by Richard Keyt, Arizona estate planning lawyer
In 2005, the IRS issued a private letter ruling 200537044 (the “PLR”) that approved a new type of trust created solely to be the beneficiary of an IRA account. As a result of this IRS PLR, it is now possible for people with IRA accounts and other retirement accounts to create IRA Inheritance Trusts® to ensure that their beneficiaries will stretch-out payments from the IRA after they inherit their shares of the account so that the funds will grow inside the account without being taxed. This type of trust is also called an IRA trust, a standalone IRA trust, an IRA stretch trust or an IRA protection trust.
If you have over $150,000 or more in all of your IRAs, Roth IRAs, 401(k) plans 403(a) plans, 403(b) plans and other employer retirement plans combined you must read this article because it could be worth hundreds of thousands or millions of dollars to your loved ones who will inherit your accounts. In this article when I use the term IRA, I mean not just traditional IRAs, but all of the previously mentioned types of retirement accounts.
If children and grandchildren who inherit IRA funds keep the funds in the IRA over their lives and only take the required minimum distributions each year (the “stretch-out”), the amount of money that can be earned, accumulated and paid to the beneficiaries can be staggering.
Parents’ Worst Fear About Inherited Money
Consider the all-to-common situation that most parents fear may happen when their children inherit a large traditional IRA or retirement account. Homer Simpson dies and leaves his $100,000 IRA to 35 year old Bart. Bart immediately takes the money and spends it on his dream car.
Problem 1: Bart must pay income taxes on the entire amount withdrawn from the IRA.
Problem 2: Bart blows the stretch-out – the ability to leave the money in the account and have it earn tax-free or tax-deferred for his life.
The following table illustrates the situation most parents do not want to happen.
Bart Takes All the Money Out the 1st Year
[table id=2 /]
To illustrate the potentially huge amounts of money that can be generated from the stretch-out, I calculated how much money Bart Simpson can receive from Homer’s $100,000 IRA account if Bart inherits the account at two different ages (10 and 35), leaves the funds in the IRA account during his life and only removes the required minimum distributions each year and the account earns average annual returns of 8% and 10%.
Bart Leaves Money in IRA Account for Life
[table id=4 /]
If you are into numbers, see the spreadsheets for 1st, 2nd, 3rd and 4th scenarios shown above.
Now do you see why this article is entitled “How Your Family Can Become IRA Millionaires Using an IRA Inheritance Trust®“? The above examples show how a $100,000 IRA account can literally pay millions of dollars to a child, grandchild or loved one.
This wealth accumulation strategy only works if your beneficiaries retain the inherited funds inside the IRA account. If a beneficiary takes all of the funds out of the IRA account (called the “blow-out” because it blows the stretch-out), this wealth accumulation technique will be lost. One of the reasons to create an IRA Inheritance Trust® is because it can insure the stretch-out and can prevent a blow-out.
You may not be aware of this, but new IRS rules now permit you to create an IRA Inheritance Trust® to insure that your beneficiaries (who’ll receive your IRAs after you’re gone) “stretchout” their taxable, required minimum IRA distributions over a much longer period of time. And, if they do it right, your IRAs can continue to compound for many years income-tax free – – and may literally grow to be worth over a million dollars!
And now, thanks to a new law, this also applies to your company retirement plans, even if you never roll them over to IRAs during your lifetime.
For example, let’s say your IRAs and company plans total over $200,000 when you pass away. If you only take out the required minimum distributions over your life, these accounts will probably grow to be worth a lot more than they are today! If your child (or other non-spouse beneficiary) is age 50 when he or she inherits this $200,000 and we assume that the accounts grow at 8% per year (from both income and principal growth), and your child only takes out the required minimum distributions, just look at these incredible numbers:
At age 80, your child will have received distributions of approximately $700,000 and still have almost $300,000 remaining in the account, which may continue to grow-tax free and be passed on to your grandchildren!
As the result of the new IRS “stretchout” rules, your IRAs and company plans may be well worth, over time, in excess of $1 million and may represent the largest assets you will pass on to your loved ones!
You can simply name your children or other individuals as beneficiaries of your IRAs and company plans, but that may be a terrible disaster. Why? Because –
Individuals may unintentionally blow the income tax “stretch-out,” resulting in a huge financial loss for your family!
This happens more often than you may think. Your beneficiaries may not be aware of the tax rules and their distribution choices, so they may immediately withdraw your IRAs or company plans at the first opportunity (or worse yet, do a prohibited rollover!). Or your beneficiary, influenced by his or her spouse or some other unscrupulous third party, may just decide to withdraw your lifetime’s savings to foolishly spend it!
If the “stretchout” isn’t done properly by your beneficiaries and income taxes are paid up front shortly after the IRAs and company plans are inherited, your family may lose hundreds of thousands of dollars (or more)!
Even if you assume that your beneficiaries will do the right thing – keep the funds in the IRA account for their lives to maximize the income tax “stretch-out” of your IRAs and company plans, your life’s savings may still be seriously exposed to one or more of the following threats that can arise years after you are gone:
Your beneficiary’s spouse may snatch half (or more) of your inherited IRAs and company plans in a divorce! The divorce rate is over 50% and a big pile of inherited money may become a divorce incentive for the ex-spouse! Even though inherited property is separate property, your beneficiary’s ex-spouse’s divorce lawyer will go after the IRA funds because the IRA account is frequently the largest asset and the lawyer knows there is a good chance the spouse who inherited the IRA will give a large portion or all of the IRA account just to end the divorce and to be rid of the ex-spouse.
Arizona is a community property state and inherited property is separate property. If you leave your IRA account to a loved one, the account will initially be separate property, but the beneficiary could intentionally or unintentionally transmute the IRA account into community property, which would give the ex-spouse a one half interest in the IRA account if they divorce.
Also realize your beneficiary’s future spouse could be a fortune hunter who you don’t currently know and who later marries your beneficiary after you’re gone!
Your beneficiaries’ poor spending habits, creditors and lawsuits may grab all of your inherited IRAs and company plans!
Your beneficiary could lose his or her needs-based government benefits (if he or she ever needs them), such as supplemental income (SSI) or long-term nursing care!
And even if your beneficiary never encounters any of these problems, he or she may get walloped with a huge estate tax when he or she passes your IRAs and company plans down to the next generation!
If you think that naming your revocable living trust as the beneficiary of your IRAs and company plans will minimize all of these problems and qualify for the maximum “stretchout” of income taxes, you may be terribly wrong!
You may need more than just your living trust!
Learn about a new, breakthrough IRA and corporate retirement account strategy from Richard Keyt, an Arizona estate planning attorney who learned how to prepare IRA Inheritance Trusts® from Phil Kavesh, the nationally known estate planning attorney who pioneered this new trust and got it approved by the IRS!
Get a free white paper on the new IRA Inheritance Trusts® or sign up to receive notice of the date, time and location of Richard Keyt’s next public seminar on the IRA Inheritance Trusts® entitled
How to Make Your Family IRA Millionaires!
If you would like a free consultation to discuss how an IRA Inheritance Trust® can help earn thousands of dollars for your loved ones who will inherit your accounts, call Richard Keyt at 480-664-7478 and make a free appointment.
If you have any questions about Arizona estate planning, the process, fees or anything else, call Rick at 480-664-7478. There is no charge for inquiries about preparing Wills, Trusts or other estate planning documents.
Arizona Estate Planning Attorney
Richard Keyt prepares wills, living trusts, estate plans and other related estate documents for Arizona residents. Rick, a former partner in one of the largest law firms in Arizona, has practiced law in Arizona since 1980. Rick’s email address is [email protected]. His direct phone number is 480-664-7478.