Once an individual decides to engage in comprehensive estate planning, several concerns may arise. One of those concerns often involves leaving a large sum of money to an heir that may be facing financial difficulty or may not yet have the ability to budget in a responsible manner. In such cases, individuals likely still want to make sure that the heir in question is financially provided for, but may have serious concerns over whether or not the heir is able to utilize an inheritance in a reasonable manner. In such cases, CNBC notes that increasingly popular IRA trusts might be the solution to helping you make sure that an heir’s inheritance accomplishes the goal you want it to meet.
Basics of an IRA Trust
An IRA, or individual retirement account, typically comes in one of two forms: a traditional IRA or a Roth IRA. There are different tax structures in place for both types of accounts, but regardless of the type you choose these retirement accounts can often grow to include sizeable amounts of money over time. As these accounts grow, it is increasingly important for you to ensure that your comprehensive estate planning strategy makes the best use of them.
An IRA trust might be the right option for you to address concerns over your heir’s ability to manage the money in your retirement account after inheriting it. An IRA trust establishes ownership of your retirement account in a trust which is created to benefit your heir. You will typically need to nominate a trustee to oversee the trust, and these individuals usually tend to be financial professionals that are able to monitor and oversee assets within the trust. The heir in whose name the trust exists can make regular withdrawals from the trust so long as they meet minimum distribution requirements, but is not able to access the entire account. This can help preserve assets within the trust for a longer period of time, preventing overspending and early depletion of the account.
These trusts can help protect assets in your IRA from outside forces, too. When you establish this type of trust, the trust becomes the owner of the IRA. While the heir you want to receive the benefits is in turn the owner of the trust, creating a trust adds an extra layer of protection from concerns like creditors. It can also protect these assets by preserving them for the heir in case of lawsuits, divorce, and other potential events that could lead individuals to seek the assets if they were specifically in the heir’s name.
While you may establish certain estate planning goals in your Will, you should remember that when it comes to financial accounts – including IRAs – the person named as heir on the actual account will supersede provisions in your Will. Additionally, not all retirement savings accounts are treated alike. For instance, there are different rules governing the inheritance of retirement options like a 401(k), which can in turn vary depending on the type of account it is. Much like other estate planning options, there is no “one size fits all” approach to estate planning. That is why working with an experienced estate planning attorney is an important part of the estate planning process.