IRA Inheritance Trust - five hands holding each other

Stretch Your IRA to the Next Generation With an IRA Inheritance Trust

You’ve got a nest egg set aside in the form of an IRA (or another company retirement plan that you may eventually roll over into an IRA). And you’ve heard that Internal Revenue Service regulations now permit you to “Stretch-out” income-taxable distributions for a much longer period of time, even to the succeeding generations of your family. But how can you be certain the transfer of your hard-earned monies will be protected from steep taxes? Our staff at Phelps LaClair, serving Mesa, Gilbert, Chandler, and Phoenix AZ, is excited about the IRA Inheritance Trust as a sound avenue for establishing continued distributions for your children, and if desired, even for your grandchildren.

When the owner of an IRA turns 70 ½ (or when they die), the IRS generally requires a minimum distribution of their IRA’s previously tax-sheltered money. If that money is released as a lump-sum (e.g., as an inheritance to family members), there is a tremendously complex set of tax laws that kick into action. But with strategic planning on the part of the IRA owner and its inheritors, the bulk of the IRA’s funds can continue to be tax-deferred, with taxation occurring only on the required minimum distributions your family members will receive.

Going For the Stretch

Ed Slott, author of Parlay Your IRA into a Family Fortune, says “A stretch IRA is one of the biggest benefits of the tax code . . . but it’s only good if everybody knows what they’re doing.” You heard it from an expert: if it’s done right, stretching your IRA can be a terrific way to provide for your heirs. In time, and depending on the amount of IRA funds, your invested funds could provide your children hundreds of thousands of dollars in minimum distributions over the course of their lives, while leaving the lump sum untouched. And if they steward it well, that same IRA could continue to fund minimum distributions to your children’s children. That’s the s-t-r-e-t-c-h aspect of planning ahead.

The caveat is this: it’s not self-activating. Your heirs will need to make the correct income tax elections, and they’ll also need to withdraw only the minimum distributions. And, if it’s not properly protected, the IRA could become vulnerable through careless spending, divorce settlements, or even through creditors or lawsuits.

The Answer: an IRA Inheritance Trust

An IRA Inheritance Trust is a revocable trust that is named as the primary (or secondary) beneficiary of your IRA account (or company retirement plan). You still maintain control over the IRA while you’re living; it’s when you pass away that your IRA distributions transfer to the IRA Inheritance Trust. If everything is set up correctly, your Inheritance Trust can provide maximum tax advantage for your beneficiaries and also protect your assets from unexpected crises like divorce, creditors, or lawsuits.

At Phelps LaClair, our team includes experienced tax attorneys who understand the complexities of U.S. tax laws. We’re excited about this particular protective Inheritance Trust. In partnership with a Living Trust, it can protect one of your strongest assets: your IRA (or company retirement plan). For more on the ins and outs of an IRA Inheritance Trust, contact our offices. We’ve been helping families save money and protect inheritances for several generations. And, we offer a free consultation. For more on what to expect during your first visit to our offices, click here.


Images used under creative commons license – commercial use (4/30/2018) Anemone123 (Pixabay)

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