This relatively new type of trust offers a number of benefits for the whoever you choose to inherit your IRA funds, whether that’s a spouse, child or other loved one.
If you are not familiar with an IRA stretch trust, here’s the gist of this strategy:
Creating an IRA stretch trust in Colorado protects funds from spendthrift beneficiaries, creditors, and divorce (ex-spouses). It’s also 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.
Of course, 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.
The Importance of Naming Your IRA Beneficiary
As with many other estate planning tools and strategies, who will get your IRA money upon your death isn’t based on what you’ve written in your will but who you have decided to list on the IRA beneficiary designation form. If you don’t fill out the beneficiary designation form, the retirement plan agreement will be utilized to decide how your plan benefits will be distributed when you die.
This may or may not reflect your actual wishes, so it’s very important to not skip this step.
Without a named beneficiary, your IRA money will likely 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 31st of the fifth year after your death. This is called the five-year rule and undoubtedly will result in unfavorable tax consequences.
Working with an estate planning attorney for an IRA stretch trust and other strategies can be helpful for matters such as this. They will protect your legacy and lifetime of work by making sure that all of your paperwork is in order, beneficiaries are properly named and tax-cutting measures have been maximized.
The Long-Term Value of Utilizing an IRA Stretch Trust
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 of age. 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you don’t take withdrawals at that time, the IRS will impose a penalty equal to 50% of the amount that should have been withdrawn.
When an IRA account owner dies, an IRA stretch trust allows the beneficiaries to retitle the IRA account as inherited in the name of the deceased owner. They must then begin taking the required minimum distributions based on the beneficiary’s age, instead of taking the sum all at once and paying taxes on it.
The language in a stretch IRA trust allows for successor beneficiaries to be named and provides further tax-deferred growth of the IRA over more than one generation.
If you have a sizeable IRA that continues to increase in value, the stretch strategy could potentially allow it to continue growing long after you’re gone. It could provide for your immediate family now, as well as grandchildren, great-grandchildren and so forth. It could be a wonderful gift to pass on to your family.
Without the proper stretch language, the old distribution rules apply.
Again, you must complete a beneficiary designation form and properly retitle your IRA. If you retitle it incorrectly, the IRS could view and treat it as a lump sum distribution to the beneficiaries. While that would benefit the IRS, it would be detrimental to your family.
To ensure this does not happen, the beneficiary must be easily identifiable in order to be eligible for the stretch provision. You cannot include language that says to refer to your will for clarification.
It’s also important to note that a rollover is not allowed in attempting to set up a stretch IRA. You have to use a direct trustee-to-trustee transfer.
In addition, 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.
Getting Help Setting Up an IRA Stretch Trust
As you can see, creating an IRA stretch trust in Colorado can be a little complicated. There are a lot of rules to follow and it can quickly become overwhelming – especially since laws can change at any time. That’s why our attorneys at the Meurer Law Offices in Denver are available to assist you.
By contacting us today, we can set up an appointment to begin helping you with your estate plan. We will take a look at your IRA and all of your other assets. Then, based on how you wish for them to be distributed upon your passing, we will formulate a plan to protect your legacy and your beneficiaries.
Most importantly, we will present options and honor your final decisions. We will explain everything without the legal jargon and answer any questions you might have for us along the way. Our attorneys want you to feel completely in control and won’t rush or pressure you.
To get started, please call or contact us today for your free initial consultation.