Instead of naming an individual as a beneficiary for your retirement account, you can help that savings grow even more by naming a standalone retirement trust. The trust then provides for your beneficiaries and distributes money each year. Some of the biggest benefits of standalone retirement trusts are the favorable rules regarding required minimum distributions (RMDs). By taking smaller distributions, beneficiaries can stretch the proceeds from retirement accounts so that multiple generations benefit.
To see the numbers, compare a $200,000 IRA being inherited by your 30-year-old child. The child could cash the fund immediately, paying the taxes owed based on his current tax rate. Alternatively, the child could move the funds into an inherited IRA, taking out only the RMDs each year. Assuming the funds earn an average of 6% over the child’s life expectancy of 53 more years, the value of the fund that pays out over those years would be over $1,500,000.00.
Will your child who inherits your IRA cash out your retirement account? Or will she make the investment decision that utilizes the stretch to allow those not-yet-taxed dollars continue to grow exponentially? You might be surprised, but the heavy odds are that she will cash out and lose out on the stretch. Most—90%—of the IRAs that are inherited are cashed out within six months.
Would you prefer to leave $200,000 for your child or would you prefer to provide over $1,500,000 for her? By leaving the IRA in a standalone retirement trust, you can do the latter. And leaving the same IRA to a five-year-old grandchild would grow the amount to over four million dollars over that person’s lifetime.
"Stretch" refers to the IRS Uniform Lifetime Table, which can be extended to accommodate the increased life expectancies of accountholders and beneficiaries. Because retirement savings cannot be kept indefinitely, distributions must be made. During and after the life of an accoutholder, retirement funds can continue to grow tax-free while required distributions are made. This way, the account won't begin depleting until distributions exceed the rate of growth.
When descendants inherit retirement assets through a standalone retirement trust, RMDs are recalculated based on the life expectancy of the beneficiary child or grandchild. By extending or stretching RMDs over many decades, assets can grow exponentially. The long-term benefits of standalone retirement trusts can significantly increase a family's wealth. However, the maximum financial growth can be realized only when beneficiaries avoid premature withdrawals. If a beneficiary liquidates an IRA, the funds usually become taxable distributions, and the potential stretchout becomes a blowout. The best way to prevent the blowout is to protect the money in a standalone retirement trust.
For many people, the concise language in standalone trusts helps them complete administrative tasks. A dedicated trust for retirement assets can ensure that the funds are managed wisely. It will also simplify the management of an estate plan or master trust.
A well-drafted, qualified trust that conforms to Florida laws can stretch IRA assets for generations. But if the trust is set up incorrectly, the entire balance could be required to pay out within five years, losing the benefit of the stretch and possibly bringing about a large tax consequence. Alternatively, oversight and education can help individuals and families achieve maximum tax-free or tax-deferred financial growth.
To talk about your goals for your plans, call an estate planning attorney to discuss your concerns and develop an estate plan that protects your assets and benefits your family.
© 2020 McCreary Law Office, PLLC