Wealth Management Blog | WrapManager

Lord Abbett Shares More Tips on Trusts for IRA and 401(k) Holders - Part 2 of 2

Posted by WrapManager's Investment Policy Committee

June 14, 2018

Lord Abbett Shares More Tips on Trusts for IRA and 401(k) Holders - Part 2 of 2

Here’s the nitty-gritty on naming a trust beneficiary, plus insights on trust mechanics and taxation, and why bequeathing a Roth IRA appeals to many investors.

Owners of a 401(k) plan or IRA account, depending on their estate and legacy-planning goals, have the option to name a trust as a beneficiary instead of an individual (e.g., spouse, child, grandchild, etc.).

In last week’s column, I covered the strict, complicated, and cumbersome IRS rules to be followed so that the oldest trust beneficiary can use his/her own life expectancy to determine post-death payouts, including the requirement that the trust qualify as a “look-through.” So long as the trust qualifies, the “stretch” technique (whereby payments can be “stretched” out over a period of time) can be utilized.

Instead, assuming the trust qualifies as a “look-through,” you must use the life expectancy of the oldest trust beneficiary for required minimum distributions (RMDs). For this reason, anyone naming multiple trust beneficiaries ideally should see that they are close in age. Further, if any of the trust beneficiaries is not an individual (e.g., estate, charity), there would be no designated beneficiary for distribution purposes, even if the trust qualifies as a look-through; thus, trust beneficiaries would not be able to stretch post-death RMDs over the life expectancy of the oldest beneficiary. If the trust fails to qualify as a look-through, then it has no life expectancy. Generally, the entire account must be distributed to the trust within five years.

Lord Abbett Talks About Designating a Trust as an IRA Beneficiary - Part 1 of 2

June 7, 2018

Such a strategy can be beneficial, but be sure to consult an experienced attorney and tax professional to navigate the maze of rules. In the first of a two-part series, money manager Lord Abbett tackles some of the complexities of designating a trust as an IRA beneficiary. Increasingly, clients are relying on their advisors for advanced beneficiary-planning strategies, such as naming a trust as the beneficiary of a retirement account. Designating a "look-through" trust as an IRA beneficiary can be tricky and complicated, with potentially serious tax consequences if done incorrectly. Advisors and their clients need to be aware of the nuances and appropriateness of these arrangements. Typically, qualified retirement plans and IRAs are not subject to probate. Instead, retirement assets are distributed according to account owners’ current beneficiary designation. Naming rules are very liberal, thus offering IRA owners a number of options in designating a beneficiary; in fact, any individual and/or non-individual (charity, estate, or trust) can be a named beneficiary. But if IRA assets are moved into the trust, either while the account owner is alive or at death, a distribution subject to income tax has occurred. Tip: Never move IRA assets into the trust. Doing so will result in a taxable event on the entire IRA balance. Instead, name a trust as beneficiary on the IRA beneficiary form. Why would the owner of an IRA want or need to name a trust, rather than a person, as his or her beneficiary? [+] Read More

Are You the Beneficiary of an IRA? You May Need to Take a Required Minimum Distribution

December 6, 2017

When most investors/retirees think of Required Minimum Distributions (RMDs), they think of turning 70 ½ and having to take mandatory distributions from an IRA. The federal government allows savers to make tax deductible contributions (with tax deferred growth) to IRAs/401(k)s/qualified retirement plans throughout their working lives, but the party ends when folks turn 70 ½. Uncle Sam eventually gets his cut. There’s one feature of RMDs, however, that is less widely known. That is, if the account owner passes away and there is still a balance in the qualified retirement account, it is the responsibility of the beneficiary to take the required distributions, whether that be the spouse, a child, a charity, a trust, and so on. Not taking the required distributions can result in a 50% excise tax penalty on the amount not withdrawn, so it’s important to understand these rules. We’ll break them down more clearly for you, below. [+] Read More

The “Never Ending” Story of the Stretch IRA

June 15, 2016

At least we hope it’s a never ending story. About two years ago, we wrote an article about the government potentially ending the Stretch IRA. Back then, there was a proposal being floated that would require non-spousal beneficiaries to receive and pay taxes on IRA distributions within five years of the IRA owner’s passing. The law never materialized, and Stretch IRAs are still a great potential tool for preserving wealth over generations. But here we are two years later, and the proposal is back again—this time as part of the 2017 White House budget. The administration is seeking to accomplish the same thing it couldn’t accomplish back in 2014, to “require non-spouse beneficiaries of deceased IRA owners and retirement plan participants to take inherited distributions over no more than five years.” In layman’s terms, it means that if you inherit an IRA from someone you weren’t married to, you have to distribute all of the funds within a 5-year period, and possibly be responsible for all the associated taxes. Today, a non-spouse person that inherits an IRA can “stretch” out their distributions over a lifetime, in hopes of reaping the long-term growth benefits of a tax-deferred IRA. In the proposed law’s defense, IRAs were never designed to be “legacy” accounts – they were designed to give people the opportunity to save for retirement in a tax advantaged way, and then use that money for retirement. Once the retiree passes away, the tax break should theoretically end – and the concept of a Stretch IRA runs counter to that. As long as it remains on the table, however, investors who have inherited an IRA would be wise to consider it as part of their investment plan. It’s difficult to argue against leaving assets in a tax deferred growth account for as long as possible. [+] Read More

Inheriting an IRA: What are Your Options?

June 13, 2014

If you are the beneficiary of a Traditional, Simple, or SEP IRA and have just inherited the assets, you have a few reasonably simple options available to you. We’ve created a guide below to help you understand your choices. Inheriting an IRA means having a new set of financial decisions, and since your financial situation is unique it’s a good idea to ask for help. Your financial advisor should be able to guide you through these options so the transition goes smoothly and you can make a choice that’s right for you. Below we break it up into two sections: spouses who have inherited IRA assets, versus non-spouses. [+] Read More

Estate Planning Strategies for IRAs: The “Per Stirpes” Designation

June 12, 2014

The “per stirpes” IRA beneficiary designation is a useful tool for ensuring your assets are distributed equally amongst your lineal descendants (children, grandchildren) or those legally adopted. It helps makes sure that each of your children receives an equal share of your assets, and that their share remains in their family in the event they are not there to inherit your assets. How the “Per Stirpes” IRA Beneficiary Option Works Say you have a $2,000,000 IRA and four children, and you want each child to receive $500,000. One of your children has three children of his own. If you set up your beneficiaries as “to my descendants that survive me, per stirpes,” your kids would each receive their $500,000, and your three grandchildren would split the $500,000 in the event they inherit the assets. Each grandchild in this case would receive one-third of the $500,000 share, or roughly $166,667 each.1 What makes the “per stirpes” designation different from assigning each child as a 25% primary beneficiary is the fact that the assets ‘flow through’ to grandchildren in the event they inherit the assets in place of one of your children. In the above example, if you had assigned each child as a 25% primary beneficiary, the $500,000 share would have been split amongst your remaining children and would not have flowed through to your grandchildren.2 [+] Read More

The Stretch IRA: A Wealth Preservation Strategy That’s Easy to Use

May 8, 2014

The Stretch IRA strategy is a method for lengthening the life of your IRA assets, in hopes they span multiple generations. We stress the word “method” because the Stretch IRA is not actually a product – it’s a wealth preservation strategy your beneficiaries can use to stretch the life of the IRA assets they inherit from you.1 We’ll explain how it’s done below, but first we’ll help you understand the benefits. Stretching Your IRA Can Help It Grow Tax-Deferred Longer Stretching your IRA can lower the required withdrawal amounts your heirs have to take each year, meaning the value of your IRA can grow tax-deferred longer – a benefit that can keep the IRA in the family for generations. [+] Read More