IRAs and 401ks allow your savings to grow tax-deferred until you begin taking money out. In most cases, you must begin taking required minimum distributions (“RMDs”) at age 70 ½. The rest of the money in your account continues to grow tax-deferred. If you pass away before depleting your account, the balance goes to your named beneficiaries. A surviving spouse may roll over the account into his or her IRA. A non-spouse beneficiary may “stretch out” the RMDs over his or her lifetime. This ability to continue tax-deferred growth can make retirement accounts an efficient way to pass wealth from one generation to the next. However, there are several problems that may develop if you name an individual beneficiary:
You do not control who will inherit the assets from your beneficiary.
Distributions from the account can become marital property. A new beach house purchased with funds from your account can easily become the property of your beneficiary’s spouse after a divorce or upon the death of your beneficiary.
If the beneficiary is a minor, distributions will need to be paid to a guardian. This will require significant expenses and court supervision.
Adult beneficiaries may take large distributions or cash out the entire account, destroying your carefully made plans for long-term, tax-deferred growth.
Creditors could seize the account, particularly if your beneficiaries do not live in North Carolina.
There is the risk of court interference if your beneficiary becomes incapacitated.
Distributions could cause a beneficiary to lose government benefits, such as Medicaid or SSI.
Naming a trust as beneficiary will give you more control and provide more protection for these tax-deferred accounts. Because the trust must meet stringent requirements established by the IRS, it is best if the designated trust is not part of a revocable living trust or another trust that was not designed for this purpose. Instead, a carefully-designed Stand-Alone Retirement Trust is the best tool. Some specific benefits of an IRA Trust are:
You may name successor beneficiaries and control who will receive the proceeds if your initial beneficiaries die before the account is fully paid out.
No guardian is needed for minor children and there is no risk of court interference if your beneficiary becomes incapacitated.
You can make your trust a special needs trust, ensuring that your beneficiaries with special needs do not lose valuable government benefits such as SSI or Medicaid.
You may prevent your beneficiaries from cashing out your account or taking larger distributions, assuring the continuation of tax-deferred growth
The account is protected from creditors and divorce claims.
You may maintain the long-term relationship you’ve enjoyed with your financial advisor by appointing him or her to serve as the trustee’s investment advisor.