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Protect Your IRA From Taxes – What Is An IRA Inheritance Trust?

Aug. 17, 2022

When it comes to Estate planning, there are several tools that can be customized to your particular needs and wishes that can be put in place. One valuable tool a Kennesaw trust lawyer will use is an IRA inheritance trust.Two elderly adults enjoying the lake

If you have an IRA or plan to have one, it is important that you learn about the benefits of an IRA Inheritance Trust. This can be a fantastic way to pass on your retirement assets in a way that's beneficial for everyone involved.

Back when you open your IRA, you most likely named a beneficiary to receive the proceeds of your account when you pass away. However, in many situations, it may be better to name a trust as the beneficiary. Naming an IRA inheritance trust as a beneficiary can provide a few important benefits.

  1. One of the main benefits of an IRA inheritance trust is that you can protect the IRA assets if the named beneficiary is not financially responsible.

    The beneficiary may find him or herself unable to handle such a large amount of money, and could end up losing it all through poor investments or frivolous spending. If that beneficiary files for bankruptcy, the inherited IRA assets could be lost to that person’s creditors.

    However, if the IRA has a trust named as beneficiary, the trust will likely protect those assets from the creditors An IRA inheritance trust allows you to name someone else as trustee who will manage the funds until they are needed by the beneficiary, who can't touch them until he or she reaches 59½ years old without paying a 10% penalty on early distributions.

  2. Another major benefit is that if your beneficiary is going through a divorce the IRA assets would be protected from being divided in the divorce.

    An IRA inheritance trust is a special type of trust that can be used to pass on an IRA to your heirs. It is designed to offer the benefits of a beneficiary-protection trust, which means it can help protect the IRA assets from being split if the beneficiary is going through a divorce.

    In Georgia, any asset acquired during a marriage is labeled as marital property and is subject to division between the spouses. However, a trust formed prior to a marriage is considered separate property. Timing on this is important, so you need to create the trust before the wedding!

  3. An IRA Inheritance Trust allows you to control how your beneficiaries use the trust assets. You can decide under what conditions, circumstances, or situations that the IRA assets held by the trust can be used.

    You have the ability to generally set out ages or accomplishments your beneficiaries must reach in order to receive a portion or all of the trust. For example, "upon reaching age 22" or "upon graduation from college" (keep in mind the possible tax consequences for a distribution before reach 59 1/2).

    Or, you have the option to be extremely specific. For example, you could require that the proceeds be used to fund a grandchild's education or buy an engagement ring or wedding dress. You also have the option to arrange that the assets would be distributed over time rather that in one lump sum. These examples really only scratch the surface.

    An IRA Inheritance Trust is a great way to ensure that your beneficiary receives exactly what they need when they need it most and not necessarily all at once.

You can also use an IRA Inheritance Trust to avoid probate court proceedings after you pass away! Probate is expensive and time-consuming; it takes months before assets are distributed among your heirs.

Although we have been discussing some of the benefits of an IRA Inheritance Trust, there are also some valid reasons why you would not choose an IRA Inheritance trust.

For example, your spouse may get some tax benefits for IRA distributions if they are named as the beneficiary of the account. If a trust is named as the beneficiary they probably would be able to take advantage of that.

Another situation is that your spouse has the option to roll over the IRA to his or her own IRA and defer the distributions. Rolling over is not likely to be possible if an IRA Inheritance Trust is the named beneficiary. So your spouse may miss out on the accrued compound interest they might get if the assets went into their IRA.

These are just other examples of why you need to speak to a Kennesaw Wills and Trust lawyer before making decisions like this. There are pros and cons to any option and having the advice of an attorney who understands the nuances is important to make sure you know the right plan is in place for you.

If you would like to talk about how an IRA Inheritance Trust fits into your over all estate plan call our office at (770)387-4529 and schedule your Peace of Mind Planning Session with a Kennesaw trust lawyer. We’ll make sure that you rest easy knowing that your family and legacy are protected.