Sometimes all you want to do is just give away an asset to your heirs, let them do with it as they wish. This lets life teach them the folly of shortsightedness, if they are not good stewards. Then again, simply letting them fail in the school of hard knocks can be such an awful waste of resources.
Unfortunately, not all heirs learn best by failure whether in Overland Park or elsewhere.
You may have many assets to leave behind for your heirs. However, an IRA is unique enough to be easily squandered in taxes, as MarketWatch noted in a recent article appropriately titled “Protect your heirs from an IRA tax trap.”
IRAs are some of the most common high-value assets. That noted, because they are such unique accounts, there are some equally unique rules regarding inherited IRAs that are either amenable to diligent long-term financial planning or a short-term high of a cash-out.
When an IRA is inherited, the inheritor can elect to take regular distributions (much like the retiree who earned the funds in the first place) that will stretch over the life of the IRA inheritor. This can maximize the long-term value of the IRA and minimize the taxation.
Alternatively, the IRA inheritor can elect to immediately cash out the IRA and foot the tax bill on the whole sum. This will limit the value of the IRA now and maximize the taxation, limiting growth and the true benefit of the IRA in the first place.
Either way, how do you make sure the IRA inheritor will make the right decision?
The original article has some options for you to consider. This is important if your IRA is going to be a large part of the inheritance you leave. Basically, to avoid a disaster that cannot be undone, make sure there is someone there to speak up when needed and to even exercise authority over the decision.
You can either name a trust as the beneficiary of the IRA, giving a trustee discretion, or you can actually structure the IRA to be a Trusteed IRA. Each option requires sound legal and financial planning advice, as the rules are some of the most complex in the entire tax code.
How does IRA distribution planning fit into your overall estate plan? Is the IRA the only asset you worry about or is there more to protect?
With appropriate legal structuring, an entire estate plan can work to protect your heirs from themselves.
Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.
For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.
Reference: MarketWatch (April 28, 2013) “Protect your heirs from an IRA tax trap”