Frequently Asked Questions
Click on a question to scroll down below for the answer.
My financial advisor told me, I don’t need a trust to be my IRA beneficiary because my children are responsible enough to do the proper stretchout (and/or he’ll be sure that my children do the stretchout) - - so why do you think I need an IRA Inheritance Trust®?
How difficult is it to file the special beneficiary designation form needed and are there problems with custodians accepting it?
What if I/my mother (or someone else) has IRAs that total less than $200,000? Is the IRA Inheritance Trust® appropriate?
I thought IRAs were creditor and lawsuit protected for my beneficiaries, just like employer benefit plans. So why do I need the IRA Inheritance Trust® to gain this protection?
Aren’t IRAs protected for my beneficiaries in bankruptcy, without using a Trust?
I don't have an IRA (yet), just a company plan. Does the IRA Inheritance Trust® apply to me?
You mentioned that you received a Private Letter Ruling from the IRS approving your Trust, but I thought a Private Letter Ruling only applies to the one taxpayer who requested it and it is not precedent or authority for others - - so how can I really rely on that IRS Ruling?
Does the IRA Inheritance Trust® create a lot more paperwork after I die, such as additional tax returns?
Does each spouse need to get their own IRA Inheritance Trust® and does this increase the fees?
Isn’t there some problem with a Trust named as a beneficiary? I thought if the Trust is named as a beneficiary, then the oldest Trust beneficiary’s life expectancy would need to be used and then shorten the stretchout for the other beneficiaries.
What if the IRS changes its mind about the Private Letter Ruling for the IRA Inheritance Trust® or the laws change?
What if I will need to take more than the required minimum distributions (RMD) in my later years in order to support myself - - will the IRA Inheritance Trust® still make sense for me?
If my child inherits my IRA through this Trust and then passes away and it goes to my grandchildren, can those grandchildren use their own life expectancies for determining the stretchout of their required minimum distributions?
You talked about the use of disclaimers when individuals are named directly as IRA beneficiaries. What if my child doesn’t need or want his or her portion of my IRA that he or she inherits under the IRA Inheritance Trust® - - can that child disclaim it so that his or her child (my grandchild) can then get it and use the grandchildren’s own much longer life expectancy to stretchout the taxable distributions and thereby accumulate more family wealth?
Will my Trustee be able to understand and handle the Trust properly at my death? How will he or she know what to do?
I have that “blended” or “mixed” marriage, with children of a previous marriage. In my case, do I alone set up an IRA Inheritance Trust® or would you do a Trust for each spouse?
If I just want to set up my own IRA Inheritance Trust® for my separate property IRA, do I need my spouse to come in too and sign anything?
How does this Trust work if a beneficiary is to get partial distributions of his or her inheritance over time, such as 1/3 at age 30, 1/3 at 35, and the remaining amount at age 40?
What if I want some of my IRA to go to charity - - how does the Trust work then?
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Question: My financial advisor told me, I don’t need a trust to be my IRA beneficiary because my children are responsible enough to do the proper stretchout (and/or he’ll be sure that my children do the stretchout) - - so why do you think I need an IRA Inheritance Trust®?
Answer: Even though you may feel a child as a beneficiary is responsible enough to take care of the stretchout on his or her own, or seek proper advice, there are lots of reasons why I’ve found this does not occur. For example, your child may not be aware of the required minimum distribution rules and their choices and simply have the custodian send them a check which they deposit. Or he or she may think they can merely rollover your IRA into their own. Both of these will cause your entire IRA to be taxed immediately and blow the stretchout or result in what I call the “blowout”! These things happen more often than you might suspect, because there’s no guarantee that your beneficiaries will seek your financial advisors’ advice first, before they run to the custodian to issue a check. And don’t forget that your beneficiary’s spouse (or some other third-party) may influence your beneficiary to withdraw the money and spend it (or loan it to them)! So, while it sounds good in theory to rely on your beneficiaries to do the stretchout or your financial advisor to guide them through it, you take a big risk if you don’t use the IRA Inheritance Trust® - - a risk that your family and loved ones may lose over $1 million like in the example we showed you!
But let’s assume the best - - that your child does the stretchout properly. There’s still the issue of protecting his or her inherited IRA from claims of a spouse in divorce, creditors and lawsuits, loss of future government benefits they may need if they ever become disabled or require nursing care, and a possible estate tax when your child dies and passes down your remaining IRA to your grandchildren. An IRA Inheritance Trust® also provides substantial protection against these potential problems when you consider that the stretchout of your IRA may occur for many years after you die, these protections become very important reasons to set up an IRA Inheritance Trust®.
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Question: How difficult is it to file the special beneficiary designation form needed and are there problems with custodians accepting it?
Answer: Your attorney can prepare for you a letter instructing how the custodian beneficiary. In most cases, the custodian will then give you their beneficiary form to complete, incorporating this information. Every custodian has its own beneficiary form and they are changing all of the time, so I only give a client a general directions letter to get started. I usually have your financial advisor help you with completing the custodian’s specific form. Your attorney may assist you if you provide him or her with the custodian’s beneficiary form prior to your signing of the Trust document, so he or she can complete it for you. Our experience has been that some custodians do not immediately accept the form that you, your financial advisor or the attorney may fill out; however, once the custodian has spoken to me and I have explained how and why it will work, the problem has always gone away. In the rare event that you do have a custodian who simply refuses to accept your beneficiary form, then the simple solution is to move your IRA to another custodian, which can be easily accomplished, usually without having to change any of the investments in the account. (Just the threat of moving your account will usually get your current custodian to say yes!)
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Question: What if I/my mother (or someone else) has IRAs that total less than $200,000? Is the IRA Inheritance Trust® appropriate?
Answer: I use $200,000 as a “rule of thumb”, but it is not a bright-line test. If your total IRAs exceed $200,000, then assuming your beneficiaries will live at least 10 years after you, the difference between having the Trust and not can literally be worth over $1 million. However, I have run across situations where people have done an IRA Inheritance Trust® even though their total IRAs are less than $200,000. For example, I had a widow whose only assets were a home, a small bank account, a $100,000 IRA, and who basically lived off of her Social Security. Her daughter was disabled and receiving government benefits and the mother did not want those benefits cut off and the IRA forced to be drained - - which would happen if the daughter received the IRA directly as beneficiary. She also wanted the stretchout to be available so the IRA funds could last for the longest time possible and supplement her daughter’s government benefits. Therefore, even though she only had a $100,000 IRA, we did set up an IRA Inheritance Trust®. There can be other situations where the Trust will be warranted even though you have less than $200,000 in IRAs. This is the type of issue that your estate planning attorney can address at your initial consultation.
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Question: I thought IRAs were creditor and lawsuit protected for my beneficiaries, just like employer benefit plans. So why do I need the IRA Inheritance Trust® to gain this protection?
Answer: The creditor and lawsuit protection available to an IRA can differ from state to state. Most states, like California, do not offer IRAs the same creditor and lawsuit protection as company retirement plans. So, an IRA Inheritance Trust® can afford significant protection for your beneficiaries’ lawsuit and creditor exposure. This is also one of the factors you must consider if you’re thinking about rolling over your 401(k) or other company plan into an IRA. However, most people don’t have significant exposure to creditors and lawsuits, unless they have a risky business or own rental real estate, or are a professional like a doctor who could be sued. Their homeowners, auto and umbrella insurance policies can protect them. Therefore, for most people, the rollover makes a lot more sense than leaving your money in the company plan because now your beneficiaries will be able to take advantage of the maximum income tax stretchout.
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Question: Aren’t IRAs protected for my beneficiaries in bankruptcy, without using a Trust?
Answer: Recently, Congress passed a new bankruptcy law which does exempt the first $1 million of IRA monies from bankruptcy creditor claims. However, in some states, the IRA beneficiary seeking bankruptcy protection may want to utilize more favorable state exemptions and then this federal protection may not apply. Also keep in mind that, once a beneficiary goes into bankruptcy, it’s “game over”. Under the new bankruptcy laws, if your beneficiary has significant wage or salary income, he or she may be forced to repay much of the creditor claims in the future. We don’t ever want things to get to the last resort of a bankruptcy, which is why the IRA Inheritance Trust® is important. It can provide enhanced protection against divorces, lawsuits and other third-party claims so your beneficiaries may not have to declare bankruptcy!
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Question: I don't have an IRA (yet), just a company plan. Does the IRA Inheritance Trust® apply to me?
Answer: YES, thanks to the Pension Protection Act of 2006. Previously, this Trust had no application to a company retirement plan - - this includes such plans as a 401(k), 403(a), 403(b), 457, pension or profit-sharing plan, etc. - - unless and until the worker/participant reached normal retirement age and took an “in service” distribution or retired, and then rolled over the company plan into an IRA. The reason why is that company plans’ own rules usually forced a non-spouse beneficiary to take the entire taxable distribution in 1 to 5 years, overriding the income tax “stretchout” rules available to IRAs.
Now, if someone has more than $150,000 in company plans, is still working but has not reached normal retirement age, or has retired but left these moneys in the company plan, this plan participant can take advantage of the stretchout and protection benefits for his or her family available through the IRA Inheritance Trust®.
The PPA permits non-spouse beneficiaries of company plans, or a Trust established on the beneficiaries’ behalf, to do a rollover into an “inherited IRA” after the plan participant passes away. In other words, a company plan participant can set up the IRA Inheritance Trust® now, make it the beneficiary of the plan and let the IRA rollover occur later!
If you haven’t seriously considered the IRA Inheritance Trust® because you are still working or have retired but still have money in a company retirement plan, you definitely need to look into it right away!
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Question: You mentioned that you received a Private Letter Ruling from the IRS approving your Trust, but I thought a Private Letter Ruling only applies to the one taxpayer who requested it and it is not precedent or authority for others - - so how can I really rely on that IRS Ruling?
Answer: Technically, you are correct, a Private Letter Ruling is only authority for the one taxpayer who requested it. However, we feel confident about this Ruling for the following reasons. First, almost every IRS announced interpretation of the required minimum distribution/stretchout rules have been made through Private Letter Rulings. Second, the IRS does not have to publish every Ruling but in our case has chosen to do so. That’s a sign that they want other taxpayers to comply with the rules in the same way we have. In other words, they wouldn’t be publishing the Ruling if they didn’t want other people to use the same IRA Inheritance Trust®.
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Question: Does the IRA Inheritance Trust® create a lot more paperwork after I die, such as additional tax returns?
Answer: For the most part, it’s a fairly easy Trust to use since the only asset payable to it is the IRA and for most beneficiaries, the distributions from the IRA will pass from the Trust to them. Each beneficiary’s Personal Asset Trust® portion of your IRA Inheritance Trust® will need a taxpayer identification number and will have to file Trust tax returns, but these are very simple and usually cost only about $200 a year, a small price to pay for all of the protections the Trust affords them.
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Question: Does each spouse need to get their own IRA Inheritance Trust® and does this increase the fees?
Answer: In most married cases, each spouse will have their own IRA Inheritance Trust®, with provisions that are merely a mirror image of each other. Here’s the reason why. If, for example, the husband passes away first, his IRA Inheritance Trust® becomes irrevocable and unchangeable at his death. Typically, the surviving spouse rolls over his IRA into her name and specifies her IRA Inheritance Trust® as the new beneficiary, because this gives her the flexibility to continue to change or amend her Trust. Most attorneys will prepare the second Trust at no additional charge.
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Question: Isn’t there some problem with a Trust named as a beneficiary? I thought if the Trust is named as a beneficiary, then the oldest Trust beneficiary’s life expectancy would need to be used and then shorten the stretchout for the other beneficiaries.
Answer: That’s correct, in a typical Trust, like a Living Trust, and is one of the reasons why it’s not a good idea to name your Living Trust as beneficiary. However, our IRA Inheritance Trust® has specifically addressed and solved this problem by naming each child’s (or other beneficiary’s) Personal Asset Trust™ (or sub-share) directly as IRA beneficiaries, rather than the IRA Inheritance Trust® itself. The IRS has approved this approach in their Ruling.
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Question: What if the IRS changes its mind about the Private Letter Ruling for the IRA Inheritance Trust® or the laws change?
Answer: Remember, the IRA Inheritance Trust® is a revocable trust, meaning you can amend (or change) it at any time you wish. I cannot guarantee you that the IRS rules or the laws won’t change in the future, but your attorney and financial advisor should keep you apprised of any important changes and help you determine if an amendment of your Trust is warranted. This is really no different than with your Living Trust or other estate planning documents. I recommend you meet with your attorney every three years to be sure all of your documents are up to date.
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Question: What if I will need to take more than the required minimum distributions (RMD) in my later years in order to support myself - - will the IRA Inheritance Trust® still make sense for me?
Answer: This is where a good financial advisor can assist you. You’ll always want to plan to have sufficient liquid assets outside your IRAs, as a safety net, if you need more to live on than the IRA required minimum distributions. Think about it - - if you have assets outside of your IRA and inside your IRA, where would it make sense for you to access principal first? Of course, your non-IRA assets because when you withdraw from the IRA, you will not only have to pay income taxes but you will forfeit the long-term compounding of wealth for your later years and for your loved ones. So, having a good financial plan in place should help you avoid needing to access the principal of your IRA and an IRA Inheritance Trust® makes sense. If you can clearly see right now that you absolutely have no alternative but to spend down your IRA - - and that will happen quickly - - then an IRA Inheritance Trust® may not be right for you.
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Question: If my child inherits my IRA through this Trust and then passes away and it goes to my grandchildren, can those grandchildren use their own life expectancies for determining the stretchout of their required minimum distributions?
Answer: No. The first non-spouse beneficiary, here your child, sets the life expectancy for every beneficiary that inherits after him or her. So the grandchildren use whatever remaining life expectancy the parent would have had, according to an IRS table. If you want the grandchildren to use their own, much longer life expectancies and take advantage of the tremendous additional wealth-building opportunity, you should name the grandchildren to receive some or all of your IRA as primary beneficiaries under the IRA Inheritance Trust®. I think this is very smart planning, particularly if you can make up the amount not received by your child in other ways, such as through life insurance. When the child receives the life insurance, both estate tax and income tax free, unlike IRA distributions, and the grandchildren take advantage of a much longer stretchout period - - so everyone actually comes out better!
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Question: You talked about the use of disclaimers when individuals are named directly as IRA beneficiaries. What if my child doesn’t need or want his or her portion of my IRA that he or she inherits under the IRA Inheritance Trust® - - can that child disclaim it so that his or her child (my grandchild) can then get it and use the grandchildren’s own much longer life expectancy to stretchout the taxable distributions and thereby accumulate more family wealth?
Answer: Yes. We have built into the Trust the ability of a beneficiary to disclaim or refuse to accept some or all of his or her inheritance, in which case it would then pass down to the next Trust beneficiary. In most cases, we even give the first beneficiary the right to name who that secondary beneficiary will be, such as one or more of their children, and determine how and when those children will receive it. The IRS approved this provision in the Ruling we received.
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Question: Will my Trustee be able to understand and handle the Trust properly at my death? How will he or she know what to do?
Answer: When we prepare an IRA Inheritance Trust®, we typically include an “Operating Procedures” checklist, where I lay out step-by-step, in plain English, the actions that are necessary in order to implement the Trust at your death. This makes the process easy for the Trustee to understand and handle. Furthermore, this checklist notifies the Trustee that he or she is entitled to a free consultation to assist him or her in getting started with this implementation process. This free consultation ultimately gets the Trustee to come in. Think about it, who is better to give them the driving lessons than the person who built the car? Just to let you know, in the IRA Inheritance Trusts® we have already administered after-death, this process has been very simple and involves little or no legal fees. The attorney who prepares your IRA Inheritance Trust® should give you Operating Procedures checklist and a free Trustee consultation. Having a good relationship with a qualified financial planner can also be of great help because most of the post-death actions can be taken by or assisted by your financial advisor.
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Question: I have that “blended” or “mixed” marriage, with children of a previous marriage. In my case, do I alone set up an IRA Inheritance Trust® or would you do a Trust for each spouse?
Answer: If you wish for your surviving spouse to have the use of your IRA, in the event he or she needs it, but you also want to lock in your IRA to pass to your own children when your surviving spouse dies, you will only have an IRA Inheritance Trust® for you and name your Trust as your primary beneficiary, rather than the surviving spouse. Your Trust will provide your spouse with the necessary support but he or she won’t be able to name someone other than your children to receive what’s left when he or she dies. Your spouse will not have the need for a separate IRA Inheritance Trust® unless your spouse also has his or her own IRAs and he or she likewise wants to lock in the distribution after you die.
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Question: If I just want to set up my own IRA Inheritance Trust® for my separate property IRA, do I need my spouse to come in too and sign anything?
Answer: Yes, if you want to assure that the Trust will work properly after you pass away. The reason why is that federal law may give your surviving spouse an interest in your IRA after your death even if it was your own separate property. So, your spouse will need to consent to you establishing the Trust as the primary beneficiary, rather than him or her directly (even though your spouse may be the primary beneficiary of your Trust). For this reason, we normally recommend that both spouses come in whenever we do IRA Trust planning. Your state’s laws can also affect the answer to this question.
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Question: How does this Trust work if a beneficiary is to get partial distributions of his or her inheritance over time, such as 1/3 at age 30, 1/3 at 35, and the remaining amount at age 40?
Answer: Where a beneficiary is to receive the distributions of his or her inheritance in several installments over time, we want to avoid certain technical and practical problems that may arise if we were to divide the IRA up and give parts of it to the beneficiary over time. Instead, we typically name that beneficiary as an initial co-Trustee of his or her Trust share, and then have that beneficiary take over as sole Trustee at the time that would have been designated for the last distribution (in your example, at age 40). The IRA itself is never actually distributed out of the Trust to the beneficiary. By doing it this way, your beneficiary will maximize both the stretchout and protection benefits of the Trust.
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Question: What if I want some of my IRA to go to charity - - how does the Trust work then?
Answer: If you know you want to make a gift to charity at your death, it can be very smart to give your charity part of your IRA, because a charity does not pay any tax on the IRA monies when they are withdrawn and the monies can go a lot farther than if an individual had received them and then had to pay tax. However, naming a charity to receive some of your IRA through your IRA Inheritance Trust® can cause problems and jeopardize the stretchout for other beneficiaries. If you want a charity to receive some of your IRA, it’s best to name the charity directly as the beneficiary for a percentage share and allow the remaining portion of your IRA to pass through to the IRA Inheritance Trust®. If you only want the charity to be a secondary beneficiary, if one of your primary beneficiaries does not survive, that gift should be handled in your Living Trust and funded with assets other than your IRA.
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