The Benefits of an IRA Trust

 Asset Protection, Elder Law, Estate Planning, Retirement Planning No Comments


An IRA trust can help you better control distributions after you pass away and restrict access to beneficiaries who might squander the funds of a large IRA. How? Let’s say your IRA is left directly to your beneficiaries outside of a trust. In this situation, your beneficiaries can immediately cash out your IRA and spend the money however they choose. The trouble is, when the IRA is cashed out, not only is the ability to stretch the required minimum distributions (RMDs) over the beneficiary’s lifetime lost, but all of the amount withdrawn will be taxable in the withdrawal year.

Or consider this scenario: If you name a minor grandchild as the direct beneficiary of your IRA, a guardianship or conservatorship will need to be established to manage the IRA until he or she reaches the age of 18. Then, when the grandchild reaches 18, he or she can withdraw all of what remains in the IRA. An IRA trust can put restrictions on how your IRA is spent, as well as when and how much a beneficiary can withdraw. This can provide important tax benefits if, for example, the beneficiary already has a taxable estate, since the IRA trust can be drafted to minimize or even eliminate estate taxes in the beneficiary’s own estate. In addition, the IRA trust has the potential to create an ongoing legacy for your family, because the IRA assets not used during a beneficiary’s lifetime can continue in trust for the benefit of the beneficiary’s descendants. If you are in a second marriage, an IRA trust can prove particularly valuable. In a typical second marriage situation, you’ll want to leave your spouse the annual IRA income, but after his or her death you may well want to make sure that the IRA goes only to your children, not the children from the spouse’s first marriage. An IRA trust can help you accomplish this.

Or what about a situation in which you dislike or do not trust your son or daughter in law? If you leave your IRA outright to your child, his or her spouse may be able to talk them into liquidating it. However, if you name a trust as the IRA beneficiary, your child won’t be able to liquidate the IRA—and suffer the potentially painful financial consequences. Similarly, if you fear that your son or daughter is not yet mature enough to handle the money in your IRA, but you hope one day they will be, an IRA trust can allow you to name them as beneficiaries but put restrictions on how they can utilize the money.

Finally, even though IRAs are protected from the claims of creditors in many states, when the IRA account owner dies and the assets go to an individual beneficiary, the IRA may lose its protected status. By putting these inherited IRA assets into a subtrust created for an individual beneficiary under the terms of an IRA trust, the assets will continue to be protected. The result? The IRA assets can remain intact for the benefit of the beneficiary in the event a lawsuit is filed against the beneficiary, if a married beneficiary later divorces, or if a single beneficiary gets married and later divorces. To determine whether you and your family would benefit from having an IRA trust as part of your overall plan, please contact us for a consultation.

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Uncle Sam to 60 Million Americans: “You’re Getting a Raise!”

 Elder Law, Estate Planning, Retirement Planning No Comments


Here’s some good news for over 60 million Social Security and SSI beneficiaries  … you’re getting a raise!

The US government recently announced a cost of living adjustment of 3.6% for both Social Security and SSI beneficiaries. The raise benefits SSI beneficiaries starting in December 2011 and Social Security beneficiaries starting in January 2012.

This is the first “raise” beneficiaries have received in three years. Many seniors will of course welcome this news, as many have felt the effects of the economic recession, the stock market decline, and the fact that banks are paying almost zero interest on savings accounts.

The increase in Social Security income will be especially welcomed by those seniors who will be experiencing a hike in Medicare premiums in the next year. In the past, many of those seniors were shielded from such an increase due to a “hold harmless” provision that protects more than 70% of Medicare beneficiaries.

Even with the expected increase in Medicare premiums, most seniors are simply glad to see Uncle Sam acknowledging the rising cost of living. While most recipients of Social Security do have an alternate form of income (with SS benefits representing a little less than half of their earnings), many rely on their monthly check for a sizable portion of their income.

For more complete information about the coming changes in Social Security and SSI, or for help understanding how this change may affect you and your estate planning, please contact our office.

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Parents of Kids with Special Needs: Avoid These Common IRA and Life Insurance Mistakes

 Estate Planning, Life Insurance, Retirement Planning, Special Needs Planning No Comments


Private retirement savings plans, like IRAs and 401(k)s, have become the main way for American families to save for retirement. But parents of children with special needs need to be vigilant when signing up for a retirement plan or company life insurance program.

Most retirement accounts allow the owner to choose a designated beneficiary to receive the funds in the account if the owner dies. This beneficiary designation is especially useful because it allows the funds in the retirement account to pass to the owner’s heirs without the cost and hassle of probate. In general, an owner names a so-called “primary” beneficiary who is first in line to receive the benefits, as well as a “secondary” or “contingent” beneficiary who would get the funds if the primary beneficiary has died or refused to accept the account. Account owners can usually name multiple people as beneficiaries, and they can often name a class of people, like “my surviving children” or “my nieces and nephews,” instead of designating people by name.

This ability to name a class of beneficiaries often leads to trouble when a member of the particular class has special needs. Problems also arise when parents name account beneficiaries when they first join a company, often before having a child with special needs. The retirement account grows over time, but the owner never revisits the beneficiary designation she created when she was just starting out. Many years later, when the account owner dies, the old beneficiary designation springs up and creates havoc for the child with special needs. For instance, if an employee fills out her IRA beneficiary designation form to give her $200,000 IRA to “her children” on her death, and she dies with four surviving children, each child will receive a $50,000 retirement account. If one of these children has special needs and is receiving needs-based government benefits, like Supplemental Security Income, Medicaid or Affordable Housing, her receipt of her share of her mother’s IRA could compromise her access to benefits. This is not just a problem for large retirement accounts; given the strict income and asset limits for many government programs, even an inheritance of a few thousand dollars can lead to the loss of health insurance worth a great deal more.

There are several ways to deal with this problem. The easiest way is to avoid class designations by specifically naming the beneficiaries of the retirement account and not including a relative with special needs as a beneficiary. The obvious drawback of this strategy, especially when the retirement account makes up the majority of a family’s net worth, is that the child with special needs loses his inheritance. A better option for families who want to leave a share of a retirement account to a person with special needs is to create a special needs trust and name it as a designated beneficiary. If properly drafted, the special needs trust can receive the retirement funds without negative income tax implications, and the funds will assist the person with special needs without compromising his benefits. If the family has other assets outside of the retirement plan, it may make sense to fund the special needs trust with those assets while leaving the retirement plan to other beneficiaries.

Employer-sponsored life insurance can be essential, especially for younger families. In many cases, companies will provide small policies that pay a death benefit equal to a year or two of salary. Employees usually have the option to purchase additional insurance, often at a discount, through their employer’s benefit program. The same concerns regarding retirement account beneficiaries apply when naming beneficiaries of life insurance policies. However, life insurance can often be a great option for funding a special needs trust, because it provides a relatively low-cost way to provide a much larger benefit to the person with special needs. In some cases, employees who have children with special needs may consider naming a special needs trust as the primary beneficiary of their company life insurance policy, and they will often purchase additional insurance to guarantee that funds will be available for their child with special needs if they were to pass away.

If you’re saving for retirement or if you have life insurance, come see us to make sure you’re maximizing the value of these assets for your family and not inadvertently interfering with public benefits for your child with special needs.

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How to Leave Your Roth IRA to Kids & Grandkids

 Asset Protection, Estate Planning, Retirement Planning No Comments


In a recent article (click here), the Wall Street Journal tells how to leave your Roth IRA to kids and grandkids.  Featured in the article is what we call a “retirement benefits trust,” which offers asset protection and other benefits provided by traditional trusts.

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