As traditional pension plans have largely been eliminated in recent decades, it is very common for people to have a large portion of their financial wealth held in an Individual Retirement Plan (IRA). Naming a trust as the beneficiary of an IRA can reduce the chances of probate and ensures the IRA is covered by the protections built-in to the trust.
But did you know that you can also require that the IRA distributions be stretched over the lifetime of a beneficiary?
We often use special trust provisions requiring the trustee to distribute only the required minimum distribution (RMD) over the life expectancy of the beneficiary. While this provision prevents the beneficiary from liquidating the IRA immediately, it can also yield greater financial benefits over a much longer period of time.
The first benefit of IRA stretch planning is reducing the overall income tax liability. Since IRA distributions are subject to income tax, spreading distributions over many years reduces the beneficiary’s taxable income and, as a result, can dramatically lower the tax rate applicable to the IRA distributions.
The second benefit can be to provide a lifetime income stream to your beneficiary. By limiting annual IRA distributions to the RMD amount, your beneficiary receives regular distributions from the IRA over his or her lifetime rather than squandering it in a short period of time.
With proper planning, your IRA can not only provide you with a stream of income during your retirement years, but can provide the same benefit to your beneficiaries as well. Please contact our offices if you have questions about IRA stretch planning or how this can be implemented into your estate plan.
Parman & Easterday