Whoever inherits your IRA funds may benefit from you creating an IRA stretch trust in Colorado. At the Meurer Law Offices in Denver, we realize that many people are not familiar with this relatively new type of trust that lets your IRA monies be paid out to your heirs over their lifetime. If you’d like to know more, our attorneys can certainly explain everything you need to know, help you decide if it’s right for your estate and set up the trust for you.
Here’s the gist of things. Creating an IRA stretch trust in Colorado protects funds from spendthrift beneficiaries, creditors, and divorce. It’s focused on making sure your beneficiaries can stretch out the payment of those monies over their lifetime. This allows the assets to grow in the account without being taxed.
Now, who will get your IRA money at your death depends not on your will but on who you have listed on the IRA beneficiary designation form. If you don’t fill out the beneficiary designation form, the retirement plan agreement will decide how your plan benefits will be distributed when you die.
Often your IRA money will go to your estate, making it subject to federal income tax and state income tax in addition to your outstanding debts. This could cause a loss of around 30 percent to taxes and debts. If there is no designated beneficiary listed, then the balance of your interest must be distributed in full by December 31 of the fifth year from your death. This is called the five-year rule and results in unfavorable tax consequences.
Money in your IRA is not subject to income tax until it is distributed. This lets your money grow and compound without a deduction for taxes until you must begin to withdraw it, usually when you are 70 1/2 years old. If you don’t take withdrawals at that time, the IRS will impose a penalty equal to 50% of the amount that should have been withdrawn.
According to a Forbes article, a stretch IRA provides for when an IRA account owner dies, the beneficiaries are eligible to retitle the IRA account as an inherited IRA in the name of the deceased owner. They can then begin taking the required minimum distributions based on the beneficiary’s age, instead of taking the entire sum all at once and paying taxes on it.
The language in a stretch IRA trust allows for successor beneficiaries to be named and allows further tax-deferred growth of the IRA over more than one generation. Without the stretch language, the old distribution rules apply.
You must complete a beneficiary designation form and properly retitle the IRA. If you retitle it incorrectly, the IRS could see it as a lump sum distribution to the beneficiaries. The beneficiary must be identifiable in order to be eligible for the stretch provision. A rollover is not allowed in attempting to set up a stretch IRA. You have to use a direct trustee-to-trustee transfer.
It’s also important to know that the funds need to be transferred into a properly titled account before the end of the year following the year of the owner’s death. If this doesn’t happen, the stretch IRA option is lost, and the funds will be paid out under the old rules.
If the beneficiary forgets to take the required minimum distribution payment within the time frame, then the five-year rule could kick in, requiring the full balance to be paid out within five years, rather than the beneficiary’s lifetime.
As you can see, creating an IRA stretch trust in Colorado can be a little complicated. Contact our attorneys at Meurer Law Offices in Denver, so we can help with your estate plans and talk to you about how you want your retirement funds distributed upon your passing. We’ll break it all down in simple terms, help you make the best decisions to protect your legacy and answer any questions you might have.