Chances are you have at least one Individual Retirement Account (IRA). You probably have more. For most Americans, IRAs are very useful and advantageous retirement savings vehicles. An IRA can also allow for easy transfer of wealth to your spouse or children.
Or is it so easy?
What if your spouse is disabled when you pass away? Do you both have estate plans that clearly define disability and place a person or corporate fiduciary you trust in charge of your assets if you are disabled and when you die?
Do you have any minor or disabled children? Leaving your IRA directly to them could be a disaster. Why? Who is generally in charge of a minor’s assets? Answer: The minor’s parents. If you are divorced, this means that your ex-spouse could control what your child inherits from you. Is that what you want?
Likewise, if you are seeking to benefit grandchildren through your IRA, do you want either of their parents (your child, his or her spouse or ex-spouse) handling decisions?
One of the big decisions concerning an inherited IRA is whether to liquidate (and likely pay related income tax) or “stretch out” the payments over time. Most of us hope that our children will take advantage of the stretch out, but the sad fact is that most won’t. You may trust your child to make good decisions, but do you trust that he won’t be influenced by people around him, including a spouse?
Remember: Often it’s not the general ability of the inheritor to use common sense, but the ability of the inheritor to use common sense when dealing with a large bucket of funds, often more than he’s handled before.
Only an individual can own an IRA, but a trust can be a beneficiary of an IRA. A trust is an estate planning tool which is effectively a set of rules for how assets are handled. Some trusts provide rules for handling assets during your life, your disability, and/or your death.
By naming a properly drafted trust as the beneficiary of your IRA, you can control how the IRA is handled after your death. Your spouse, children, grandchildren, as you choose, can be the beneficiaries of the trust, but they won’t directly control the IRA. A trustee will be in charge of decisions, but your family can still enjoy the funds in a responsible manner.
The Internal Revenue Service (IRS), as you know, makes the rules that govern IRAs, so a trust established for this purpose must comply with the IRA rules. You will need to work with an attorney familiar with these rules.
If you are planning to leave an IRA to a person with special needs, a minor, or have a blended family, it may be wise to consult with an attorney experienced with IRA trusts.
The attorneys at Frisse & Brewster Law Offices are here to help.
This article is not intended as legal advice but is provided for informational purposes. Always consult with an attorney experienced in dealing with situations similar to yours. Frisse & Brewster Law Offices are located in Paris and Effingham, Illinois and Terre Haute, Indiana.