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Should an IRA trust be part of your estate plans?

On Behalf of | May 4, 2022 | Estate Planning |

You shouldn’t wait until your golden years to start planning for your retirement. But life has a way of interfering with the best of our plans sometimes.

So it could be that you find yourself in your 50s or 60s and only having a single – but sizeable – IRA as your legacy to your heirs. Below are some suggestions for maximizing and protecting your significant asset.

Consider an IRA trust

Individual retirement account (IRA) trusts come in two main forms. One is an accumulation trust. Here, the IRA funnels money straight to the trust but reserves these funds. The beneficiaries receive them at a future point, which allows the tax rate for the distribution to remain under 40%.

The second is a conduit trust. It shuffles the money through the trust itself before getting distrubuted to the beneficiary. That intermediary step means your former funds will be taxed at your beneficiary’s rate.

Why use a trust at all?

You may not need to. But for those who do, these financial instruments can be a lifeline. IRA trusts add a layer of protection between the trust’s funds and your beneficiaries. If that individual is terrible at managing money or is suffering from an addiction, this type of trust can benefit them. 

Otherwise, the funds in what was once a hefty IRA (north of $500,000) can be dissipated swiftly. Your legacy could even contribute to the downfall of a beloved son, daughter or grandchild – something that no one wants.

Another consideration

Be prepared to update your beneficiaries for each major life change. If you enter into a second marriage after establishing your IRA trust beneficiary as your former spouse years ago, a will naming your second, surviving spouse as your sole heir is superseded by the listed beneficiary on the trust.

In other words, named beneficiaries of financial instruments like life insurance policies, IRAs and even brokerage accounts trump the heirs and beneficiaries in your will.

Financial planning can be complex

If you have significant assets, don’t go it alone. Seeking guidance now can give your great peace of mind in the future.

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