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Estate planning for high-net-worth individuals is essential to reduce the tax burden and protect wealth. Using trusts is a common strategy for high-net-worth estate planning. Comprehensive estate plans for high-net-worth families often include several trusts to meet specific needs and avoid the public probate process. Our New Brunswick estate planning attorneys discuss using IRA trusts in this blog.
What Is an IRA Trust?
An IRA Trust is set up to be the beneficiary of an Individual Retirement Account (IRA). There are two types of IRA Trusts:
Conduit IRA Trust
A Conduit IRA Trust serves as a pass-through for the Required Minimum Distributions (RMDs) received from the IRA. The trust collects the RMDs and pays them to the trust beneficiaries. Each beneficiary pays taxes on the distributions at their individual income tax rates.
Accumulation IRA Trust
The trustee must collect the Required Minimum Distributions (RMDs) annually from the IRA. However, the trust can hold the funds instead of distributing the money to the beneficiaries.
Accumulation IRA Trusts give the grantor more control over how the funds are paid to the beneficiaries. It also provides asset protection for the funds held in the trust. A drawback is that the income retained in the trust is subject to trust tax rates.
Benefits of Using IRA Trusts for High-Net-Worth Estate Planning
There are several benefits of naming a trust as your IRA beneficiary. You may want to consider an IRA Trust if:
- Your beneficiary has special needs. Inheriting an IRA would likely cause them to lose their government benefits. The IRA Trust uses the money for expenses that do not jeopardize government benefits.
- A minor cannot own an IRA. Therefore, you name the IRA Trust as the beneficiary to manage the inheritance for the minor.
- Inherited IRAs are not protected in bankruptcy. If an heir has financial problems or poor money management skills, naming a trust as the IRA beneficiary can protect the assets from the heir’s creditors.
- You want to limit your heir’s access to funds to prevent them from withdrawing more than the RMDs each year. An IRA Trust allows you to determine when and how much beneficiaries receive from the trust.
- You want to stretch out the funds for more than ten years. Under current rules, all funds must be withdrawn from the IRA within ten years after the owner’s death. An Accumulation IRA Trust can hold and manage the funds for longer than ten years.
- The IRA Trust can be used to provide for a surviving spouse during their lifetime and then transfer the remaining funds to successive beneficiaries. This option may be useful in blended families.
- IRA Trusts can be used to name successive beneficiaries for the trust funds. Therefore, you can control who receives the funds should your primary beneficiary pass away before the funds are fully distributed from the trust.
Because IRA estate planning involves complicated tax rules for retirement accounts, working with an experienced trust and estate planning attorney is crucial. There could be alternative strategies available that would meet your needs while avoiding some of the potential drawbacks of IRA Trusts.
Get More Information About IRA Trusts From Our Staten Island and New Brunswick Estate Planning Attorneys
Trusts can help you preserve and protect your wealth for yourself and future generations. Contact our office to schedule an appointment with one of our estate planning attorneys in New Brunswick. We represent clients throughout New Jersey and New York.