As we have discussed in previous posts, there are many forms
of trusts used in the estate planning process. While many planning strategies have
greater benefit to individuals with more complex financial situations today’s
post addresses one form of stand-alone trust which can be very beneficial to a
wide variety of clients.
An “IRA Trust,” is a stand-alone trust, separate from a
Living Trust that acts as the beneficiary of IRAs or retirement benefits. The
provisions of an IRA Trust satisfy all of the regulations related to the
distribution of IRAs and retirement benefits, allowing clients to create a situation
where their beneficiaries can take advantage of their inherited benefits over
their lifetime and enjoy extra protection from creditors and other potential
problems.
The beneficiaries of the IRA Trust can be the same as those
of the client's Living Trust. However, the distribution terms of an IRA Trust
terms are often different from the Living Trust and frequently more restrictive
in order to ensure that no matter what happens to the Living Trust assets, the
IRA Trust assets will be available to help support children, grandchildren and
other beneficiaries. Alternately, clients can use an IRA Trust to provide for a
different group of beneficiaries than their Living Trust beneficiaries. For
example, the Living Trust may benefit a second spouse while the IRA Trust has
children and grandchildren as beneficiaries. Finally, an IRA Trust can help
beneficiaries in more difficult or complex situations, such as beneficiaries
who for any number of reasons are not prepared to handle large sums of money. In
these situations, the IRA Trust Trustee can provide professional management of
Trust assets, allowing the IRA assets to grow tax deferred, except for required
distributions, and ensure that the beneficiaries do not waste those
distributions.
Just like a Living Trust, the distribution provisions of an
IRA Trust dictate how the beneficiaries receive distributions. One design
option for an IRA Trust is the "conduit trust", under which the
trustee has no power to accumulate plan distributions in the trust and must
allocate any distribution received from the IRA or retirement plan to the
beneficiaries. The conduit trust lessens the trustee’s ability to control the
income but still allows control over principal distributions as necessary.
Alternatively, when it is desirable or necessary to impose
greater control upon the dispersal of the Required Minimum Distributions (RMDs),
an "accumulation trust" allows the trustee to hold the RMDs in trust
for the beneficiary’s benefit. For example, if the beneficiary of the IRA Trust
is special needs child, it is important to limit income distributions in order
to avoid adversely affecting the beneficiary's right to receive state or
federal benefits. It is important to remember however when using an
accumulation trust that the federal government taxes income received from the
IRA but not distributed to beneficiaries according to the potentially higher
trust income tax rates.
Whether a client wants to provide for multiple generations,
ensure a lifetime of income for a beneficiary in a difficult personal or
financial situation, or simply ensure that different groups of beneficiaries receive
the asset that provides them the greatest value, an IRA trust is an extremely
useful tool for a wide variety of situations. Due to the complexities
surrounding IRA and retirement plan distributions, it is important to work with
experienced estate planning attorney familiar with those regulations in order
for an IRA Trust to achieve a client's goals.
Matt
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