It is common to find that adult children have been named as beneficiaries of an IRA. In the event of a parent’s death they then have the option to determine how the assets are taken out of the IRA. They may pull the assets out at one time and have the full amount taxed, or they may “stretch” the distributions over their own lifetimes. Experience shows that although the stretchout is often the best plan, most children tend to take a lump sum distribution within one year of the parent’s death.
When there are concerns about protecting the IRA for the next generation, a special trust can be drafted that will allow the distribution of annual “required minimum distributions” and a Trustee may access the IRA and take more if there is a real need.
To accomplish this, a properly drafted trust is necessary. For a trust to be utilized to determine that a “designated” beneficiary exists, it must have very specific language. In addition, there are drafting techniques and wording that can be used on beneficiary forms that will allow your trust to qualify as a designated beneficiary. This language must be correct in order to allow a “look through” the trust to the beneficiaries of the trust. If drafted properly, an IRA trust can be a tremendous asset to your heirs, and if it is not drafted properly it can cause the recognition of all income in an IRA at your death.
For example, if you are considering leaving a large IRA balance to your children who are adults and do not need the assets, you may want to consider leaving the assets to your grandchildren in an IRA trust. By leaving the assets to your grandchildren in a properly drafted IRA trust, each grandchild can use his or her life expectancy to determine the annual required minimum distribution. By using the grandchildren’s life expectancy, a larger percentage of your assets remain tax-deferred and can grow and expand over the life-span of your grandchildren, which could potentially result in several extra million dollars by the time your grandchildren reach retirement. If you have many grandchildren with a large age range in between them, say the oldest is 25 and the youngest is 4, then you must make sure that the trust has been propery drafted to provide that each child may use his or her own life expectancy and not just the lifetime of the oldest beneficiary. If the trust is set up for all the grandchildren as a class, then the age of the oldest beneficiary is used to determine the payout schedule for all the grandchildren.
This is a sophisticated Estate Planning technique that should be carefully reviewed by an experienced and knowledgeable Estate Planning Attorney. If you would like more information about creating an IRA trust or “stretching” your assets, contact our firm for more information.
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