Trusts in General
A trust is a legal relationship that exists when one person or an entity (the Trustee) holds title to money or property for the benefit of one or more people (the Beneficiaries). The terms of the relationship are decided by the person providing money to the trust (the Grantor), and are usually in writing.
The term Stretch IRA refers to a plan, following the death of the IRA holder, to withdraw only the minimum amount allowed by law. This amount is known as the required minimum distribution. The resulting benefit of this plan is that the assets inside the IRA can continue to grow tax-deferred over the lifetime of the named beneficiaries. Either a traditional IRA or a ROTH IRA may be stretched.
Design of a “Stretch IRA Trust”
A “Stretch IRA Trust” is a flow-through trust designed to guarantee the extension of payouts of your IRA for as long as possible after your death. This is accomplished by allowing the trustee of the Stretch IRA Trust to take out the required minimum distribution, absent emergency. The trust is specially created for the sole purpose of being named as the Designated Beneficiary of an IRA.
The reason a special trust is needed is because the provisions of most trusts will not qualify as a flow-through trust. In contrast, should a non-qualified trust be named as the Designated Beneficiary, all the income tax would be due in year one and there would be no further opportunity for tax deferred growth – the worst outcome possible.
What are the Benefits of a Stretch IRA Trust?
Guarantees Deferred Payout of IRA
A plan to stretch out an IRA is merely a plan until the person you name as your beneficiary decides to withdraw the entire amount, creating a huge income tax. Naming a Stretch IRA Trust as the beneficiary of your IRA will ensure that your loved ones defer the built in tax for as long as possible. This is especially useful for young or irresponsible children/grandchildren.
Allows for Control of Assets After You Die
You can set the terms of an IRA Stretch Trust so that your heirs receive money over time, rather than in a lump sum. You can also control where the money goes at the death of the beneficiary if the beneficiary should die before all the money is distributed.
A trust can protect your money from creditors and make it less likely your heirs will fritter away their inheritance.
Allows for Post-mortem Planning
It is difficult to do much planning with IRAs, but in the event your children do not need the money, creating a trust structure will permit your children to transfer the IRA to their heirs, via disclaimer, without fear that the money will be squandered.
Avoids Over-funding of Spouse for Estate Tax Purposes
A trust structure can both provide income for a surviving spouse and allow both spouses to make proper use of their tax exemptions, thereby minimizing federal and state estate taxes upon the second to die.
Who Should Consider an IRA Stretch Trust?
Individuals with Significant IRAs or ROTH IRAs
Individuals with substantial wealth trapped in their IRA or ROTH IRA may benefit from a Stretch IRA Trust as a way to guarantee that income taxes are reduced, the assets continue to grow on a tax deferred basis, the assets are protected from creditors, and your wealth is preserved. This is particularly helpful for individuals who have young or irresponsible children/grandchildren.
Couples in a Second Marriage
An IRA which names a second spouse as a beneficiary, rather than children of the first marriage, can frequently lead to unintended results – like the money going to the children of your spouse rather than to your children! Giving the money to your spouse in trust will ensure that the money is available for spouse, but also provide for any remainder to go to the people you truly wish to benefit.
What Is Involved In Creating an IRA Stretch Trust?
Hiring an Attorney
When choosing an attorney to prepare your IRA Stretch Trust, you should choose an attorney who is knowledgeable in estate planning, retirement planning, current tax law and asset protection law.
Choosing a Trustee
You can hire either a corporate trustee or an individual trustee. Many people simply have their spouse or a relative act as trustee. You may also have a corporate fiduciary and another person act as co-trustees.
The cost of an IRA Stretch Trust varies from practitioner to practitioner as well as each client’s needs. How complicated you wish to make the trust and how many beneficiaries you wish to name may also be a factor in the cost. Nevertheless the cost will almost always be far less than the anticipated savings.
Beneficiary Designation Forms
Whether you create an IRA Stretch Trust or plan to stretch an IRA without a trust, it is imperative that you correctly fill out the beneficiary designation forms associated with your IRA to avoid one or more of your loved ones from being inadvertently left out or to avoid paying unnecessary taxes.
An IRA Stretch Trust generally requires no maintenance until after the death of the IRA holder.