One of the most valuable investments most of us will ever accumulate is our retirement plan asset. We work hard, save all our lives, retire to live out our dreams and then watch the government take our hard-earned cash in taxes?
Wait, what? That’s not how it’s supposed to go.
Well, without the proper planning, that’s what could happen. But with a well-executed plan, it doesn’t have to be this way. With an ounce of prevention, there’s no need for a pound of tax!
With IRAs, the problems are the limited options you will have to choose from when planning how to save your money without feeding the taxman. Since the government was kind enough to let these funds accumulate tax-free all these years, they want their pound of flesh at some point.
So, one must follow some rules to make this happen. Rules such as making required distributions at a certain age, having a named beneficiary at the owner’s passing, etc. Ok, these rules aren’t so bad in the grand scheme of things. What does hurt are the rules that state that when the owner passes, if there is a non-spouse beneficiary, the IRA must pay out an accelerated rate. Ouch! And the owner has no control over what happens to the proceeds at that time. Again, if this is one of your largest assets, this may not be how you want it to pass to your beneficiaries.
Enter the IRA Trust. This is an IRA in which the owner establishes the IRA as a trust, naming a corporate fiduciary as the Trustee (an individual cannot be named) and the proceeds of the IRA are passed according to the terms of the trust at the death of the IRA owner.
Sound complicated? It’s really not.
The funds remain invested in the IRA and the trust acts as a conduit to the ultimate beneficiaries. Each year, the IRA must pay the required minimum distribution (RMD) to the trust, which then pays it to the beneficiaries named in the trust agreement - or not. This ensures that the rules of the IRA are intact (RMD is met), etc. The owner is able to continue the estate planning he or she was not able to accomplish through the IRA by naming the beneficiaries and the terms under which they receive distributions.
For example, they can set the terms of the trust to state that the trust is for the health, education, maintenance and support of the beneficiaries - a typical IRS standard. If there are family issues, then the Trustee is the one making the distribution decisions and not a family member. The heirs are not in control of what happens to the proceeds of the IRA. The owner does not have to worry about second or third marriages, gambling or substance-abuse issues or poor money management on the part of their heirs - or any other issues that may arise. Oftentimes, there are no issues, but the owner simply wishes to ensure the ultimate disposition of what he or she has worked so hard to achieve for so many years.
By using an IRA trust, it preserves the “stretch” capabilities of being able to use the owner’s life expectancy (even though the owner is deceased). This is much more favorable than using that of a beneficiary or the five-year payout rule. Even if the preference is to name the surviving spouse as the beneficiary of the IRA, the spouse can establish a trusteed IRA with the IRA at their passing. This is a great planning opportunity and one that should be considered by those who want to maintain the integrity of an asset that they have worked very hard to earn.
Old North State Trust, LLC (ONST) periodically produces publications as a service to clients and friends. The information contained in these publications is intended to provide general information about issues related to trust, investment and estate related topics. Readers should be aware that the facts may vary depending upon individual circumstances. The information contained in these publications is intended solely for informational purposes, is proprietary to ONST and is not guaranteed to be accurate, complete or timely.
Susan Willett is the director of trust services and oversees all aspects of trust administration for Old North State Trust, LLC. Old North State Trust, a North Carolina chartered trust company, provides: asset management services; income, estate and trust tax consulting; retirement planning and administration; and trustee and estate services to both individuals and businesses. Old North State Trust professionals have many years of experience and for over a decade have assisted clients in identifying and reaching their financial goals. For more information, visit www.oldnorthstatetrust.com or call 910-399-5470.
Cece Nunn - Jun 17, 2019
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