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IRA Trusts Provide Extended Tax-Deferred Growth

Many people whether working or retired have Individual Retirement Accounts that hold a significant portion of their assets and allow for tax-deferred growth.

What many people don’t have is a trust in place to provide for extended tax-deferred growth and protection of those assets upon their death.

In the typical case, a person has his or her IRA which names their children as the beneficiary of that IRA.

While this is not necessarily a problem, let me explain what can happen using this plan.

In this case when the owner of the IRA dies, his or her IRA beneficiary immediately becomes the holder of that IRA account and may, at their discretion, immediately withdraw the entire amount of the IRA.

This has historically been the case with about 90 percent of IRAs being completely withdrawn within the first year after the retiree’s death.

When this happens, that money immediately becomes taxable income to the beneficiary. The money is also often times spent quickly, losing its ability to grow tax deferred.

This also means that the IRA proceeds will include 100 percent in the beneficiary’s taxable income for that year.

Further, the U.S. Supreme Court has ruled that an inherited IRA is an asset for purposes of bankruptcy, which would cause a child to lose the inherited IRA. A second option exists in which creating an IRA trust can alleviate the above referenced issues.

An IRA trust is established and named as the beneficiary of a person’s IRA.

This trust allows for the retiree to dictate how the IRA money is spent and how quickly the beneficiary has access to that money.

This will insure that the IRA assets will remain intact for the use and benefit and protect the beneficiary from his or her own bad decisions, excessive spending habits inexperience with investing, or from bankruptcy creditors.

It is also worth noting that using this method is an effective plan to provide for a special-needs person while not disqualifying him or her of government benefits. An IRA trust is an excellent tool to allow the retiree to provide for grandchildren and great-grandchildren, as it will allow for the IRA to stretch over the beneficiary’s life.

This will also provide protection of assets as there would be a third-party trustee in place to oversee the trust and have control over the spending of the distributed assets.

In summary, naming a child as the IRA beneficiary, while may be appropriate for some, does have some consequences that are worth noting. While on the other hand naming an IRA trust as a beneficiary, with a child or grandchild as beneficiary of the trust, may provide for an extended period of tax-deferred growth, as well as spendthrift protection. If you have questions regarding your IRA, seeking competent legal advice could prove valuable to protecting your legacy for generations to come.

Ryan Rokisky practices with the law firm of Rokisky, Wilharm, Blair and Rokisky, PLLC. The firm has offices at 3200 Main St., Weirton, and 38 15th St., Wheeling. If you would like to submit a question for publication, email it to rrokisky@ rokiskylaw.com.


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