Most IRA owners want the person they’ve named as IRA beneficiary to delay the payment of income taxes for as long as possible. For a vulnerable IRA beneficiary, there is a secondary goal of passing the IRA account in a way that protects the income tax deferral, but also ensures the IRA itself will not be misspent.
If the individual you’ve named as beneficiary of your IRA would not have the ability to make good financial decisions because of dementia, other health issues, inexperience, or just a history of poor money management, leaving outright control of the IRA to that beneficiary does not make sense.
A spouse can treat an inherited IRA like their own retirement account, and roll it over into a new or existing IRA, or leave it as an inherited IRA. Either option allows continued income tax deferral. If the spouse didn’t follow the rules on a timely basis, the benefits of the income tax deferral would be in jeopardy.
The same tax concern applies to non-spouse beneficiaries who can elect to take required minimum distributions over their life expectancy. Incapacity or poor decision making would put income tax deferral at risk.
For many retirees, their IRA is a significant part of their net worth. Why leave something you’ve worked a lifetime to accumulate to a beneficiary who would not understand the importance of income tax deferral, or be able to preserve and protect the IRA?
The way to protect the income tax deferral and protect the IRA itself is to name a qualified trust for the vulnerable beneficiary as the beneficiary of the IRA. A trust that meets the requirements of a “designated beneficiary” receives the same income tax deferral as if the individual was named as beneficiary, and a trust provides protection against creditors and predators. The Trustee would make the decisions regarding income tax deferral and investment choices, and would distribute appropriate amounts for the beneficiary’s needs either to the beneficiary, or if the beneficiary would not be capable of paying bills, pay them directly from the trust.
Do you need to update your estate planning to protect your beneficiaries? Reach out to schedule an appointment with our expert Estate Planning Attorneys. Call us at (770) 817-4999 or click here to send us a message.