The IRA Inheritance Trust® Maximizes Growth A New Trust That Can Stretchhhh and Protect IRA's After You're Gone
Using The IRA Inheritance Trust® To Maximize Growth
Thanks to new IRS rules, your beneficiaries who receive your IRA’s after you’re gone, may now “stretch out” their taxed required minimum distributions (RMD) over their own life expectancies, rather than yours. This means that IRA monies can compound tax-free for a much longer time…and can literally grow into millions!!!
For example, if your child is age 50 when he inherits your $200,000 IRA and that money is growing at 8% and he withdraws only the RMD, watch this…at age 80 he will have withdrawn a total of $700,000 and the account value will still be $300,000, (which can pass to your grandkids). That’s 1 million from only $200,000.
The problem is that our beneficiaries usually don’t understand the benefits of “stretch out” and will withdraw the entire IRA after your death. That can generate a 35% tax bill of $70,000. Since that tax isn’t due until April 15th of the following year, often the funds are gone and the beneficiary is in a financial bind. Stretch out is not automatic! You must do the proper advance planning. Your IRA must have the right beneficiary designation and chances are that your current beneficiaries are wrong. Beneficiaries often do not understand the tax rules. They could be influenced by a spouse or 3rd party into withdrawing all the money or foolishly spending it. Also, will the IRA funds be protected in the event of your child’s divorce, creditor's claim, bankruptcy, or a lawsuit?
On September 16, 2005, the IRS issued a ruling which approved a special type of trust which we call the IRA Inheritance Trust®. We are utilizing the very trust that was the subject of the ruling, to be sure that it will be approved in any review that could be made by the IRS. It allows your beneficiaries to:
1)"Stretch" payments out over each beneficiary's own life expectancy. Under previous rulings, if your trust named your 55-year old son and 20-year old grandson, the 20-year old grandson was required to withdraw IRA distributions over your 55-year old son’s life expectancy, causing your grandson to lose over 35 years of tax-deferred growth. The IRA Inheritance Trust® avoids this major disadvantage of naming your standard Revocable Trust as a beneficiary as explained in our On Line Presentation entitled "Who Should Be Beneficiary On Your IRA?", slide #22;
2)Insulate the IRA from your children's creditors, lawsuits, and divorces, after your death (your IRA is insulated from creditors and lawsuits, while you are living, however, without the IRA Inheritance Trust®, that protection disappears after your death, when the IRA is inherited by children or grandchildren). The IRA Inheritance Trust® avoids this major disadvantage of naming your children directly, as explained in our On Line Presentation entitled "Who Should Be Beneficiary On Your IRA?", slide #18;
3)Make the IRA funds estate-tax free when transferred from child to grandchild;
4)Assure that each beneficiary can take advantage of the maximum income tax “stretch out”; and
5)Create a legacy for your grandchildren and great grandchildren so that many many years after you're gone, they are still receiving a check every year WITH YOUR NAME ON IT.
You also need to be wary if your existing Living Trust is the beneficiary of your IRA. Normally, we suggest to our clients that surviving spouse be the primary beneficiary of the IRA and their Living Trust be the secondary (contingent) beneficiary. However, if your trust was written more than a few years ago or has not been recently updated to comply with current IRS regulations related to IRA accounts, it is possible and even likely that the Trustee of your Trust will be required to withdraw ALL of the IRA funds in 5 years and will not be allowed to use any of the beneficiary's life expectancies to stretch out the required minimum distributions. Preparing the new IRA Inheritance Trust® or updating the tax provisions of your existing trust will resolve this serious problem.
If you live in Illinois, you are interested in this exciting new planning tool and you have IRA funds in excess of $200,000, please call us and ask for our free educational materials regarding the IRA Inheritance Trust®.
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