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The Montana Estate Lawyer

Friday, July 21, 2017

Should You Consider an IRA Trust for Your Estate Plan?

The biggest advantage of IRAs and other tax-deferred retirement savings is the tax-deferred growth of your investment.  The longer you can leave assets in the account to grow, the bigger the possible tax savings.  This is true even if you have reached age 70 ½ and must take required distributions.  The remaining assets continue to grow and all tax is deferred until the money is distributed out to you or the beneficiaries you name after your death. 

Naming the correct beneficiary is crucial as the age of the beneficiary determines how long distributions can be stretched out to maximize tax-deferred growth. We caution against naming individuals outright as the account is not adequately protected in the event of incapacity or from any creditors.

We believe that the best option, which allows the greatest chance for continued deferred growth and creditor protection for you beneficiaries, is to name an IRA Trust, also known as a Retirement Trust, as the beneficiary after your death.  An IRA Trust is designed to specifically hold and manage tax-deferred accounts, and the sole purpose is to protect those accounts so your family receives the greatest benefit from this money.  There are two ways to structure this trust: (1) require the beneficiary to receive annual required distributions outright; or (2) give your trustee discretion to accumulate required minimum distributions in the trust to accommodate changing circumstances of the beneficiary.  A discretionary distribution provision is especially helpful to prevent loss of value due to heirs who lack money management skills, to provide benefit to heirs with special needs, and to prevent the loss of assets to creditors. 

Several advantages of an IRA Trust include:

  1. Avoiding a conservator for minor children who are beneficiaries;
  2. Ensuring cash-deferred growth by preventing beneficiaries from cashing out full value;
  3. Protecting undistributed assets and accumulated minimum distributions from creditors; and
  4. Providing for a beneficiary with special needs without interfering with needs-based benefit programs.

Heather


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