For many women, estate planning is one of the most important parts of our financial lives. While we enjoy our money and the things it can buy for us, what matters most to us are our families and our loved ones. We have worked hard and carefully managed our wealth, not so we can spend it all on expensive toys but so that we can provide for our families. We want to make sure our children’s marriages aren’t torn apart by financial stress. We want to make sure our grandchildren can go to college and start their adult lives without being buried by student debt. We want to leave a legacy.
One estate planning strategy that you may have heard of is to assign a trust as the beneficiary of your IRA as opposed to individual heirs. This is not a one-size-fits-all answer and is only appropriate for certain situations. Below are some of the advantages and disadvantages of taking this approach so that you will have a better understanding of how it might fit your personal situation.
Advantages Of Having A Trust Be Your Beneficiary
Protect Minor Children
When minor children are heirs, if there aren’t proper instructions a guardian will have to be appointed by the court to manage the inheritance. This can be a lengthy and complicated process and can reduce the benefit that the child gets from the inheritance.
Maneuver Blended Family Dynamics
If your family includes children from multiple marriages, you can use a trust to ensure that each heir gets exactly what you want them to.
Support Children With Special Needs
Inheriting an IRA could threaten a person with special needs’ ability to qualify for Social Security disability benefits or other forms of assistance.
Avoid Imprudent Spending
Young adults, and many older adults as well, may not appreciate the benefits of an IRA and be inclined to cash it out and pay the taxes instead of taking advantage of deferred distributions. With a trust, you can control how much an heir receives per year and when they gain control over assets.
Safeguard Family Wealth From Creditors
A 2014 Supreme Court case found that unlike your own IRA, inherited IRAs are not protected from creditors in a bankruptcy. If you are concerned that your heirs may face divorce or bankruptcy, a trust might be a good idea.
Disadvantages Of Having A Trust Be Your Beneficiary
Mistakes Are Easily Made
Trusts are complicated documents that have to be carefully worded to accomplish your goals. Your heirs could even lose most of the benefits of inheriting tax-advantaged IRA assets if the trust is not created to meet federal regulations. If the trust doesn’t qualify as a “see-through” trust, the assets may have to be distributed over a five-year period instead of over a lifetime. Also smaller mistakes, such as naming a charity as a beneficiary, could trigger expensive tax consequences.
Professional Advice Is Necessary
It’s critical to work with an attorney who has experience with trusts and inherited IRAs and has a firm understanding of your situation if you are going to name a trust as a beneficiary. You also need to check with your IRA custodian to ensure that the trust provisions are compatible with the document that governs your IRA.
Trusts are complex and costly to create and maintain, so they are not usually worth the trouble unless you face a complicated estate situation or have significant assets to protect. In most cases, naming a spouse or children as primary and contingent beneficiaries is enough to preserve the tax benefits of the IRA for your heirs.
Choosing beneficiaries for your IRA is best done alongside an experienced professional who can help you coordinate every aspect of your estate plan. Engaging Women In Wealth can provide you with a comprehensive review of your estate plan and answer any questions you have regarding trusts, inherited IRAs or beneficiary provisions. Call us at 858.756.0004 or email [email protected] so we can discuss how you can best care for your family and leave a lasting legacy.
About Deb Sims
Deborah Sims is the Principal of Estate Management Group, a wealth management and financial services firm offering comprehensive and customized strategies to help her clients manage their assets and feel confident in their future. Her mission is to serve as her clients’ most trusted wealth advisor through professional knowledge, integrity, and personalized wealth management services. Based in San Diego, California, Deb’s team has offices in Rancho Santa Fe, Old Town, and Del Mar. She invites you to contact her team today to learn more about how they can help you.