Estate Planning for Retirement Accounts–Part II

In Part 1, we discussed the fact that IRAs and other retirement accounts can result in estate-planning complications because they are (hopefully) stuffed with untaxed money.  We also discussed how you can name your loved ones as “pay-on-death” beneficiaries of your retirement accounts—a method that can provide important tax benefits. Estate Planning for Retirement Accounts–Part II will address the following.

However, this strategy is not for every family.  Let’s assume that Jackie’s daughter, Jill, has a gambling problem.   If Jill gains control over her share of Jackie’s IRA, Jill could easily spend it down in a few months, leaving nothing for her future needs.  What can Jackie do about this?

One potential solution is for Jackie to name a different set of pay-on-death beneficiaries for her IRA:

Primary Beneficiary: the Jackie Trust

In the terms of the Jackie Trust, Jackie can instruct the trustee (such as a bank or family member) to distribute Jill’s share of the IRA to Jill on an ongoing basis for Jill’s support—essentially, protecting Jill from herself.  But, Jackie can instruct the trustee to give John control over his share of the IRA.

The Jackie Trust will have to be carefully drafted to make this happen without incurring substantial taxes:

• If the Jackie Trust does not meet the requirements of certain specific IRS regulations, it will be required to “cash out” the IRA immediately rather than draw it down slowly using RMD’s based on Jill’s life expectancy. If the IRA is large, this could result in a hefty tax bill—remember, the assets in the IRA have never been taxed before.
• Even worse, if the Jackie Trust is not set up correctly, the trust itself—not Jill—could be treated as the taxpayer of Jill’s share of the IRA. A person will almost always pay a lower rate of income tax than a trust.  Structuring the Jackie Trust to pass the tax liability on to Jill will probably save a lot of taxes.

This is a general overview and not to be confused as legal advice. If you would like to speak to Jonathan about estate planning, legal, business or tax matter, please email him at jcw@eastbaybusinesslawyer.com or call him at (925) 217-3255.