According to census bureau statistics, nearly half of married couples will at some time go through a divorce. If you are going through the divorce process, you’ve got a lot of company.
So, do you need a new will? What does the process of divorce do to your estate plan?
You need to remember that in New Jersey you are considered legally married until the judge signs the final divorce decree. There is no such thing in New Jersey as a legal separation.
This means that if you die before the divorce if final, your soon-to-be ex is still considered to be your husband or wife and is entitled, under New Jersey law, to claim his or her spousal share, approximately one-third, of your estate.
If you have a will giving everything to your spouse, and you die before the divorce is over, then the spouse gets everything! The will is still valid! It doesn’t matter if the divorce was been going on for 3 years. It doesn’t matter if you have been separated for 10 years. It doesn’t matter if the divorce will be final next week. It doesn’t matter if you’re living with a new boyfriend or girlfriend. The spouse gets everything unless you have changed that will. And if you have changed that will, your spouse may still elect to take his or her spousal share.
If you are in the midst of a divorce and die without a will, your spouse will be entitled to a share of your estate, as decided by intestacy laws, and he or she will also be in charge of the administration of your estate.
Once the divorce is final, if you don’t have a will, the state intestacy statute governs and your children would be your heirs, or if you have none, your parents, or brothers and sisters, etc.
If you made a will while you were married, and are then divorced, the will is still valid, but any provisions naming the former spouse are interpreted as if the former spouse had predeceased you. After the divorce is final, your will may be satisfactory, interpreted as if the ex-spouse had predeceased you.
This doesn’t apply to trusts, however. If your estate plan includes a trust, mentions of the ex-spouse must be affirmatively amended to be deleted.
The terms of living wills and medical directives survive the divorce. No legislation or case law has yet tested this issue. You may be well advised to rewrite your living will and medical directives if you don’t want your ex to "pull the plug."
What about your 401(k) plan? If you are domiciled in New Jersey when you die, the state legislature has done your thinking for you. If there is a divorce, any beneficiary designation for a life insurance policy, annuity contract, pension, profit-sharing plan or other contractual arrangement, providing for payment to a spouse, will be construed as if the former spouse had predeceased. Comparable to the wills situation, the divorce must be final for this rule to apply. In many other states it is up to you to change the beneficiary designation.
However, if your insurance is in an irrevocable life insurance trust, which is a common vehicle, the protective statute won’t change the terms of the trust, and benefits may be given to or used for your ex-spouse. And irrevocable trusts being, well, irrevocable, there is no fix. Most life insurance trusts are drafted to take care of this by addressing what happens if the current spouse becomes the ex-spouse.
If you remarry, the federal law enacted as part of the Retirement Equity Act automatically makes the new spouse a beneficiary of qualified plans. Qualified plans include 401(k) plans, profit-sharing plans and pensions plans, but not IRA’s. If you are married, your spouse is automatically the beneficiary of your qualified plan unless he or she has consented in writing to another beneficiary designation.
Even after the divorce is final, it is important to have your estate planning attorney review your divorce decree or agreement. Your obligations under the agreement may effect your retirement plan. Your ex-spouse may retain rights in a retirement account, or the divorce decree may require maintenance of life insurance payable to the ex-spouse or children.
Showing posts with label Protecting Your Assets. Show all posts
Showing posts with label Protecting Your Assets. Show all posts
Friday, April 3, 2009
Sunday, March 1, 2009
Stretch IRA - How Your IRA Can Survive Several Generations
The stretch IRA concept is a wealth-transfer strategy that can help you extend the period of tax-deferred earnings on your retirement assets. After the owner of the IRA dies, the beneficiaries will also have the longest allowable period of tax-deferral on the required distributions of the IRA assets. This strategy can allow distributions from your retirement assets to be extended over several generations. Because of this, your family could save significant dollars in income taxes over their lifetimes.
A stretch IRA strategy can be established at any time, as long as you have named an individual person as the beneficiary. It's also important to name an individual person as a contingent beneficiary in case your primary beneficiary predeceases you. If set up correctly, your beneficiaries should be able to take their required IRA distributions over their individual life expectancies.
However, there are a number of steps that need to be followed to put this strategy in place. These steps include the following:
1. Selection of individual beneficiaries.
As previously mentioned, you will need to designate an individual beneficiary. Although there might be certain reasons for naming a trust as a beneficiary (e.g., asset protection for the beneficiaries), you should keep in mind that you will jeopardize the ability to use this strategy if you do it. Even with a qualified trust, distributions must be paid out over the life expectancy of the oldest beneficiary. With this in mind, you could jeopardize you ability to stretch out distributions to your grandchildren if you name a trust as the beneficiary.
2. Discuss your plans with an experienced advisor.
The benefits of this strategy could also be jeopardized if the IRA is not set up properly. Therefore, you need to speak with an experienced tax advisor who has worked with this strategy before.
3. Establish and maintain separate accounts for your beneficiaries.
If you have two or more beneficiaries, you need to set up a separate account for each one of them. You should also designate a certain percentage of you IRA assets to each of your beneficiaries. By doing this, each beneficiary can then choose to have their share distributed over their individual life expectancy.
4. Inform your beneficiaries of your plans.
You should also let your beneficiaries know about their future interest in your account when you pass away.
There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution (50% of the distribution that should have been taken).
On a final note, it should be remembered that this strategy may not be suitable for everyone. For example, if you think that you will need access to your IRA money to meet your daily living needs during retirement, then this strategy might not help you. Please note I always advise people to consult with their own qualified legal advisor prior to making any decisions.
Do you want to know more about the benefits and restrictions of the stretch IRA strategy? Email or Call me.
Tuesday, February 24, 2009
Asset Protection
For the client who needs to protect assets, estate planning may include the use of asset protection trusts (such as foreign-situs trusts) that will put assets safely out of reach. Although there are potentially many reasons to use such vehicles, their use is not for everyone; many factors must first be considered. This article explores the world of the "Integrated Estate Planning Trust," discusses why and when it is used and offers a model planning structure.
INTRODUCTION
Today, asset protection planning is generally a concept familiar to wealth-planning professionals worldwide. However, while it has become more familiar and accepted, too often, such planning is done in a vacuum and without regard for its effect on the client's overall estate plan.
The same can be said for conventional estate planning; the emphasis tends to be on tax mitigation at death, the smooth transition of property, probate avoidance and ensuring that intended beneficiaries receive the intended property in the intended fashion. Unfortunately, the lifetime side of the estate plan has typically been ignored particularly, planning to preserve the client's estate during his life.
The collective thinking of the planning community has evolved tremendously over the past 10 years. The time has come for asset protection planning and estate planning to be joined into a new concept-integrated estate plan(ning) (IEP).
ASSET PROTECTION PLANNING
Asset protection planning recognizes the fact that preservation and protection of a client's estate during his life is at least as important (and in the view of many, more important) than preserving and protecting it after death.
The financial uncertainties stemming from (1)engaging in business or a profession or (2) being an entrepreneur or property owner and (3) economic and social factors have caused many successful people to adopt strategies to safeguard their accumulated wealth. A number of factors have contributed to the growing interest in and recognition of the asset protection component of the overall IEP. These factors include: (1) expanding theories of legal liability, (2) threat of litigation, (3) result-oriented judges and juries, (4) the unavailability of affordable, adequate or appropriate insurance coverage, and (5) the continuing national increase in the volume of litigation. Of course, other reasons may serve as motivating factors to persons of means who reside in (or who have assets) in other jurisdictions, as discussed below.
DEFINITION
Asset Protection Planning may be defined as the process of organizing assets and affairs in advance so as to safeguard them from loss or dissipation.
Stated another way, wealth may be more or less vulnerable to risk, depending on the nature of the property and the manner in which the property is held. Thus, at least in part, the asset protection component of the IEP will involve reorganizing the manner in which property is held so that it is less vulnerable to threats than it otherwise would be (e.g., converting joint tenancy property to a tenancy by the entirety or placing property in trust for the benefit of third parties or the settlor).
Asset protection planning is broader than simply planning for the possibility of future litigation. Clients will be motivated to plan for different reasons, not necessarily tied to the possibility of litigation. Thus, a client in a civil-law jurisdiction may desire to achieve "testamentary freedom" and avoid the forced heirship provisions applicable in his home country; a client residing (or with assets) in a politically or socially volatile part of the world may seek to protect his accumulated wealth from the various threats posed by such instability. However, the asset protection component of an IEP is not to be used to:
Hide Assets
Planning to or "hiding" assets can be dangerous; the dangers arise from the likelihood that a client will have to choose between protecting assets and committing perjury if he becomes involved in litigation. Whether or not litigation ever arises, a client may face difficult decisions each year when the client's Form 1040; full disclosure on a return is inconsistent with planning based on concealing assets. Further, hiding assets may result in criminal prosecution. Finally, the tangled web that often results from such planning is inconsistent with the goal of creating a user-friendly IEP.
While many clients appreciate the confidentiality that can be obtained through an IEP, a proper plan will not rely on secrecy for its efficacy.
Defraud creditors
There is some uncertainty as to when asset protection planning can be implemented (and the extent to which it can be implemented, if at all) when a client has a pending or expected legal threat. This uncertainly is much less prevalent today that in the past.
The easy clients are those with neither pending nor threatened claims who seek to protect against the unexpected. The difficult clients are those on the brink of bankruptcy (although pre-bankruptcy planning may help). There is a vast gray area in between.
Fraudulent conveyance law varies by state; there is also some Federal fraudulent conveyance law. A statutory body of fraudulent conveyance law applicable to certain situations exists at the federal level as well. For the good of the client and the planner as well, any asset protection planning must be implemented within the bounds of propriety as defined by reference to applicable fraudulent conveyance law.
Our common-law system favors the free alienability of property; an individual without creditor concerns is free to dispose of his property as he sees fit, whether in the form of charitable gifts or gifts to children, to a spouse or in trust. Fraudulent conveyance laws tend to focus not on who is the transferee, but on the transferor's intent at the time of the transfer.
Fraudulent conveyance law generally protects present creditors and subsequent creditors from transfers made by a person who is (or foreseeably will become) their debtor. However, "subsequent creditors" does not include every person who becomes a creditor in the future; there is also a "future potential" class of creditors. The distinction is clarified by a Florida decision, 1 which stated that asset transfers are permissible as to one's possible creditors, but not as to one's probable creditors. The operative inquiry is whether the client has any outstanding judgments, and whether he has any litigation or investigations pending, threatened or expected 2.
Evade Taxes
Some U.S. clients and their advisors are attracted to foreign-based planning by hoped-for tax advantages. As relatively few tax maneuvers involving foreign entities exist today for the global investor, a well designed IEP will have no particular income, gift or estate tax advantage other than those that can be accomplished through "conventional" inter vivos or testamentary planning. Importantly, a well-designed IEP will have no particular income, gift, excise, or estate tax disadvantages either, whether from the domestic or foreign standpoint. Both the planner and the client should be aware on an ongoing basis that certain tax issues will exist in the IEP setting. These tend to be not much different from (nor much more involved than) those associated with other types of entities than clients and planners are familiar with. Although there may be additional government reporting obligations (depending on the nature and design of the overall planning structure), neutrality in terms of tax liability will therefore generally prevail under an IEP.
INTRODUCTION
Today, asset protection planning is generally a concept familiar to wealth-planning professionals worldwide. However, while it has become more familiar and accepted, too often, such planning is done in a vacuum and without regard for its effect on the client's overall estate plan.
The same can be said for conventional estate planning; the emphasis tends to be on tax mitigation at death, the smooth transition of property, probate avoidance and ensuring that intended beneficiaries receive the intended property in the intended fashion. Unfortunately, the lifetime side of the estate plan has typically been ignored particularly, planning to preserve the client's estate during his life.
The collective thinking of the planning community has evolved tremendously over the past 10 years. The time has come for asset protection planning and estate planning to be joined into a new concept-integrated estate plan(ning) (IEP).
ASSET PROTECTION PLANNING
Asset protection planning recognizes the fact that preservation and protection of a client's estate during his life is at least as important (and in the view of many, more important) than preserving and protecting it after death.
The financial uncertainties stemming from (1)engaging in business or a profession or (2) being an entrepreneur or property owner and (3) economic and social factors have caused many successful people to adopt strategies to safeguard their accumulated wealth. A number of factors have contributed to the growing interest in and recognition of the asset protection component of the overall IEP. These factors include: (1) expanding theories of legal liability, (2) threat of litigation, (3) result-oriented judges and juries, (4) the unavailability of affordable, adequate or appropriate insurance coverage, and (5) the continuing national increase in the volume of litigation. Of course, other reasons may serve as motivating factors to persons of means who reside in (or who have assets) in other jurisdictions, as discussed below.
DEFINITION
Asset Protection Planning may be defined as the process of organizing assets and affairs in advance so as to safeguard them from loss or dissipation.
Stated another way, wealth may be more or less vulnerable to risk, depending on the nature of the property and the manner in which the property is held. Thus, at least in part, the asset protection component of the IEP will involve reorganizing the manner in which property is held so that it is less vulnerable to threats than it otherwise would be (e.g., converting joint tenancy property to a tenancy by the entirety or placing property in trust for the benefit of third parties or the settlor).
Asset protection planning is broader than simply planning for the possibility of future litigation. Clients will be motivated to plan for different reasons, not necessarily tied to the possibility of litigation. Thus, a client in a civil-law jurisdiction may desire to achieve "testamentary freedom" and avoid the forced heirship provisions applicable in his home country; a client residing (or with assets) in a politically or socially volatile part of the world may seek to protect his accumulated wealth from the various threats posed by such instability. However, the asset protection component of an IEP is not to be used to:
Hide Assets
Planning to or "hiding" assets can be dangerous; the dangers arise from the likelihood that a client will have to choose between protecting assets and committing perjury if he becomes involved in litigation. Whether or not litigation ever arises, a client may face difficult decisions each year when the client's Form 1040; full disclosure on a return is inconsistent with planning based on concealing assets. Further, hiding assets may result in criminal prosecution. Finally, the tangled web that often results from such planning is inconsistent with the goal of creating a user-friendly IEP.
While many clients appreciate the confidentiality that can be obtained through an IEP, a proper plan will not rely on secrecy for its efficacy.
Defraud creditors
There is some uncertainty as to when asset protection planning can be implemented (and the extent to which it can be implemented, if at all) when a client has a pending or expected legal threat. This uncertainly is much less prevalent today that in the past.
The easy clients are those with neither pending nor threatened claims who seek to protect against the unexpected. The difficult clients are those on the brink of bankruptcy (although pre-bankruptcy planning may help). There is a vast gray area in between.
Fraudulent conveyance law varies by state; there is also some Federal fraudulent conveyance law. A statutory body of fraudulent conveyance law applicable to certain situations exists at the federal level as well. For the good of the client and the planner as well, any asset protection planning must be implemented within the bounds of propriety as defined by reference to applicable fraudulent conveyance law.
Our common-law system favors the free alienability of property; an individual without creditor concerns is free to dispose of his property as he sees fit, whether in the form of charitable gifts or gifts to children, to a spouse or in trust. Fraudulent conveyance laws tend to focus not on who is the transferee, but on the transferor's intent at the time of the transfer.
Fraudulent conveyance law generally protects present creditors and subsequent creditors from transfers made by a person who is (or foreseeably will become) their debtor. However, "subsequent creditors" does not include every person who becomes a creditor in the future; there is also a "future potential" class of creditors. The distinction is clarified by a Florida decision, 1 which stated that asset transfers are permissible as to one's possible creditors, but not as to one's probable creditors. The operative inquiry is whether the client has any outstanding judgments, and whether he has any litigation or investigations pending, threatened or expected 2.
Evade Taxes
Some U.S. clients and their advisors are attracted to foreign-based planning by hoped-for tax advantages. As relatively few tax maneuvers involving foreign entities exist today for the global investor, a well designed IEP will have no particular income, gift or estate tax advantage other than those that can be accomplished through "conventional" inter vivos or testamentary planning. Importantly, a well-designed IEP will have no particular income, gift, excise, or estate tax disadvantages either, whether from the domestic or foreign standpoint. Both the planner and the client should be aware on an ongoing basis that certain tax issues will exist in the IEP setting. These tend to be not much different from (nor much more involved than) those associated with other types of entities than clients and planners are familiar with. Although there may be additional government reporting obligations (depending on the nature and design of the overall planning structure), neutrality in terms of tax liability will therefore generally prevail under an IEP.
Wednesday, December 10, 2008
How to Stretch Your IRA Into a Family Fortune
Your individual retirement account (IRA) can do much more than provide funds for your retirement -- it can be stretched to provide millions of dollars in payouts to your children, grandchildren or others you choose to be beneficiaries.
Example: An IRA balance of only $100,000 may provide more than $8 million in future distributions when left to a young child.
What you need to know...
stretching an IRA
Most IRA owners think of their IRAs as providing savings only for themselves -- and their spouses, if married.
This is largely because traditional IRAs are subject to annual required minimum distributions (RMDs) that begin at age 70½ and cause the IRA's funds to be distributed over the life expectancy of its owner.
IRA owners typically believe that if they live to their full life expectancies (or longer), there will be little or nothing left in their IRAs to leave to heirs.
Surprise: The life expectancies that govern mandatory IRA distributions as given in IRS tables are not actual life expectancies. The IRS life expectancies are much longer than actual average life expectancies.
The table below shows the life expectancies as provided by the IRS's "Uniform Lifetime Table" for IRA distributions, which is used by most IRA owners (single persons and married persons with spouses not more than 10 years younger) to determine the size of RMDs, versus actual average life expectancies as given by the National Center for Health Statistics.
Life Expectancies
Age | IRA Table Years | Actual Years |
70 | 27.4 | 14.9 |
75 | 22.9 | 11.8 |
80 | 18.7 | 9.0 |
85 | 14.8 | 6.8 |
90 | 11.4 | 5.0 |
95 | 8.6 | 3.6 |
100 | 6.3 | 2.6 |
Key: As a result of the difference, you may be able to leave funds in an IRA for much longer than you expect.
Moreover, initial RMDs may be so small that your IRA will continue to grow in value for years after distributions begin.
Explanation: At age 70½, when RMDs start, life expectancy under the IRS table is 27.4 years.
Each year's RMD is determined by dividing the IRA balance by the number of years in life expectancy -- so at age 70½, the RMD is 1/27.4, or 3.6%, of the IRA's value. If your IRA earns more than this, it will continue to grow in value in spite of the distributions.
So, if you take only minimum distributions each year from your IRA and it earns 8% annually, it will continue to grow until you reach age 88! (Under the IRS table, the RMD won't reach 8% of the IRA's value until then.)
the stretch
Once a beneficiary receives an IRA, its value may resume growing at a much faster rate.
Rule: A beneficiary can take required distributions over his/her life expectancy starting in the year after the inheritance. But if the beneficiary is young, life expectancy may be 50, 60 or 70 years, or even more, making initial RMDs so small that the IRA can grow rapidly.
Example: A grandparent leaves a $100,000 balance in an IRA that earns 8% annually to a one-year-old grandchild. The child's life expectancy under the IRS single life tables used by beneficiaries is 81.6 years, so the initial RMD is only 1.2% of the IRA balance.
Under the applicable IRS life expectancy table, the RMD won't reach 8% of the IRA balance until the grandchild is 70 years old. If the child takes minimum distributions, the IRA balance will grow for 69 years -- even with the child taking minimum distributions from it all that time.
In total, over the 82 years of the child's life expectancy, the IRA will pay the child $8,167,629 dollars -- more than eight million dollars from the initial $100,000.
how to do it
Steps to make the most of your IRAs...
Roll over funds from other retirement accounts into IRAs. This will let you use the "stretch IRA" strategy for as much of your retirement savings as possible.
Open Roth IRAs or convert traditional IRAs to Roths if eligible. These are even better to stretch than traditional IRAs. Distributions from them are tax free and there are no required minimum distributions for the original IRA owner. (Beneficiaries must take RMDs.) This lets you save funds in them for longer periods to earn more compounding.
Plan retirement spending to preserve IRAs. Build your investment portfolio for your retirement years. Best: Plan to consume IRA funds last. This will provide more tax-favored compounding within the IRA for you, and help you leave a bigger IRA balance to heirs.
Rules for the stretch
The beneficiary who takes a stretch IRA must be a named person, not your estate.
Be sure the custodial agreement with your IRA trustee provides for allowing a stretch IRA -- not all do.
Either have separate IRAs for each beneficiary or formally "split" your IRA among them, such as by designating a set percentage as going to each. Traps...
If an IRA with multiple beneficiaries isn't split up, the life expectancy of the oldest governs distributions for the others.
If a non-person (such as a charity) is co-beneficiary of an IRA, its life span of zero applies to all other co-beneficiaries, forcing them to take rapid distributions -- and eliminating the stretch.
When an IRA is left to a spouse, to use its funds to set up a stretch IRA for a child (or other beneficiary), the spouse must first convert the inherited IRA into his own IRA (only a spouse can do this), and then name the child (or other party) as beneficiary.
After the spouse dies, the inherited IRA must be retitled with the deceased owner's name in it, or the IRS will deem it distributed and taxable.
Example: "Frederic Jackson, IRA (deceased June 15, 2006) for the benefit of Sandra Jackson, beneficiary."
Important: Convince your beneficiaries of the importance of taking minimum "stretch" distributions. If they empty your IRA of cash as soon as they inherit it, all the potential decades of future compounding will be lost.
Saver: A trust can be named as beneficiary of your IRA to pass through payments to an heir, assuring that only minimum RMDs are taken (unless the trustee deems there is good reason to take larger distributions) so compounding is maximized.
Many technical rules apply to trusts and IRAs generally, so consult an IRA expert.
Friday, December 5, 2008
Stretch your IRA
How would you like to make your grandchildren millionaires? Would it put a smile on your face to insure that your great-grandchildren never have to think about money?
Its easy ... if you have the discipline and self control to budget annual savings, if you're right about any number of assumptions and if you read on.
We're talking about Stretch IRAs.
Individual Retirement Accounts (IRAs) have been one of the most popular retirement vehicles for the past generation of investors. They let you enjoy tax-deferred savings over an extended period of time.
A Stretch IRA is a term commonly used to describe an IRA established to extend the period of tax-deferred earnings, typically over multiple generations.
In the short run, you can use the concept to reduce the required withdrawal you must take from the account if you're retired or at least age 70 1/2, and you'll cut your current income tax bill as well.
Meanwhile, because you are extending the IRA payout until your grandchildren retire (or further, if appropriate), you get substantial additional deferral years to compound the earnings growth. Depending on the earnings and payout rates, potential payouts may approach multi-million-dollar levels.
Distribution rules simplified
All of this becomes possible thanks to rules a few years ago that simplified distribution rules for qualified plans and IRAs. These rules:
Provide a uniform table to determine lifetime required minimum distributions regardless of age.
Permit a beneficiary to be determined up to the end of the year following the death of the primary owner.
Allow the normal life expectancy that would apply at the time of death to be taken into account in the calculation of post-death minimum distributions.
The rules let you determine your minimum distribution each year, based on your current age and account balance. The new distribution schedule is based on the joint life expectancies of you and a survivor who's at least 10 years younger. It assumes that both begin receiving distributions beginning at age 70. (There's an even simpler distribution table for spouses who are not more than 10 years apart in age.)
These new rules also allow you to determine your beneficiary up to your death, and to select a beneficiary more than 10 years younger than you. These moves are what combine to reduce current minimum distribution requirements and extend the deferral period. (Remember, you can always take more than the minimum required annual distribution from your retirement plan. These changes affect people who want to take out the lowest required amount.)
Checking out the numbers
Lets take an example. Assume I started my IRA at age 29. (I know, I know: I should have started earlier.) And I plan to contribute $2,000 per year until age 69 when I die. That gives me 40 years of compounding, and, at a 7% rate of return, my IRA at the end of that time should be worth $399,270.
I leave the IRA to my wife, whos 20 years younger than I am and who lives until shes 69. Thats another 20 years of tax-deferred compounding, which, at 7%, compounded monthly, brings the value of the account to $1,612,547.
She leaves the account to our granddaughter, who has additional 70 years of compounding. At the same 7% rate, her account is then worth $213,487,584 when she retires!
I can see the smile on her face now ... even if the money becomes all taxable. I can hear her children laughing, freed from any financial concerns.
(The numbers potentially could be bigger. Thanks to the 2001 and 2003 tax cut laws, you have been able to make larger contributions to IRAs. For 2005 and 2006, the contribution limit is $4,000 a year. It will rise to $5,000 a year starting in 2008.)
IRAs have been an excellent and extremely popular investment tool. As of 2004, millions of Americans have saved $3.07 trillion for retirement using IRAs and employer-sponsored defined contribution plans, according to the Investment Company Institute. The IRA total was $1.49 trillion.
Is the Stretch IRA right for you?
But before you jump at Stretch IRAs, recognize that its all in the assumptions. Any changes in the assumptions change the potential value of your investment fund. A Stretch IRA assumes:
You dont need the money, either before or after retirement. That's a big assumption.
You will take the smallest amount of money the law allows, and at the latest time it allows, without penalty (currently at age 70 1/2).
Your primary beneficiaries die early, before they can deplete the investment fund.
That tax laws will remain constant and not change.
That inflation is minimal, and will not significantly cut into your rate of return and the ending values of the account.
That your returns dont vary. Most Stretch IRAs assume a constant rate of return that can be projected accurately over the long term. In the real world, those investors in the stock market who got in six years ago and got out two years ago -- before the market crash -- will have a very different rate of return than those who started their investment portfolio two years ago.
Stretch IRAs are a great way to accumulate financial freedom for your heirs. But their true value depends on realistic assumptions being made and realized. Lots of things can happen that will stunt the growth of an IRA. And you have to be sure the account fits YOUR needs.
But that $213 million looks awfully attractive to me!
Its easy ... if you have the discipline and self control to budget annual savings, if you're right about any number of assumptions and if you read on.
We're talking about Stretch IRAs.
Individual Retirement Accounts (IRAs) have been one of the most popular retirement vehicles for the past generation of investors. They let you enjoy tax-deferred savings over an extended period of time.
A Stretch IRA is a term commonly used to describe an IRA established to extend the period of tax-deferred earnings, typically over multiple generations.
In the short run, you can use the concept to reduce the required withdrawal you must take from the account if you're retired or at least age 70 1/2, and you'll cut your current income tax bill as well.
Meanwhile, because you are extending the IRA payout until your grandchildren retire (or further, if appropriate), you get substantial additional deferral years to compound the earnings growth. Depending on the earnings and payout rates, potential payouts may approach multi-million-dollar levels.
Distribution rules simplified
All of this becomes possible thanks to rules a few years ago that simplified distribution rules for qualified plans and IRAs. These rules:
Provide a uniform table to determine lifetime required minimum distributions regardless of age.
Permit a beneficiary to be determined up to the end of the year following the death of the primary owner.
Allow the normal life expectancy that would apply at the time of death to be taken into account in the calculation of post-death minimum distributions.
The rules let you determine your minimum distribution each year, based on your current age and account balance. The new distribution schedule is based on the joint life expectancies of you and a survivor who's at least 10 years younger. It assumes that both begin receiving distributions beginning at age 70. (There's an even simpler distribution table for spouses who are not more than 10 years apart in age.)
These new rules also allow you to determine your beneficiary up to your death, and to select a beneficiary more than 10 years younger than you. These moves are what combine to reduce current minimum distribution requirements and extend the deferral period. (Remember, you can always take more than the minimum required annual distribution from your retirement plan. These changes affect people who want to take out the lowest required amount.)
Checking out the numbers
Lets take an example. Assume I started my IRA at age 29. (I know, I know: I should have started earlier.) And I plan to contribute $2,000 per year until age 69 when I die. That gives me 40 years of compounding, and, at a 7% rate of return, my IRA at the end of that time should be worth $399,270.
I leave the IRA to my wife, whos 20 years younger than I am and who lives until shes 69. Thats another 20 years of tax-deferred compounding, which, at 7%, compounded monthly, brings the value of the account to $1,612,547.
She leaves the account to our granddaughter, who has additional 70 years of compounding. At the same 7% rate, her account is then worth $213,487,584 when she retires!
I can see the smile on her face now ... even if the money becomes all taxable. I can hear her children laughing, freed from any financial concerns.
(The numbers potentially could be bigger. Thanks to the 2001 and 2003 tax cut laws, you have been able to make larger contributions to IRAs. For 2005 and 2006, the contribution limit is $4,000 a year. It will rise to $5,000 a year starting in 2008.)
IRAs have been an excellent and extremely popular investment tool. As of 2004, millions of Americans have saved $3.07 trillion for retirement using IRAs and employer-sponsored defined contribution plans, according to the Investment Company Institute. The IRA total was $1.49 trillion.
Is the Stretch IRA right for you?
But before you jump at Stretch IRAs, recognize that its all in the assumptions. Any changes in the assumptions change the potential value of your investment fund. A Stretch IRA assumes:
You dont need the money, either before or after retirement. That's a big assumption.
You will take the smallest amount of money the law allows, and at the latest time it allows, without penalty (currently at age 70 1/2).
Your primary beneficiaries die early, before they can deplete the investment fund.
That tax laws will remain constant and not change.
That inflation is minimal, and will not significantly cut into your rate of return and the ending values of the account.
That your returns dont vary. Most Stretch IRAs assume a constant rate of return that can be projected accurately over the long term. In the real world, those investors in the stock market who got in six years ago and got out two years ago -- before the market crash -- will have a very different rate of return than those who started their investment portfolio two years ago.
Stretch IRAs are a great way to accumulate financial freedom for your heirs. But their true value depends on realistic assumptions being made and realized. Lots of things can happen that will stunt the growth of an IRA. And you have to be sure the account fits YOUR needs.
But that $213 million looks awfully attractive to me!
Wednesday, October 15, 2008
The Secret Stretch IRA
It may seem like a contradiction, but there is a way to leave a lot of money to your heirs even if you're not rich. Individual retirement accounts (IRAs) were established to let you save tax-deferred until age 70 1/2, after which you were required by law to begin withdrawing funds. But new rules define how you can pass on your wealth for two generations and reduce the amount you must take out. Called a stretch IRA, this new version has become a popular estate-planning tool.
"Stretch" is a bit complicated, but at its heart is the miracle of compounding. Over the course of 60 years, assuming an 8% rate of return, $200,000 in an IRA can pay out more than $4.9 million, according to Putnam Investments.
Here's one way a stretch IRAcould work: A father names his son as a beneficiary. When the father reaches age 70 1/2, he elects to have the benefits stretched over his life and his son's life. When he dies, the son gets the IRA and can take the money out slowly by spreading withdrawals over his remaining life expectancy. He has to pay income taxes only on the amount he withdraws every year. That's a huge tax benefit considering that if the father died without naming a beneficiary, the IRA would be liquidated and more than a third could be eaten up by taxes. Spreading the payments out over more time and thus reducing the withdrawals means the beneficiary won't have to take such a big tax hit right away. The son can also name his own beneficiary, perhaps his daughter, and spread the remaining proceeds to a third generation (although that's where it stops). Talk about the gift that keeps on giving. "It could grow exponentially," says financial planner Lee Rosenberg of ARS Financial Services in Jericho, N.Y.
Even though the IRS offers these provisions, some financial institutions won't let you stretch out your IRA. So before you open an account or decide to keep the IRA where it is, make sure your firm will allow it. If so, designate the beneficiary before you are required to start taking distributions. And keep the paperwork in a safe place. "People lose their IRA assets after death because they can't find the documents. If you can't find your beneficiary forms, the firm may treat it as if you don't have a beneficiary," says Ed Slott, a Rockville Centre, N.Y., accountant and editor of Ed Slott's IRA Advisor.
Another problem: you or your parents may have already hit the age that requires you to start taking IRA benefits, which is generally April 1 of the year following the year you turn 70 1/2. Right now, if you missed the deadline, you're out of luck. But there's legislation working its way through Congress that would give everyone a chance to start anew. If enacted, the fresh-start rule would go into effect on Jan. 1, 2002.
Keeping track of all these provisions can be confusing, and there are serious tax implications. So you might want to seek the advice of a retirement planner to determine if the stretch IRA works for you. It may not make sense if you're planning to live off your IRA assets in retirement. But if you have a sizable nest egg, taking the stretch can be a valuable option for you and your heirs. You can't take it with you, so you might as well leave as much as you can.
Thursday, September 11, 2008
Estate Planning: More Than A Will
By Parag P. Patel, Esq.
www.patellawoffices.com
During our lifetime, most of us strive to create and build upon our net worth. We generate savings, purchase a home, and eventually invest in stocks, bonds, mutual funds, IRAs and retirement plans. Unfortunately, most of us risk losing an unnecessarily large amount of these assets by failing to plan to protect them.
Recent surveys have revealed that over 40% of our population does not have a will. For those individuals, their death often creates a scenario whereby their family must needlessly waste money to petition the court for an individual to administer the estate. In many instances, this insult is compounded by the assets being subject to taxes, which could easily have been avoided. Thus, an integral part of anyone's financial planning must be an estate plan.
Traditionally, an estate plan was simply a will. However, with the growing medical needs of an aging population, as well as the ever-present threat of the Internal Revenue Service, prudent estate planning requires additional protections for all of us. Even the best written will has little value if one's assets are depleted in later years by health care costs which can be mitigated or borne by someone else.
Any prudent estate plan should address four questions:
(1) Where do I want my money to go after I am dead?
(2) How can I minimize any taxes as a result of my death?
(3) How can I protect my estate and myself if I become disabled?
(4) Do I want my life to be extended by life support even though a medical event has left me in critical condition without any hope of recovery?
The basic documents, which are necessary to answer these questions, are a will, living will and power of attorney. A will declares who shall inherit an individual's assets (the beneficiaries) and who shall be responsible for distributing them to such beneficiaries (the executor). For young parents, a will can also be used to appoint a guardian for their children and a trustee to manage a child's money until they are old enough to handle it themselves.
Often, individuals wish to care for their spouse first, then their children. Often, this intention is reflected in a will. If you die without a will, though, your spouse is only entitled to the first $50,000.00 outright. In New Jersey, he or she must split the rest of your assets with your children, no matter how young or old they are. If you have no children, your parents step into their place.
Even if you have a will, your assets are not completely protected. It is necessary to execute a Power of Attorney to provide to appoint someone to care for you and your assets if you are disabled. Individuals, who become disabled mentally and do not have a power of attorney, can only be protected by an expensive and humiliating procedure known as a guardianship, whereby they are judged to be "incompetent" in the public forum of a court.
Finally, a living will should be executed to announce your intentions in the event an accident, stroke or other serious medical event leaves you brain dead or physically depleted of any possible quality of life. A living will protects your assets from being used for unnecessary and costly life support. Without a living will, there is no authority, outside of a court proceeding, to allow a doctor to discontinue this treatment.
www.patellawoffices.com
During our lifetime, most of us strive to create and build upon our net worth. We generate savings, purchase a home, and eventually invest in stocks, bonds, mutual funds, IRAs and retirement plans. Unfortunately, most of us risk losing an unnecessarily large amount of these assets by failing to plan to protect them.
Recent surveys have revealed that over 40% of our population does not have a will. For those individuals, their death often creates a scenario whereby their family must needlessly waste money to petition the court for an individual to administer the estate. In many instances, this insult is compounded by the assets being subject to taxes, which could easily have been avoided. Thus, an integral part of anyone's financial planning must be an estate plan.
Traditionally, an estate plan was simply a will. However, with the growing medical needs of an aging population, as well as the ever-present threat of the Internal Revenue Service, prudent estate planning requires additional protections for all of us. Even the best written will has little value if one's assets are depleted in later years by health care costs which can be mitigated or borne by someone else.
Any prudent estate plan should address four questions:
(1) Where do I want my money to go after I am dead?
(2) How can I minimize any taxes as a result of my death?
(3) How can I protect my estate and myself if I become disabled?
(4) Do I want my life to be extended by life support even though a medical event has left me in critical condition without any hope of recovery?
The basic documents, which are necessary to answer these questions, are a will, living will and power of attorney. A will declares who shall inherit an individual's assets (the beneficiaries) and who shall be responsible for distributing them to such beneficiaries (the executor). For young parents, a will can also be used to appoint a guardian for their children and a trustee to manage a child's money until they are old enough to handle it themselves.
Often, individuals wish to care for their spouse first, then their children. Often, this intention is reflected in a will. If you die without a will, though, your spouse is only entitled to the first $50,000.00 outright. In New Jersey, he or she must split the rest of your assets with your children, no matter how young or old they are. If you have no children, your parents step into their place.
Even if you have a will, your assets are not completely protected. It is necessary to execute a Power of Attorney to provide to appoint someone to care for you and your assets if you are disabled. Individuals, who become disabled mentally and do not have a power of attorney, can only be protected by an expensive and humiliating procedure known as a guardianship, whereby they are judged to be "incompetent" in the public forum of a court.
Finally, a living will should be executed to announce your intentions in the event an accident, stroke or other serious medical event leaves you brain dead or physically depleted of any possible quality of life. A living will protects your assets from being used for unnecessary and costly life support. Without a living will, there is no authority, outside of a court proceeding, to allow a doctor to discontinue this treatment.
Friday, July 25, 2008
Family Limited Liability Companies (LLCs)
As a proponent of Family Limited Liability Companies (LLCs) for asset management, creditor protection, and ease of gifting, I was pleased to read about the U.S. Tax Court's decision in Mirowski v. Commissioner, T.C. Memo 2008-74. March 26, 2008.
Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses. Then, in 2001, she formed a single member LLC, transferring substantial assets to it. Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts. A mere four days later, she died unexpectedly.
The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate. The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.
The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable. The Court stated that Mrs. Mirowski had "legitimate and significant non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.
Some key points for Family LLCs to hold up for gift and estate tax purposes:
Strictly follow the terms of the Operating Agreement
State the reasons for the LLC in the Operating Agreement
Have the Agreement reviewed by separate counsel for all initial members
Leave enough assets outside the LLC to live on and pay taxes
Don't mingle LLC assets with personal assets
File the proper tax returns each year
File the necessary documents with the Secretary of State each year
Don't put your personal residence in a Family LLC
Make sure the senior generation does not have the power to allocate profits and losses
Require annual distributions
Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
Don't wait until the senior family member is near death
The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages. Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions.
Mrs. Mirowski, widow of the inventor of the heart defibrillator implant, created a trust for each of her three daughters in 1992, which were funded with portions of her interests in the patent licenses. Then, in 2001, she formed a single member LLC, transferring substantial assets to it. Shortly thereafter, Mrs. Mirowski gifted a 16% interest in the LLC to each of the trusts. A mere four days later, she died unexpectedly.
The IRS argued under Section 2036(a) of the Internal Revenue Code that Mrs. Mirowski retained the right to income or enjoyment of the gifted property, so that it was included in her taxable estate. The estate maintained that the Section 2038 "bona fide sale" exception applied, so that the transferred assets were not subject to estate tax.
The Tax Court agreed, holding that the LLC's activities do not have to be equivalent to those of a "business" for the bona fide sale exception to be applicable. The Court stated that Mrs. Mirowski had "legitimate and significant non-tax reasons" for establishing and funding the LLC, including 1) joint management of family assets, 2) combining family assets to maximize investment opportunities, and 3) enabling equal transfers to her daughters.
Some key points for Family LLCs to hold up for gift and estate tax purposes:
Strictly follow the terms of the Operating Agreement
State the reasons for the LLC in the Operating Agreement
Have the Agreement reviewed by separate counsel for all initial members
Leave enough assets outside the LLC to live on and pay taxes
Don't mingle LLC assets with personal assets
File the proper tax returns each year
File the necessary documents with the Secretary of State each year
Don't put your personal residence in a Family LLC
Make sure the senior generation does not have the power to allocate profits and losses
Require annual distributions
Have the junior family members (or their trusts) make initial contributions to the LLC to provide for the pooling of assets
Don't wait until the senior family member is near death
The bottom line is that Family LLCs remain a viable and attractive option for transfers of family wealth, while also providing asset protection and management advantages. Just make sure you use an attorney experienced in forming Family LLCs to assist you, and carefully follow all of his or her instructions.
Friday, April 18, 2008
New guidance on fixing a botched IRA stretch after it's "too late"
To preserve the ability to stretch IRA distributions for a beneficiary, that individual must start taking withdrawals based on his/her life expectancy in the year after death. If those required withdrawals don't start on time, can you still rectify the situation to preserve the tax deferral? A recent private letter ruling procured our by our law firm indicates the answer is "yes."
In the recently released Private Letter Ruling 200811028, an IRA owner died in 2002 and the beneficiary failed to take any distributions from the account until 2005. In 2005, the beneficiary took all of the make-up distributions from the RMDs that were not taken in 2003 and 2004 (in addition to taking the 2005 amount), and paid the 50% excise penalty for the insufficient RMDs for 2003 and 2004, but in return the IRS allowed the beneficiary to subsequently continue RMDs based on the beneficiary's life expectancy, preserving a significant amount of tax deferral for the bulk of the IRA.
Normally, to preserve the ability to stretch over the beneficiary's life expectancy, distributions should have commenced by December 31, 2003, as required by Treas. Reg. 1.401(a)(9)-3, Q&A-3 and IRC Section 401(a)(9)(B)(iii). However, the Service acknowledges that the "default" rule for post-death distributions is to apply the life expectancy rule (as supported in Treas. Reg. 1.401(a)(9)-3, Q&A-4); thus, in essence the Service's view was not that the beneficiary had made an election to take distributions out more rapidly (e.g., under the 5-year rule since the decedent died prior to his/her required beginning date), but simply that the beneficiary had failed to take withdrawals according to the default rule. Thus, the beneficiary could come back into conformance with the life expectancy stretch rules by simply making up the missed RMDs, paying the associated penalty, and then proceeding forward with the stretch from that point on.
Although this PLR is only that - a private letter ruling, and not necessarily binding on the IRS - the logic in the ruling is fairly straightforward, and some IRA experts have suggested for many years that this should be an available (albeit untested) remedy. Whether it is appealing in any particular situation, though, will still depend on the facts and circumstances of the situation. The cost for fixing a botched RMD situation is not cheap - aside from the potential concentrated income (and thus higher marginal tax rates) on several years of RMDs lumped into a single year, the beneficiary must still pay the whopping 50% excise tax on the amounts that were not appropriately withdrawn. If it's only one year's worth of RMDs, and the beneficairy is young and may stretch the IRA for 4-6+ decades, this is probably still a very good deal. On the other hand, if there are more years of failed RMDs and associated penalties, or if there's a high risk the beneficiary will withdraw the funds more rapidly anyway, and/or if the beneficiary is older and doesn't have as long of a life expectancy, this remedy may not be as appealing. And of course, because this is only guidance via a PLR, some beneficiaries may ultimately wish (or find it necessary as a mandate from the IRA custodian) to get their own ruling to secure their particular situation (which has its own associated cost).
Nonetheless, the fact that the strategy has now worked at least once in a direct ruling from the IRS is promising, and provides a better roadmap for how other beneficiaries that have botched IRA RMDs or a failed stretch may be able to remedy their own situation in the future!
In the recently released Private Letter Ruling 200811028, an IRA owner died in 2002 and the beneficiary failed to take any distributions from the account until 2005. In 2005, the beneficiary took all of the make-up distributions from the RMDs that were not taken in 2003 and 2004 (in addition to taking the 2005 amount), and paid the 50% excise penalty for the insufficient RMDs for 2003 and 2004, but in return the IRS allowed the beneficiary to subsequently continue RMDs based on the beneficiary's life expectancy, preserving a significant amount of tax deferral for the bulk of the IRA.
Normally, to preserve the ability to stretch over the beneficiary's life expectancy, distributions should have commenced by December 31, 2003, as required by Treas. Reg. 1.401(a)(9)-3, Q&A-3 and IRC Section 401(a)(9)(B)(iii). However, the Service acknowledges that the "default" rule for post-death distributions is to apply the life expectancy rule (as supported in Treas. Reg. 1.401(a)(9)-3, Q&A-4); thus, in essence the Service's view was not that the beneficiary had made an election to take distributions out more rapidly (e.g., under the 5-year rule since the decedent died prior to his/her required beginning date), but simply that the beneficiary had failed to take withdrawals according to the default rule. Thus, the beneficiary could come back into conformance with the life expectancy stretch rules by simply making up the missed RMDs, paying the associated penalty, and then proceeding forward with the stretch from that point on.
Although this PLR is only that - a private letter ruling, and not necessarily binding on the IRS - the logic in the ruling is fairly straightforward, and some IRA experts have suggested for many years that this should be an available (albeit untested) remedy. Whether it is appealing in any particular situation, though, will still depend on the facts and circumstances of the situation. The cost for fixing a botched RMD situation is not cheap - aside from the potential concentrated income (and thus higher marginal tax rates) on several years of RMDs lumped into a single year, the beneficiary must still pay the whopping 50% excise tax on the amounts that were not appropriately withdrawn. If it's only one year's worth of RMDs, and the beneficairy is young and may stretch the IRA for 4-6+ decades, this is probably still a very good deal. On the other hand, if there are more years of failed RMDs and associated penalties, or if there's a high risk the beneficiary will withdraw the funds more rapidly anyway, and/or if the beneficiary is older and doesn't have as long of a life expectancy, this remedy may not be as appealing. And of course, because this is only guidance via a PLR, some beneficiaries may ultimately wish (or find it necessary as a mandate from the IRA custodian) to get their own ruling to secure their particular situation (which has its own associated cost).
Nonetheless, the fact that the strategy has now worked at least once in a direct ruling from the IRS is promising, and provides a better roadmap for how other beneficiaries that have botched IRA RMDs or a failed stretch may be able to remedy their own situation in the future!
Saturday, April 5, 2008
Living Trusts Are Revocable And Not An Asset Protection Tool
This great post comes from Jennifer N. Sawday of The California Estate Planning Blog.
Her post is titled: Living Trusts Are Revocable And Not An Asset Protection Tool and describes a fundamental (and often misunderstood) aspect of asset protection planning - if you have relatively unfettered access to your money, so do your creditors. It comes up all the time, she writes.
A call comes in from a potential client: “I need to set up a living trust now to protect my assets.”
Generally, if the person (called the settlor) who created the living trust and transfers property to this living trust has retained the right to revoke the living trust then he also retains an interest in the trust assets. There is no protection from outside entities or creditors regarding what has been transferred into the living trust.
In other words, a living trust is known as a revocable trust. As such, living trusts are not considered a vehicle for asset protection. A living trust is used mainly to allow assets to transfer at death without going through probate or to allow a co-trustee or successor trustee manage assets in the event of incapacity of the settlor of the trust.
Her post is titled: Living Trusts Are Revocable And Not An Asset Protection Tool and describes a fundamental (and often misunderstood) aspect of asset protection planning - if you have relatively unfettered access to your money, so do your creditors. It comes up all the time, she writes.
A call comes in from a potential client: “I need to set up a living trust now to protect my assets.”
Generally, if the person (called the settlor) who created the living trust and transfers property to this living trust has retained the right to revoke the living trust then he also retains an interest in the trust assets. There is no protection from outside entities or creditors regarding what has been transferred into the living trust.
In other words, a living trust is known as a revocable trust. As such, living trusts are not considered a vehicle for asset protection. A living trust is used mainly to allow assets to transfer at death without going through probate or to allow a co-trustee or successor trustee manage assets in the event of incapacity of the settlor of the trust.
Sunday, February 24, 2008
THE ABCs OF STRETCH IRAs
You can plan to have your heirs inherit your IRA assets.
Can an IRA keep growing for a century or more? In theory, it can. Some people are planning to "stretch" their Individual Retirement Accounts over generations, so that their heirs can receive IRA assets accumulated after decades of tax-deferred or tax-free growth. A stretch IRA can potentially create a legacy of wealth to benefit your heirs, and it could also help to reduce your estate taxes.
Usually, this is a choice of the high net worth investor. Typically, an individual, couple or family has amassed sizable retirement savings – so sizable that they don't need to withdraw the bulk of their IRA assets during their lifetimes.
How does this work? Simply put, a stretch IRA is a Roth or traditional IRA with assets that pass from the original account owner to a younger beneficiary when the original account owner dies. The beneficiary can be a spouse or a non-spousal heir (or in some cases, not a person at all but a "see-through" trust.)1
If the beneficiary is a person, this younger beneficiary will have a longer life expectancy than the initial IRA owner, and therefore may elect to "stretch" the IRA by receiving smaller required minimum distributions (RMDs) each year of his or her life span. This will leave money in the IRA and permit ongoing tax-deferred growth – or tax-free growth, in the case of a Roth IRA.
In fact, since you don't have to take RMDs from a Roth IRA at age 70½, you could opt to let your Roth IRA grow untapped for a lifetime. At your death, your beneficiaries could then stretch payouts over their life expectancies without having to pay tax on withdrawals.2
What options do the beneficiaries have? Well, the rules governing inherited IRAs are quite complex. The explanation below is simply a summary, and should not be taken as any kind of advice or guide.
If you have named your spouse as the beneficiary of your IRA, your spouse can roll over the inherited IRA assets into his or her own IRA after your death (presuming they don't need the money).
If you die before age 70½, your spouse can treat the inherited IRA as his or her own and make contributions and withdrawals. Or, instead of treating the IRA as his or her own, your spouse can elect to begin receiving distributions on either December 31st of the calendar year following your death, or the date that you would have been age 70½, whichever date is later.
If your beneficiary is non-spousal, he or she cannot treat the IRA as his or her own, and cannot make contributions to it or rollovers into or out of it.3 A non-spousal beneficiary can either take the lump sum and pay taxes on it, or transfer the IRA assets to an IRA distribution account.
If your non-spousal beneficiary elects to set up a distribution account and you have passed away before age 70½, he or she must follow either the one-year rule or the five-year rule.
Under the one-year rule, annual distributions are based on the life expectancy of the designated beneficiary and must start by December 31st of the year following the original IRA owner's death. In this way, your beneficiary can stretch out the distributions over his or her life expectancy, which can allow more of the inherited IRA assets to remain in the IRA and enjoy tax-deferred or tax-free growth.
Under the five-year rule, there are no minimum annual distribution requirements, but the beneficiary must withdraw their full interest by the end of the fifth year following the owner's death.
The beneficiary can be determined even after the original IRA owner dies – if there is somehow no named beneficiary, you have until the end of the year following the death of the primary IRA owner to establish one.4 But it is vital to establish a beneficiary during your lifetime: if you don't, your IRA assets could end up in your estate, and that will leave your heirs with two choices. If you pass away after age 70½, the RMDs from the IRA are calculated according to what would have been your remaining life expectancy. If you pass away before age 70½, the five-year rule applies: your heirs have to cash out the entire IRA by the end of the fifth year following the year of your death.2
Things to think about. The decision to stretch your IRA cannot be made casually. A beneficiary must be selected with great care, and there is always the possibility that you may end up withdrawing all of your IRA assets during your lifetime. A stretch IRA strategy assumes that your beneficiary won't deplete the IRA assets, and it also assumes a constant rate of return for the account over the years. It's also worth remembering that stretch IRA planning is based on today's tax laws, not the tax laws of tomorrow.
If you are interested in stretching your IRA, you must find a truly qualified advisor to help you. While many advisors know something of the rules and regulations governing stretch IRAs, look for an advisor with an advanced education in IRA planning.
Citations.
1 investmentnews.com/apps/pbcs.dll/article?AID=/20080501/REG/74256949/1031/RETIREMENT
2 kiplinger.com/retirementreport/features/archives/2006/06/Cover_Jun2006_03_01.html
3 irs.gov/pub/irs-pdf/p590.pdf
4 moneycentral.msn.com/content/Taxes/Taxshelters/P33760.
Sunday, August 5, 2007
10 Most Frequently Asked Questions and Answers for Stretch IRAs
What is a stretch IRA?
Stretching an IRA is simply the ability to have an IRA live longer than the account owner. A stretch IRA is an IRA that uses beneficiary designations to enable assets to continue to grow tax deferred not only beyond the death of the original IRA owner; but even beyond the death of his or her beneficiaries. Until recently, IRA assets were usually liquidated shortly after the beneficiary's death. This put an end to tax deferral and often resulted in large taxable distributions. Thanks to a private letter ruling by the IRS, you can avoid immediate liquidation and extend the life of the IRA because beneficiaries are now allowed to make the required distributions from the IRA over their own life expectancy.The required minimum distributions are calculated each year simply by dividing the account value at the beginning of the year by the applicable life expectancy factor of the beneficiary for that year.By naming your children or grandchildren as beneficiaries, the applicable life expectancy factors are greater resulting in smaller annual required distributions.This allows IRA assets to be passed along the family tree, allowing tax deferral to continue for other generations
What are the benefits of stretching-out an IRA?
By "stretching-out" an IRA, you are maximizing the life of an investment and extending the deferral of taxes on the assets held in it. Stretching out an IRA extends its tax deferred growth for the lifetime of the beneficiaries resulting in substantially more growth than if the IRA were paid out immediately following the original owner's death.
These features make the IRA one of the best investment alternatives for transferring assets to your children and grandchildren.
If a beneficiary of an IRA dies, can that beneficiary's beneficiary now recalculate required minimum distributions (RMDs) based on their own life expectancy?
No. RMDs to the beneficiary's beneficiary must continue over the same period based on the same calculation method as RMDs to the original beneficiary. In order to increase the "stretch-out", name your grandchildren as the beneficiaries of your IRA.
This will decrease the RMD amount because your grandchild’s life expectancy is used to calculate this amount. This is the most effective way to increase the potential for tax deferred growth.
For example, a 5 year old, according to the IRS, has a life expectancy of 76.6 years, which results in an RMD of only 1.3% of the account value. In contrast, a 45 year old has a life expectancy of 37.7 years which results in an RMD of 2.65%, over twice the required distribution for a 5 year old.
Taking smaller distributions leaves more money in the IRA to grow. Consequently, the younger the beneficiary, the greater the stretch.
Does a stretch-out IRA allow an IRA owner’s child to roll over the IRA into their name?
No. Technically, your IRA remains your account as the original owner, even after your death. In order for the stretch to work, the beneficiary must maintain the IRA in the deceased’s name. The only person who can treat a deceased’s IRA as their own is the deceased’s spouse. Only a spouse can roll the IRA into their own IRA account. A non-spouse would base the required distributions on their own life expectancy as stated in the IRS life expectancy tables. This calculation sets up an income stream over a set number of years. The final stage in the stretch involves the ability of a beneficiary to name their own beneficiary. Upon the death of the original beneficiary, the new beneficiary is allowed to continue the income stream previously established. By taking advantage of these options, an IRA can last for decades after the death of the original owner and generate hundreds of thousands of dollars. For example, a $100,000 balance in a 401(k) that a 60 year old retiree with a 58 year old spouse rolls over to an IRA with their 35 year old children as contingent beneficiaries results in dramatic consequences for the wealth of the entire family. Assuming a 12% annual rate of growth and average life expectancies for this couple, taking out only RMDs results in distributions totaling over $470,000 to them and over $5.1 million to their children over their lifetime.
Who can establish a stretch IRA?
Any IRA owner may create a stretch IRA through proper designation of beneficiaries. These beneficiaries must be established prior to death. Establishing primary and contingent beneficiaries on every IRA account is of the utmost importance. The stretch out option give investors greater control over their IRAs and the ability to maximize tax deferral. This can keep an inheritance growing for a longer period of time and can ensure ongoing financial security for one’s heirs.
Does the stretch concept apply to qualified plans such as 401(k)s and other company sponsored plans?
Not Usually. Unlike IRAs, the beneficiary options for qualified plans are plan-specific. No company is going to deal with the administrative headache of distributing between 1% and 5% of the account value over the next 60 years to a 5 year old beneficiary, who inherits an account. Consequently, it is imperative that any 401(k) or other employer retirement plan be rolled over to an IRA in order to preserve the ability to stretch out distributions to beneficiaries over the maximum length of time
Who can I name as a beneficiary of my IRA to accomplish this stretch out option?
Your can name anybody as your IRA beneficiary and you can change your beneficiaries at any time. Typically, your beneficiary is going to be either your spouse, a non-spouse or a trust. As a practical measure, naming your spouse as your primary beneficiary ensures that the IRA is available to help meet their income needs. Upon death, a spousal beneficiary assumes ownership of the IRA and can then name their own beneficiaries. If your spouse has sufficient assets or has predeceased you, a non-spouse beneficiary, such as your children or grandchildren, may be named. In choosing such beneficiaries, one should consider their income needs, marginal tax rates and age. If your children don’t need the additional income that a beneficiary IRA provides, naming your grandchildren as beneficiaries increases the stretching of that IRA due to their longer life expectancy. Since the required distributions are smaller, the taxes payable on the distributions are also smaller. Naming a trust as a beneficiary helps to control what happens to your IRA after your death.
If multiple beneficiaries are named on a Traditional IRA, does each beneficiary have the same stretch options?
Yes. Each beneficiary may establish a separate beneficiary IRA whereby RMDs are calculated based upon each individual beneficiary’s life expectancy. Beneficiary IRAs prevent assets from becoming fully taxable by ensuring that the assets are not placed in the beneficiary’s name. To maximize tax-deferred growth, a non-spouse beneficiary must maintain the IRA in the deceased’s name.
If the beneficiary of an IRA is a trust, can the stretch option still be utilized?
The stretch option may be utilized if the trust is named as the designated beneficiary, clearly names beneficiaries and becomes irrevocable upon the death of the IRA owner. Nelson Investment Planning Services has created a prototype IRA Trust Agreement to accomplish the stretch. This trust provides an IRA owner the ability to protect their family and control distributions. Naming individual beneficiaries may defeat your intention to have the asset extended over the longest possible time. By law, your beneficiary can do whatever they want with the assets – including liquidating the IRA completely – regardless of your plans. An IRA Trust ensures that your desires are fully carried out.
Can I change my distributions?
Of course. At any time, if the owner or beneficiary’s situation changes, the amount of distributions from an IRA can be increased above the RMD amount. If an owner or beneficiary of an IRA needs income or requires a lump sum distribution of any amount, then such distributions can be made at any time. The RMD amounts are just that – the minimum amount that must be distributed. Stretching out an IRA does not limit your ability to withdraw money from the IRA. In addition, since payments to beneficiaries are paid out as death distributions, there is no 10% penalty that would normally apply for premature distributions before age 59 ½. Of course, income tax rates apply to every dollar withdrawn at the recipient’s marginal tax rate.
Stretching an IRA is simply the ability to have an IRA live longer than the account owner. A stretch IRA is an IRA that uses beneficiary designations to enable assets to continue to grow tax deferred not only beyond the death of the original IRA owner; but even beyond the death of his or her beneficiaries. Until recently, IRA assets were usually liquidated shortly after the beneficiary's death. This put an end to tax deferral and often resulted in large taxable distributions. Thanks to a private letter ruling by the IRS, you can avoid immediate liquidation and extend the life of the IRA because beneficiaries are now allowed to make the required distributions from the IRA over their own life expectancy.The required minimum distributions are calculated each year simply by dividing the account value at the beginning of the year by the applicable life expectancy factor of the beneficiary for that year.By naming your children or grandchildren as beneficiaries, the applicable life expectancy factors are greater resulting in smaller annual required distributions.This allows IRA assets to be passed along the family tree, allowing tax deferral to continue for other generations
What are the benefits of stretching-out an IRA?
By "stretching-out" an IRA, you are maximizing the life of an investment and extending the deferral of taxes on the assets held in it. Stretching out an IRA extends its tax deferred growth for the lifetime of the beneficiaries resulting in substantially more growth than if the IRA were paid out immediately following the original owner's death.
These features make the IRA one of the best investment alternatives for transferring assets to your children and grandchildren.
If a beneficiary of an IRA dies, can that beneficiary's beneficiary now recalculate required minimum distributions (RMDs) based on their own life expectancy?
No. RMDs to the beneficiary's beneficiary must continue over the same period based on the same calculation method as RMDs to the original beneficiary. In order to increase the "stretch-out", name your grandchildren as the beneficiaries of your IRA.
This will decrease the RMD amount because your grandchild’s life expectancy is used to calculate this amount. This is the most effective way to increase the potential for tax deferred growth.
For example, a 5 year old, according to the IRS, has a life expectancy of 76.6 years, which results in an RMD of only 1.3% of the account value. In contrast, a 45 year old has a life expectancy of 37.7 years which results in an RMD of 2.65%, over twice the required distribution for a 5 year old.
Taking smaller distributions leaves more money in the IRA to grow. Consequently, the younger the beneficiary, the greater the stretch.
Does a stretch-out IRA allow an IRA owner’s child to roll over the IRA into their name?
No. Technically, your IRA remains your account as the original owner, even after your death. In order for the stretch to work, the beneficiary must maintain the IRA in the deceased’s name. The only person who can treat a deceased’s IRA as their own is the deceased’s spouse. Only a spouse can roll the IRA into their own IRA account. A non-spouse would base the required distributions on their own life expectancy as stated in the IRS life expectancy tables. This calculation sets up an income stream over a set number of years. The final stage in the stretch involves the ability of a beneficiary to name their own beneficiary. Upon the death of the original beneficiary, the new beneficiary is allowed to continue the income stream previously established. By taking advantage of these options, an IRA can last for decades after the death of the original owner and generate hundreds of thousands of dollars. For example, a $100,000 balance in a 401(k) that a 60 year old retiree with a 58 year old spouse rolls over to an IRA with their 35 year old children as contingent beneficiaries results in dramatic consequences for the wealth of the entire family. Assuming a 12% annual rate of growth and average life expectancies for this couple, taking out only RMDs results in distributions totaling over $470,000 to them and over $5.1 million to their children over their lifetime.
Who can establish a stretch IRA?
Any IRA owner may create a stretch IRA through proper designation of beneficiaries. These beneficiaries must be established prior to death. Establishing primary and contingent beneficiaries on every IRA account is of the utmost importance. The stretch out option give investors greater control over their IRAs and the ability to maximize tax deferral. This can keep an inheritance growing for a longer period of time and can ensure ongoing financial security for one’s heirs.
Does the stretch concept apply to qualified plans such as 401(k)s and other company sponsored plans?
Not Usually. Unlike IRAs, the beneficiary options for qualified plans are plan-specific. No company is going to deal with the administrative headache of distributing between 1% and 5% of the account value over the next 60 years to a 5 year old beneficiary, who inherits an account. Consequently, it is imperative that any 401(k) or other employer retirement plan be rolled over to an IRA in order to preserve the ability to stretch out distributions to beneficiaries over the maximum length of time
Who can I name as a beneficiary of my IRA to accomplish this stretch out option?
Your can name anybody as your IRA beneficiary and you can change your beneficiaries at any time. Typically, your beneficiary is going to be either your spouse, a non-spouse or a trust. As a practical measure, naming your spouse as your primary beneficiary ensures that the IRA is available to help meet their income needs. Upon death, a spousal beneficiary assumes ownership of the IRA and can then name their own beneficiaries. If your spouse has sufficient assets or has predeceased you, a non-spouse beneficiary, such as your children or grandchildren, may be named. In choosing such beneficiaries, one should consider their income needs, marginal tax rates and age. If your children don’t need the additional income that a beneficiary IRA provides, naming your grandchildren as beneficiaries increases the stretching of that IRA due to their longer life expectancy. Since the required distributions are smaller, the taxes payable on the distributions are also smaller. Naming a trust as a beneficiary helps to control what happens to your IRA after your death.
If multiple beneficiaries are named on a Traditional IRA, does each beneficiary have the same stretch options?
Yes. Each beneficiary may establish a separate beneficiary IRA whereby RMDs are calculated based upon each individual beneficiary’s life expectancy. Beneficiary IRAs prevent assets from becoming fully taxable by ensuring that the assets are not placed in the beneficiary’s name. To maximize tax-deferred growth, a non-spouse beneficiary must maintain the IRA in the deceased’s name.
If the beneficiary of an IRA is a trust, can the stretch option still be utilized?
The stretch option may be utilized if the trust is named as the designated beneficiary, clearly names beneficiaries and becomes irrevocable upon the death of the IRA owner. Nelson Investment Planning Services has created a prototype IRA Trust Agreement to accomplish the stretch. This trust provides an IRA owner the ability to protect their family and control distributions. Naming individual beneficiaries may defeat your intention to have the asset extended over the longest possible time. By law, your beneficiary can do whatever they want with the assets – including liquidating the IRA completely – regardless of your plans. An IRA Trust ensures that your desires are fully carried out.
Can I change my distributions?
Of course. At any time, if the owner or beneficiary’s situation changes, the amount of distributions from an IRA can be increased above the RMD amount. If an owner or beneficiary of an IRA needs income or requires a lump sum distribution of any amount, then such distributions can be made at any time. The RMD amounts are just that – the minimum amount that must be distributed. Stretching out an IRA does not limit your ability to withdraw money from the IRA. In addition, since payments to beneficiaries are paid out as death distributions, there is no 10% penalty that would normally apply for premature distributions before age 59 ½. Of course, income tax rates apply to every dollar withdrawn at the recipient’s marginal tax rate.
Monday, July 2, 2007
Asset Protection - Don't Do It Yourself
Jonathan Alper in the Florida Asset Protection Blog has a great post on how standard off the shelf LLC and estate planning forms by non-experts will generally not protect your assets from lawsuits.
A well-conceived asset protection plan can fail because attorneys use standard, off-the-shelf business forms to create legal entities to hold the debtor’s assets. Case in point is a case I worked on with a creditor’s attorney to penetrate a very complex asset protection plan involving domestic limited liability companies whose membership interests were owned by domestic trusts. The planning attorney used llc forms typically used for operating business and standard estate planning trust forms.
Standard LLC forms and estate planning forms are designed to provide current income to the llc owners and trust beneficiaries. These typical forms often provide for mandatory distributions of all current income. In this instance, we convinced the trial judge to compel the llc manager and trustee of the trust to follow the terms of their documents and make current income distributions to the debtor and his family. We were then able to seize the llc required distributions with charging liens and garnishment proceedings.
Asset protection planning is customized. Each and every document must be carefully and intelligently drafted to maximize protection Many clients want legal work and documents to be simple and inexpensive. That approach often works in simple business arrangements; it usually does not provided effective asset protection.
Before you make a mistake that may cost you everything, consult an attorney well versed in asset protection.
A well-conceived asset protection plan can fail because attorneys use standard, off-the-shelf business forms to create legal entities to hold the debtor’s assets. Case in point is a case I worked on with a creditor’s attorney to penetrate a very complex asset protection plan involving domestic limited liability companies whose membership interests were owned by domestic trusts. The planning attorney used llc forms typically used for operating business and standard estate planning trust forms.
Standard LLC forms and estate planning forms are designed to provide current income to the llc owners and trust beneficiaries. These typical forms often provide for mandatory distributions of all current income. In this instance, we convinced the trial judge to compel the llc manager and trustee of the trust to follow the terms of their documents and make current income distributions to the debtor and his family. We were then able to seize the llc required distributions with charging liens and garnishment proceedings.
Asset protection planning is customized. Each and every document must be carefully and intelligently drafted to maximize protection Many clients want legal work and documents to be simple and inexpensive. That approach often works in simple business arrangements; it usually does not provided effective asset protection.
Before you make a mistake that may cost you everything, consult an attorney well versed in asset protection.
Sunday, March 25, 2007
Asset Protection Mistakes - 13 Tips
These days, just about everyone should take care to protect their assets from possible lawsuits or other problems.
Here are 13 things to watch out for:
1. Don't keep money in a joint account, even with a spouse.
2. Don't own the car of an adult child, or keep him or her on your policy.
3. Don't own vehicles jointly with your spouse.
4. Don't go without sufficient umbrella liability insurance.
5. Don't own rental real estate in your own name.
6. Don't own real estate jointly with someone other than your spouse without a "buy-sell" or joint ownership agreement.
7. Don't leave property, including life insurance and retirement benefits, directly to minor children.
8. Don't operate a business as a sole proprietor.
9. Don't let other people operate any of your motor vehicles, but if you do, make sure your insurance policy covers them.
10. Don't sign a joint income tax return with your spouse if you have any suspicion that he or she is not reporting all income, over-stating deductions, or is otherwise acting fraudulently or negligently.
11. Don't co-sign or guarantee loans to family members or friends.
12. Don't serve on the board of a non-profit organization unless it has sufficient errors and omissions insurance for directors.
13. Don't get married without a comprehensive prenuptial agreement.
While this list can help get one started on an asset protection plan, there is no substitute for seeking the counsel of an experienced attorney to ensure that you and your family are fully protected.
Here are 13 things to watch out for:
1. Don't keep money in a joint account, even with a spouse.
2. Don't own the car of an adult child, or keep him or her on your policy.
3. Don't own vehicles jointly with your spouse.
4. Don't go without sufficient umbrella liability insurance.
5. Don't own rental real estate in your own name.
6. Don't own real estate jointly with someone other than your spouse without a "buy-sell" or joint ownership agreement.
7. Don't leave property, including life insurance and retirement benefits, directly to minor children.
8. Don't operate a business as a sole proprietor.
9. Don't let other people operate any of your motor vehicles, but if you do, make sure your insurance policy covers them.
10. Don't sign a joint income tax return with your spouse if you have any suspicion that he or she is not reporting all income, over-stating deductions, or is otherwise acting fraudulently or negligently.
11. Don't co-sign or guarantee loans to family members or friends.
12. Don't serve on the board of a non-profit organization unless it has sufficient errors and omissions insurance for directors.
13. Don't get married without a comprehensive prenuptial agreement.
While this list can help get one started on an asset protection plan, there is no substitute for seeking the counsel of an experienced attorney to ensure that you and your family are fully protected.
How to S T R E T C H Your IRA
The stretch IRA concept is a wealth-transfer strategy that can help you extend the period of tax-deferred earnings on your retirement assets. After the owner of the IRA dies, the beneficiaries will also have the longest allowable period of tax-deferral on the required distributions of the IRA assets. This strategy can allow distributions from your retirement assets to be extended over several generations. Because of this, your family could save significant dollars in income taxes over their lifetimes.
A stretch IRA strategy can be established at any time, as long as you have named an individual person as the beneficiary. It's also important to name an individual person as a contingent beneficiary in case your primary beneficiary predeceases you. If set up correctly, your beneficiaries should be able to take their required IRA distributions over their individual life expectancies.
However, there are a number of steps that need to be followed to put this strategy in place. These steps include the following:
1. Selection of individual beneficiaries.
As previously mentioned, you will need to designate an individual beneficiary. Although there might be certain reasons for naming a trust as a beneficiary (e.g., asset protection for the beneficiaries), you should keep in mind that you will jeopardize the ability to use this strategy if you do it. Even with a qualified trust, distributions must be paid out over the life expectancy of the oldest beneficiary. With this in mind, you could jeopardize you ability to stretch out distributions to your grandchildren if you name a trust as the beneficiary.
2. Discuss your plans with an experienced advisor.
The benefits of this strategy could also be jeopardized if the IRA is not set up properly. Therefore, you need to speak with an experienced tax advisor who has worked with this strategy before.
3. Establish and maintain separate accounts for your beneficiaries.
If you have two or more beneficiaries, you need to set up a separate account for each one of them. You should also designate a certain percentage of you IRA assets to each of your beneficiaries. By doing this, each beneficiary can then choose to have their share distributed over their individual life expectancy.
4. Inform your beneficiaries of your plans.
You should also let your beneficiaries know about their future interest in your account when you pass away.
There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution (50% of the distribution that should have been taken).
On a final note, it should be remembered that this strategy may not be suitable for everyone. For example, if you think that you will need access to your IRA money to meet your daily living needs during retirement, then this strategy might not help you. Please note I always advise people to consult with their own qualified legal, tax, and financial advisor prior to making any investment decisions.
A stretch IRA strategy can be established at any time, as long as you have named an individual person as the beneficiary. It's also important to name an individual person as a contingent beneficiary in case your primary beneficiary predeceases you. If set up correctly, your beneficiaries should be able to take their required IRA distributions over their individual life expectancies.
However, there are a number of steps that need to be followed to put this strategy in place. These steps include the following:
1. Selection of individual beneficiaries.
As previously mentioned, you will need to designate an individual beneficiary. Although there might be certain reasons for naming a trust as a beneficiary (e.g., asset protection for the beneficiaries), you should keep in mind that you will jeopardize the ability to use this strategy if you do it. Even with a qualified trust, distributions must be paid out over the life expectancy of the oldest beneficiary. With this in mind, you could jeopardize you ability to stretch out distributions to your grandchildren if you name a trust as the beneficiary.
2. Discuss your plans with an experienced advisor.
The benefits of this strategy could also be jeopardized if the IRA is not set up properly. Therefore, you need to speak with an experienced tax advisor who has worked with this strategy before.
3. Establish and maintain separate accounts for your beneficiaries.
If you have two or more beneficiaries, you need to set up a separate account for each one of them. You should also designate a certain percentage of you IRA assets to each of your beneficiaries. By doing this, each beneficiary can then choose to have their share distributed over their individual life expectancy.
4. Inform your beneficiaries of your plans.
You should also let your beneficiaries know about their future interest in your account when you pass away.
There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution (50% of the distribution that should have been taken).
On a final note, it should be remembered that this strategy may not be suitable for everyone. For example, if you think that you will need access to your IRA money to meet your daily living needs during retirement, then this strategy might not help you. Please note I always advise people to consult with their own qualified legal, tax, and financial advisor prior to making any investment decisions.
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