Have an IRA? Let’s stretch that out a few more decades!

by Sep 27, 2017Estate Planning0 comments

Wills. Trusts. Powers of Attorney. Are these items that you have considered putting together, but haven’t gotten around to yet? All too often, people wait until a crisis strikes to hurriedly construct these documents. Why not act in advance and allow yourself time to take care of other things, should crisis ever strike? At Keist Thurston O’Brien, we have a large toolbox of ways in which we can protect your assets and allow you to face life’s challenges without having to worry about where money is going or to whom. One such effective tool is the IRA Dynasty Trust.

The Individual Retirement Account (IRA) was never effectively used as a wealth-transfer tool to subsequent generations until recently. The rules governing IRA’s require the owner (or owner’s spouse) to begin taking required minimum distributions (RMD) from the IRA at the age of 70 ½. The amount required depends on the life expectancy of the owner. Often, however, the amount taken each year is less than the projected growth of the IRA (around 8% per year for the last few decades). An IRA Dynasty Trust allows for that growth to continue long after the original holder’s passing.

To qualify as the beneficiary of an IRA, a well-planned IRA Dynasty Trust will be irrevocable and have individual beneficiaries. When the owner (and owner’s spouse) of the IRA dies, the IRA Dynasty Trust inherits the IRA. The Trust may then continue to take the RMD each year from the IRA. The key is that these distributions are now calculated based upon the life expectancy of the oldest trust beneficiary, which can allow for decades more wealth accumulation.

A brief example illustrates the power of the IRA Trust. An IRA owner has approximately $400K in the IRA at age 70 ½. For the next ten years, the owner takes the RMD, totaling $220K in revenue for the owner over that time. Even so, when the owner dies at age 80, the IRA has grown to over $550K. If this IRA is put into a Trust at the owner’s death, and the owner’s oldest child is 45 years old, the IRA will continue to take RMD’s until that child’s death. At age 80, the distributions over the course of 35 years are around $2.9M, and with annual growth, almost $750K still remains for the original owner’s grandchildren to inherit.

The monetary benefits of stretching the IRA are obvious. The flexibility of the Trust is also wonderful, as it can either make distributions each year to the Trust beneficiaries, or it can accumulate the distributions in Trust. The Trust will also protect beneficiaries against creditors, the temptation to withdraw everything at once (derailing the stretch of the funds), greedy ex-spouses, or financial predators.

Federal regulations are currently being considered that would potentially close off the usefulness of the IRA as a wealth-transfer tool by preventing the calculation of RMD’s based on the age of the beneficiaries of the Dynasty Trust. This should be all the incentive that you need to take action now. We would love to help you construct just such a trust so as to take advantage of every possibility to leave as much to your descendants as possible, while still providing for your well-being in the interim. If for any reason legislation were to change the current state of things, we guarantee that we will help you find the best alternative to achieve your goals. But why wait? Set up a consult with one of our attorneys today, and we will be more than happy to discuss our wide range of estate planning options with you.

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