Stretching Out IRA Distributions
Most people don't have a problem in designating who the beneficiary will be for their retirement accounts. Married people typically designate the other and single or divorced individuals designate children and/or other relatives.
The next issues becomes who will be custodian, trustee, or the person who will manage the IRA account with regard to financial decisions, and most importantly, whether the designated beneficiary receives all of the retirement funds at one time or receives the funds over a period of time. Receiving all the funds at one time will usually result in a reduction of the bequest (the retirement funds) actually received by nearly 50%. Remember that IRA funds or 401(k) funds have not been previously taxed by the IRS unless they are Roth IRAs.
The typical beneficiary designation under what is called a custodial IRA enables the beneficiary to receive either a lump sum and then minimum distributions or minimum distributions over a period of time and then a lump sum of the balance.
Designated beneficiaries have difficulty in deciding what is in their best interest, i.e. whether to take minimum distributions based on their life expectancy, or a lump sum, or some combination or some other distribution of the IRA.
Another issue facing the party who invested funds and who will designate a beneficiary is that, although the invested funds belonging to the owner are not attachable by a judgment creditor, the funds left to the designated beneficiary in an IRA or 401(k) can be obtained by a judgment creditor. A judgment creditor is one who has sued the beneficiary and has been successful in getting a judgment against that beneficiary.
What options does the owner of the IRA or 401(k) have to achieve protection for the designated beneficiary?
There are number of legal documents that I can draw up for you that will provide protection for the designated beneficiary. These documents include but are not limited to the following:
- Spendthrift trust
- Special needs trust
- Retirement trust
- Trusteed IRA
Each of the above entities that will have control over the non-taxed retirement accounts of the IRA perform different functions. Some of the entities have provisions that are similar and/or the same as one of the others.
For clients that have over $100,000 in retirement funds, the question is will the designated beneficiary be able to manage and deal with a large sum of money available to him or her?
Is it more likely or less likely that the designated beneficiary, particularly children, will keep the funds and receive minimum distributions or cash it in? The temptation of the designated beneficiary is such that the designated beneficiary is likely to cash in the IRA.
Most parents have children that are at least 20 or more years younger than themselves. Assume that the parent will predecease the child, and that if the parent passes after age 70, the child will be in his/her 50s or older. The child or children will be facing retirement in the not too distant future. Therefore I recommend to clients who fit the above example to have two types of distributions. The first type is required minimum distributions. The parent cannot hold up the required minimum distribution of an IRA, however the parent may designate that their child receives only the minimum distributions which the IRS requires. The minimum distribution is formulated by determining the oldest beneficiary’s age and life expectancy. Let's assume that the parent’s IRA is $500,000 and the beneficiary has a life expectancy of 20 years. Under this scenario the beneficiary would receive approximately $25,000 a year plus interest. The second type provides additional benefits from the first type. Here, the parent could also permit the custodian or trustee the discretion to provide additional monies out of the IRA if needed. Additionally with spendthrift provisions, the parent who owns the IRA can protect the beneficiary from judgment creditors.
Often one of the largest assets of persons approaching retirement is an IRA account. The owner needs to understand the various options that are permitted under law to protect the designated beneficiary.
Fred Antenberg has over 30 years’ experience advising clients about asset protection, financial planning, and legal instruments such as wills, retirement trusts, testamentary trusts, and other related documents in Howard County and the surrounding counties in Maryland.
Call Fred at 410-730-4404 for a free initial consultation.