IRA trust
There are good reasons to leave your IRA in trust:
- To keep a beneficiary from blowing all the money on a fancy
car or worse
- To keep the assets away from the spouse of a beneficiary,
a spouse who you never liked
- You have great control over the conditions which must exist
before your beneficiary can access the funds (other than the
mandatory IRA distributions)
But there are specific regulations to adhere to:
If you use your living trust as the beneficiary of your IRA
(not recommended), the trust must meet four conditions to hold
an IRA (see Life and Death Planning for
Retirement Benefits by Natalie Choate)
a. it must be valid under state rules
b. beneficiaries must be identifiable
c. the trust that will hold the IRA is irrevocable
at death
d. trustee must supply the IRA custodian copy of
trust
e. all beneficiaries must be individuals
Some cautions:
When you leave an IRA to a trust, or sub
trusts, there is only one measuring life for IRA distributions—the
life of the oldest beneficiary. Therefore, if you have several
beneficiaries who are far apart in age, you need to establish
a separate trust for those for whom you want to maximize the
post-death stretch distribution period.
Retirement asset will
The IRA beneficiary firms supplied by the bank or the securities
firms are very poor and do not adequately allow you to spell
out your IRA distribution desires. For example, consider this
chart.
You probably think that if your son, John, predeceases you,
his IRA distribution share goes to your grandson, Bob. That may
or may not be the case depending on whether your custodian uses
a per capita or per stirpes method of IRA distribution. If you'd
rather not rely on the process of some large impersonal institution,
have your attorney prepare a Retirement Asset Will to replace
those very poor institutional beneficiary forms.
Custodian forcing distributions
Just because IRS has a rule that permits
certain liberal action does not mean that the custodian of
a retirement plan must follow those IRA distribution rules.
For example, you may assume that leaving your 401k balance
at the company is just fine. You have named your son as beneficiary
and assume that he will inherit the IRA and can use the “stretch” concept to defer
IRA distributions over his lifetime, allowing the funds to grow
tax deferred for decades. The custodian may say no way—they
may very well have a rule that says all IRA distributions to
non-spouse beneficiaries are paid out within 5 years.
Have a professional review those booklets with
tiny little type that you get from custodians if you want to
avoid IRA distributions surprises. It is probably best not to
leave assets in qualified plans but rather, roll them to an IRA
where you can use your own IRA Asset Will or trust to determine
your IRA distribution desires.
Rule 72t for those under age 59½
If you need IRA distributions
prior to age 59½,
the IRS does let you tap your plan and also avoid the 10% penalty
for early IRA distribution. The simple rule is to set up a stream
of lifetime equal distributions. For example, if your life expectancy
at age 59 is 20 years and your IRA is $200,000, then it's okay
to take 1/20, or $10,000 annually. Of course, the calculation is
a little more complex than this as the IRS must be assumed to earn
interest that is not more than 120% of the federal mid-term rate
(published monthly by the Federal Reserve).
You can change the amount under the above calculations after
5 years and attainment of
age 59½.
Here's an IRA distribution example for a client age 52, spouse
age 48, joint life, assuming lump sum of $800,000 and a projected
interest rate of 6.72% (which is the IRS guideline). The 72t
IRA distributions could be any of the following:
- Minimum distribution method - $24,845
- Amortization method - $57,451
- Annuitization method - $64,616
Note the age of the client in this example is age 51. He and
his wife also had a college-age child. To create flexibility,
the qualified plan distributions can be rolled into multiple
IRAs. In this example, the client actually rolled the IRAs into
three separate accounts utilizing the 72(t) option for two. The
first was on a monthly basis; the second paid annually, and the
third remained intact so the account could grow. Since no payment
was being made from the third account it could be used for college
funding, if needed. (Remember, higher education expenses are
one of your exceptions under the 10% penalty rules). This is
a great way to create IRA distribution flexibility under the
72(t) election.
Split IRA
If you have multiple beneficiaries of your IRA, they can split
your IRA after your date of death. The advantages to this are
several:
- They each get to invest as they like
- One can go buy a yacht with their portion while another can
stay invested
- They can have different IRA custodians
- They don't have to make joint decisions
- They get to name their own beneficiaries
- They each have a separate IRA distribution schedule based
on their age
Some advisors recommend splitting your
IRA during your lifetime—one
account for each beneficiary. If you like more paper and more
accounts to manage, this is a good idea, however, it won't make
your life simpler. So just make your beneficiaries aware that
they should split the account to maximize their IRA distribution
benefits.
Make sure that the IRA is easily divided or you provide instructions.
For example, if your IRA contains a note on property, you may
want to have an IRA Asset Will describing how the split should
occur.
Qualified
Plan distributions
Roth
IRA Conversion Issues
IRA Distribution
tables
IRA
Distribution Client Newsletter
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