s (child’s) spouse’s remarriage since you (not your beneficiary) can dictate (through the trust) how the funds are to be distributed after your beneficiary’s death. In other words, you may prefer the IRA to go to your grandchildren instead of your son-in-law’s or daughter-in-law’s new spouse if your child dies before his or her spouse. You can also protect your beneficiary (your child, in this example) by requiring an accumulation in the IRA stretch-out trust so that the son-in-law or daughter-in-law would not be entitled to any distribution during your child’s life (if they had no prenuptial or postnuptial agreement) as the required minimum distribution would stay in the trust.
  4. Name a Contingent Beneficiary to Avoid Probate and Adverse Tax Consequences. If you name your estate as a beneficiary or do not name an individual or properly drafted IRA stretch-out trust as a contingent beneficiary, then you may have to probate a Will (that sometimes you need not do if other assets passed by beneficiary designation, etc.). If that occurs there could be adverse tax consequences since there could be a requirement that all taxes be paid within five (5) years whereas with an inherited IRA (even if a properly drafted IRA stretch-out trust is the beneficiary) taxes could be stretched out over the life expectancy of the beneficiary. The IRA stretch-out trust or Trusteed IRA can be treated like an individual so long as the trust’s beneficiaries are identifiable, the trust is irrevocable, the trust is legal under state law, and the custodian of the IRA receives a copy of the trust in a timely manner.
  5. Protect Your Child From Child’s Creditors. In the majority of states (Texas is not one of those states), an inherited IRA is not protected from the beneficiary’s creditors. If the beneficiary of the IRA is a properly drafted IRA stretch-out trust, there would be creditor protection for the beneficiary. So, if you have a child that lives in another state and you want to protect that child from his or her creditors, an IRA stretch-out trust (whether it be a stand-alone trust or as part of a Will or Trust) could be a consideration.
  6. Protect Your Disabled Beneficiary From Loss of Public Benefits. Public benefits (such as Medicaid) are “means tested.” As a result, either the inheritance of an IRA (although this law is subject to be changed and there is consideration for a change at this time) or the distribution from an IRA could result in a loss of Medicaid eligibility. A properly drafted supplemental needs trust being named as a beneficiary that could avoid loss of valuable public benefits (healthcare costs, drugs, etc.).
  7. Protection of Beneficiaries Who are Minors. If you have a beneficiary that is a minor, many consider having an IRA stretch-out trust as a beneficiary to possibly avoid guardianship or having to go to court for someone to act on behalf of the minor that could occur if they had directly inherited the funds.
  8. Charitable Planning. If you plan on giving some assets to charity and some to others after you pass, you might consider the charity as the beneficiary of the retirement account since other beneficiaries (such as family members) would have to pay income taxes if they inherited the retirement account.
  9. Protection From Ex-Spouse Inheriting. If you name your child as a direct beneficiary (instead of a trust), then your child can do anything he or she wants with the inherited funds including giving the inherited assets to your ex-spouse. Furthermore, if the child owns assets that do not have a beneficiary designation if the child doesn’t have a Will, it is possible the asset could go to the parent of that child – your ex-spouse pursuant to the laws of intestacy (when one dies without a Will). A trust could eliminate that risk.

The focus of each individual (whether planning by Will, Trust or simply in designating a beneficiary of a retirement account) should be what is important for them to protect.

If interested in knowing more about estate planning, you can sign up for one of our free “Estate Planning Essentials” workshops by clicking here – or calling (214) 720-0102. Our next workshop is on Thursday, November 15, 2018 at 1:00 p.m. and the one after that will be on Saturday, December 15, 2018 at 10:00 a.m. We will be having a FaceTime Live event in January 19, 2019.

Click here to listen to Michael Cohen’s podcast on beneficary designations!

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