Inherited IRA Life Expectancy Payout for Benefits Held in Trusts
Under the tax laws, a beneficiary may stretch out distributions from an inherited IRA over his or her life expectancy. However, this favorable “life expectancy” payout option applies only to benefits that are paid to individual beneficiaries. Only individuals can extend distributions over his or her life expectancy.
What if circumstances exist where a retirement plan owner would rather not leave retirement plan benefits outright to one or more individual beneficiaries?
Providing certain rules are complied with, retirement plan owners may now use creative multigenerational estate planning strategies with trusts by allowing a trustee to receive required minimum distributions on behalf of a plan beneficiary. A trust cannot be a designated beneficiary, however, unless it qualifies as a “see through trust.”
Trusts offer a combination of versatility and planning capabilities not otherwise available for the retirement plan owner with custodial IRAs. If drafted properly, all retirement plan distributions can be payable to certain trusts which will be able to take advantage of the favorable life expectancy payout method. If certain rules are complied with, the plan administrator will be allowed to “see through the trustee” for the purposes of making required minimum distributions to the trusts beneficiaries.
By blending the minimum distribution rules with creative estate planning techniques, plan owners may now leave IRA benefits in trust for beneficiaries while still retaining the life expectancy payout method. Under this method, plan distributions received by the trust qualify for the life expectancy payout method without requiring the trustee to immediately distribute all benefits outright to the beneficiary.
By allowing a trustee to receive minimum distributions on behalf of a plan beneficiary, the trustee can accumulate plan distributions inside the trust. Rather than being required to immediately pass the plan distributions on to the beneficiary, the distributions are entirely within the trustee’s discretion. By complying with the “see through trust” rules, plan owners can restrict post mortem withdrawal rights over certain retirement plan distributions alleviating any concern that a ‘spendthrift’ beneficiary may withdraw large amounts all at once.
Trust planning with retirement accounts is primarily about the post-mortem control that a trust grantor can obtain, especially now in light of the see through allowances that can be used in combination with the minimum distribution calculation options. Wealthy families have used trusts for years to preserve wealth by preventing children from squandering the family fortune. A trust can impose age-based allocation restrictions over a retirement plan in conjunction with the current required minimum distribution rules adjusting them as children age and mature financially.
Such planning strategies can fulfill a plan owner’s desire for post-mortem control using payout provisions that will enforce the minimum withdrawal terms allowed under the IRS’s minimum distribution rules. If a longer withdrawal period can be applied to a retirement account, the funds will obviously realize tax-deferred accumulations for a longer period of time if the money stays in the account. Of course, the longer money stays in the account growing tax-deferred, the more the account may ultimately be worth to the beneficiary.
As with any planning strategy, trust planning should be integrated with other aspects of your financial plan. As such, you should consult with qualified professionals to make sure any trust is in compliance with the terms of the Treasury Regulations and also to make sure that your beneficiaries of an inherited IRA receive the most favorable distribution options.
Resources: In order for a trust to qualify as a designated beneficiary, it must satisfy the qualifying terms prescribed under Treasury Regulations Section 1.401(a)(9)-4,A-5., as a designated beneficiary trust (DBT).
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