For many clients, a retirement plan or IRA rollover balance is a substantial portion of their estate. Careful planning is needed to provide the greatest benefits for a surviving spouse or family. Otherwise, estate and/or income taxes will decrease the assets passed on. Improperly planning for a retirement plan balance can prevent beneficiaries from deferring income taxes on the plan’s assets. Instead, they may be forced to withdraw all the plan’s assets in a one- to five-year period, which results in substantial and unnecessary income taxes.
A family may find that it is more advantageous to utilize some — or all — of the client’s estate tax exemption by leaving the IRA in trust. Or the client may wish to protect the IRA plan balance when leaving it to a surviving spouse, insuring that upon the death of that surviving spouse, the client’s children, rather than the spouse’s children, will benefit from the IRA. In either of these situations, a trust must be carefully crafted to be the recipient/owner of the IRA. Further, IRA beneficiary designations must meet certain requirements of Treasury regulations in order for a trust to be a qualified beneficiary for IRA distribution purposes.
Stretch IRAs are IRAs which permit minimum distributions to be based on the beneficiaries’ life expectancy. These minimum distributions are often very small, enabling the bulk of the IRA’s assets to continue growing tax-deferred, which allows for substantial pre-tax compounding. This tax deferred growth can significantly increase the benefits ultimately available to beneficiaries. The term “Stretch IRA” refers to required withdrawal of the IRA balance being extended, or “stretched” over the maximum period of time, thereby enabling beneficiaries to take advantage of tax-deferred growth. A trust that is often the targeted beneficiary or owner of the IRA must be carefully structured in order that the maximum stretch period is available.