A highly tax-effective way to plan for retirement
Keeping tax manageable when you retire is an important part of estate planning.
The last thing you want is for your hard-earned assets to dwindle through a lack of planning and paying unnecessary taxes.
Special trusts can help you navigate this.
We’ll help you:
- Set up a retirement account trust that protects your retirement income
- Shield assets from excessive taxes or claims
- Avoid potentially costly estate planning mistakes
Which type of retirement account trust is right?
A retirement account trust is an important estate planning tool that designates a trust as the beneficiary of your IRA or other retirement plans.
It is especially effective if your combined (husband and wife) retirement income exceeds $150,000.
The main benefits of a retirement account trust include:
- Maximizing income tax deferral and wealth accumulation over your child’s lifetime and possibly over your grandchild’s lifetime
- Minimizing estate and generation-skipping taxes
- Guaranteeing that your assets reach your desired beneficiaries over generations
- Protection from creditors and divorce
A retirement account trust is different from a living trust.
There are two basic types:
- Conduit trust – where the trust is designated as the IRA beneficiary and the beneficiary of the trust is an individual named in the trust document. Upon the death of the IRA owner, the trust beneficiary receives payments (Required Minimum Distributions or RMDs) from the available funds.
- Accumulation trust – instead of Required Minimum Distributions being paid out, this trust keeps growing from the inherited IRA assets. Note that this may not be the most tax-effective way to set it up but it can help protect funds if the beneficiary is financially unreliable or is likely to face legal action (assets are protected from creditors).
What does it mean to “stretch out” RMDs?
Stretching out RMDs refers to the ability, under IRS rules, for beneficiaries of an IRA to compound their taxable Required Minimum Distributions over their own life expectancies.
This can help the trust grow significantly and tax-effectively.
So, beneficiaries can withdraw only the RMDs from their inheritance, while the account can grow year on year.
This may well leave a large lump sum remaining at the end of the beneficiary’s own life, which can then be passed on to their children and help fund the next generation.
Set your trust up correctly to avoid later problems
As a complex area of estate planning, it is important to receive the appropriate legal advice before attempting to set up a retirement account trust.
The income tax stretch out of RMDs is not an automatic process. It requires an experienced hand to plan for this and set the trust up correctly.
Besides, your family may not be aware of the tax regulations, which can end up costing them dearly.
For instance, they may:
- Risk losing out by withdrawing the entire amount from the trust
- Attract needless estate taxes or generation-skipping taxes (40 percent)
- Waste funds through inadvisable spending or investing
- Be influenced by poor advice or an unscrupulous third party
- Waste funds through a divorce if the trust is not correctly planned
It is important to go through an educational process with the beneficiaries you nominate with a retirement account trust.
In fact, this advice applies to any and all trusts that you set up.
We can also help you arrange:
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