IRA Inheritor’s Trust

IRA Inheritor’s Trust

Owners of Individual Retirement Accounts (IRAs) and other qualified retirement plans in the U.S. are faced with a challenge of how to best to “stretch out” the distributions from these plans in order to minimize income taxation and also how to provide asset protection for their loved ones.

Proper estate planning can provide good results.  Lots of money can be amassed by allowing the assets in the plan to grow tax-free over the life expectancy of your beneficiaries.

Example:  Grandfather dies at age 80 with a $100,000 IRA. Grandfather names his grandson, Charlie (age 5), as the designated beneficiary.  If Charlie takes only the required minimum distributions over his lifetime (a “stretch out”), and we assume an 8% rate of return on the IRA, Charlie can expect to receive a total of $7.3 million in annual distributions over his 76-year life expectancy (as taken from the IRS life expectancy tables).

Some parents and their advisors mistakenly believe that such a “stretch out” will occur automatically and assume that their children will take only the required minimum distributions and will seek professional advice to make the stretch out happen.  Unfortunately, this is not always true.  Often, beneficiaries mistakenly cash out the plan earlier than required. This can happen for two reasons: Lack of financial discipline, or simply not understanding the benefits of deferring withdrawals. When an IRA is cashed out too early, a “blow out” occurs (rather than a stretch out) and this can be a huge family disaster.

A better alternative to a “blow out” is The IRA Inheritor’s Trust. Instead of your IRA being paid directly to your children, The IRA Inheritor’s Trust is named as the beneficiary.  The trustee of the trust can then ensure a proper stretch out by taking only the required minimum distributions.  The IRA Inheritor’s Trust can also provide your children with protection from the loss of the IRA to a spouse in divorce, or to lawsuits and creditors, or even the beneficiary’s poor spending habits.

Until recently, it was not clear that the IRS would allow the use of such a trust as a beneficiary of an IRA.  It is good that the IRS recently issued a ruling (called PLR 200537044) that approved of the use of a trust as the beneficiary of an IRA. This ruling provides a roadmap that tax professionals can follow in drafting trusts as the beneficiary of an IRA.

Summary re IRA Inheritor’s Trust

Benefits of The IRA Inheritor’s Trust are twofold:  First, the trust allows for the “stretch out” of your IRA distributions.  Second, such trust allows you to provide your loved ones with protection from creditors, divorce or improvidence.


Source of information here is Steven M. Ratner, estate planning attorney, San Diego, CA. 

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