IRAs and qualified plans are great vehicles for saving for retirement. Contributions to the plans
\nare not taxed, and the assets inside the plan enjoy tax free reinvestment and accumulation. The
\nincome tax is payable only when the assets are withdrawn from the plan.
\nUnfortunately, while IRAs and other retirement plans are great for retirement savings; they are
\nnot so great for passing wealth on to your beneficiaries. The assets in the plan are subject to
\nfederal estate tax (if your gross estate exceeds $2 million in 2008, and $3.5 million in 2009) and
\nthey are also subject to income tax when received by the beneficiary. If the beneficiary is a person
\ntwo or more generations below that of the owner of the plan, it is possible for these plans to also
\nbe subject to generation-skipping tax. The net effect of all this taxation is that in the hands of the
\nbeneficiary, the IRA or retirement plan may be worth only a fraction (possibly one-fourth) of what
\nit was to the original account owner.
\nSince the IRA beneficiary can make withdrawals over his or her life expectancy, naming a very
\nyoung person or persons as beneficiaries can be very attractive. When the beneficiary inherits the
\nIRA, he or she can stretch the required minimum distributions over his or her own life expectancy,
\ndeferring taxes until withdrawals are made. The younger the beneficiary, the longer the life
\nexpectancy, the less that has to be withdrawn each year, and the more time the assets can grow
\ninside the plan, tax-deferred.
\nHere is an example. You leave a $100,000 IRA to a grandson Jack born the year you die. Jack\u2019s
\nlife expectancy at age 1, according to the IRS life-expectancy table for inherited IRAs is 81.6
\nyears. Jack could stretch the minimum required distribution over 82 years! The first year
\ndistribution would be only $1,323. If the IRA has an average growth rate of 8% during his life
\nexpectancy, the account would wind up worth a cumulative $8.8 million in total withdrawals by
\nthe time he has to empty it at age 83. That is not a misprint – a $100,000 IRA results in over $8.8
\nmillion in withdrawals by Jack!
\nThe $8.8 million in withdrawals depends on the assumed rate of return of 8%. Look at what
\nhappens at other rates of return. At an assumed 7% return, total withdrawals are 4.6 million, for
\n6% total withdrawals are 2.4 million, 5% – $1.3 million, 4% – $750,000. (Don\u2019t forget that the
\nin Lancaster Intelligencer Law spencerlawfirm.vehicles for saving for retirement. the inside the plan enjoy tax free reinvestment and accumulation. are withdrawn while IRAs and other retirement plans are retirement savings; beneficiaries. The assets tax $2 million $3.5 to by the beneficiary. the beneficiary more generations the owner of the plan, it is possible for these to skipping all this taxation is that in the hands worth fourth) expectancy, beneficiaries can be very attractive. he she to a you 1, according to for distribution If the IRA has an average the account would wind up worth $8.8 million to empty it at age 83. assumed rate of return of 8%. at other rates of return. 7% return, total 4.6 million,
\naverage return numbers are net of fees.) At the other extreme, a return of 10% results in a total of
\n$32 million in withdrawals.
\nTo get these kinds of returns, it is important that the beneficiary designations on the IRA are done
\ncorrectly. One of the most common estate planning disasters I see in my years of experience is
\nnaming minors individually, i.e. as outright beneficiaries. Minors are not allowed to make
\nproperty transactions in Pennsylvania until they attain the age of majority. Naming a minor can
\nresult in costly, time-consuming court proceedings, legal disputes, or holding estates open for
\nyears which ultimately dwindles the benefit of the accumulated IRA.
\nThe significant returns illustrated also depend on the beneficiaries\u2019 discipline to withdraw only the
\nminimum required distributions over their lifetimes. Beneficiaries are often tempted to simply
\nwithdraw the IRA and pay the tax in one lump sum shortly after attaining the age of majority.
\nFortunately, both pitfalls are easily avoided with proper estate planning and the full benefit of the
\nIRA can be realized by your beneficiaries. Furthermore, only you are in the position to assure that
\nthe structure is in place to have your intent carried out.
\nYou really shouldn\u2019t name baby Jack as the IRA beneficiary. Why? Because Jack, the babe-inarms,
\ncan\u2019t make the required withdrawals. He lacks legal capacity. In fact, he won\u2019t have legal
\ncapacity until he attains the age of 18. The IRS doesn\u2019t care; baby or no, the minimum
\ndistribution rules still apply. When the minimum required distribution is not withdrawn, a very
\nstiff 50% penalty applies.
\nThere are three choices for properly designating a minor beneficiary of your IRA: 1) a legal
\nguardian can be appointed for Jack (This is expensive and unwieldy – not a good choice.); 2) you
\ncan create a trust for the benefit of Jack that meets the IRS requirements for stretching out
\npayments over Jack\u2019s, the beneficiary\u2019s, life expectancy; 3) you can name a custodian under the
\nUniform Transfers to Minors Act (UTMA) for the benefit of Jack to receive the IRA on his behalf
\nuntil he is 21.
\nA trust specifically to receive the benefit is probably the best choice. It provides the most
\nflexibility and will cover all possible contingencies. This alternative is the most expensive because
\nof the need to create a trust before death, but it gives you the most control over making sure your
\nwishes are carried out.
\nThe most common type of trust used as an IRA beneficiary is a conduit trust. This type of trust
\nrequires the trustee to distribute the required distributions each year from the trust to the child so
\nthat the child pays the tax rather than the trust, which would generally owe more. The
\ndistributions can be made to a UTMA custodian for the minor.
\nAnother type, called an accumulation trust, allows the trustee to stretch-out the IRA withdrawals
\nover the child\u2019s life expectancy but the trustee could keep all, or part, of those withdrawals in the
\ntrust. Withdrawals kept in the trust would be taxed as income at the trust\u2019s income tax rate, and
\nany amounts distributed to or for the benefit of the child would be taxed at his or her personal
\nincome-tax rate. An accumulation trust has the added benefit of giving you control of deciding
\nreturn are net of fees.) At the other extreme, a return of total that the beneficiary One of the most common estate planning disasters I see my years outright until they attain the age of majority. consuming proceedings, estates IRA.
\nbeneficiaries\u2019 discipline to withdraw Beneficiaries and pay are can you are to assure name the IRA Why? Because Jack, the required withdrawals. have of 18. When penalty choices for properly a minor beneficiary of your IRA: appointed for and unwieldy – not good trust for you can name for the benefit of Jack to receive the on his receive choice. and will cover all possible contingencies. This alternative is the most expensive because
\nbut as an IRA beneficiary is a conduit trust. from tax than the trust, which would owe more. to a UTMA trust, trustee to stretch-out the IRA Withdrawals kept in the trust would be taxed as income income distributed be taxed An accumulation has of
\nwhen your beneficiaries actually receive money from the IRA withdrawals. There is no
\nrequirement that the funds be distributed to the child upon attaining the age of majority.
\nThe third option is a viable, low cost option of naming a minor as a beneficiary of an IRA. In the
\nbeneficiary designation of your IRA account you may designate a custodian, and even a successor
\ncustodian, under the Uniform Transfer to Minors Act, for the benefit of Jack (much like should be
\ndone in your will for any property passing to a minor). This named custodian receives the
\nminimum required distribution annually, invests it in an account titled \u201cCustodian\u2019s Name,
\nCustodian for Jack under PA UTMA\u201d until Jack turns 21. The short-coming of this low-cost
\noption is that Jack inherits both the accumulated funds and the IRA outright when he turns 21.
\nIf the IRA you leave to Jack is a Roth IRA, then you have really hit the ball out of the park. If we
\nassume an 8% return, the entire $8.8 million in distributions to Jack will be federal income tax
\nfree.
\nWhen using any of these techniques, always get written acknowledgment from the plan custodian
\nthat they have accepted the beneficiary designation you have made. Keep a copy with your will
\nand other important papers. If your custodian won\u2019t cooperate, move your account to a
\ncustodian who will. This is much too important to let slide.
\nactually receive money from the IRA withdrawals. distributed of a beneficiary of an IRA. IRA account you may designate a custodian, and even a successor
\nthe Uniform for the benefit of Jack much should for any property passing a This named custodian receives for under PA UTMA\u201d the IRA you leave really hit the ball out of the park. an 8% return, the entire $8.8 million always get written the beneficiary designation you have made. Keep a copy with your will
\ncustodian cooperate, who This is much<\/p>\n","protected":false},"excerpt":{"rendered":"
IRAs and qualified plans are great vehicles for saving for retirement. Contributions to the plans are not taxed, and the assets inside the plan enjoy tax free reinvestment and accumulation. The income tax is payable only when the assets are withdrawn from the plan. Unfortunately, while IRAs and other retirement plans are great for retirement […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_daextam_enable_autolinks":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"footnotes":""},"categories":[11],"tags":[14,37,29,15,16,18],"class_list":["post-1216","post","type-post","status-publish","format-standard","hentry","category-general-estate-planning-and-probate","tag-2009-estate-tax","tag-2009-state-death-tax","tag-estate-planning-errors","tag-nj-estate-tax","tag-nj-estate-tax-2009","tag-state-federal-estate-tax"],"_links":{"self":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/1216","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/comments?post=1216"}],"version-history":[{"count":0,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/posts\/1216\/revisions"}],"wp:attachment":[{"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/media?parent=1216"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/categories?post=1216"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/patellawoffices.com\/blog\/wp-json\/wp\/v2\/tags?post=1216"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}