Pottstown Retirement Trust Attorneys
Retirement planning has become enormously popular over the past 20 years for many reasons too obvious to mention. Part of this planning, however, should absolutely include how to protect these assets from the enormous dangers hidden within the trillions of dollars these types of investments represent.
In a nutshell, the government has allowed you to enjoy tax deferred savings on IRA investments and they now need the tax revenues. To reap these revenues, the government has enacted a very small number of ways to withdraw this money during your lifetime that is structured so they can collect the taxes a fast as possible. We all know this and it usually takes 1 of 3 forms. Those are premature distributions (with or without exceptions), distributions after you turn 59 ½ but before 70 ½, and required distributions after you turn 70 ½. Again we all know this but what happens when you die and leave your IRA to your beneficiaries?
Traditionally, your beneficiaries also have 1 of 3 options. This time, however, the government has set the rules so they get accelerated tax revenues during the beneficiaries’ life. Those 3 options are immediate distribution upon your death, a distribution spread out over 5 years after your death, and a distribution spread out over the beneficiaries’ lifetime. Do any of those options sound good to you? I hope not.
The reason those options are not appealing is that your beneficiaries, who are usually your children, want the money now. This is the generation of immediate gratification and they don’t care if the government will take a whopping 30% tax out of a pile of money that you saved and sacrificed to build for well over 20 years. Is there any good solutions? Yes – it’s a brand new phenom called retirement trusts!
Retirement trusts are a qualified trust and this is how they work. The trust is named as the beneficiary of your IRA and then distributes the proceeds of your IRA’s to your beneficiaries. The exciting part, and major difference between simply stating a designated beneficiary versus using the trust, lies in the withdrawal powers of the beneficiary.
When you use the trust, you can specify, among other options, that the trust can only withdraw the proceeds of the IRA over the lifetime of the beneficiary. As a result, the beneficiary can’t succumb to human nature, immediately withdraw all of the money after you die, and ruin the major benefits of an IRA; the power of tax deferred compounding for the longest period of time the law allows – the lifetime of the beneficiary. This is opposed to simply naming a beneficiary of an IRA; in that case the beneficiary can withdrawal money at their leisure anytime they want. When you realize that the average inheritance is squandered in less than 66 days, this can represent a very powerful tool in your estate plan.
In addition, another powerful reason for utilizing this trust lies in the creditor/predator protection this trust provides. Normally, if you just named a beneficiary designation for your IRA without using a trust, the IRA is subject to the creditors and predators of the beneficiary. For example, if the beneficiary divorced after the inheritance was distributed, the spouse of the beneficiary could petition for a division of the IRA assets. However, if the trust is the named beneficiary, the spouse cannot claim they are entitled to a division of the IRA assets because the trust is in control. Another situation typically happens when the beneficiary is a professional subject to creditor claims. Again, if the trust were named as the beneficiary, those creditors would not be able to “reach” the IRA assets.
One more reason for utilizing the trust lies in the ability to integrate the trust with other estate planning options that provide maximum flexibility for utilizing the estate tax credits provided by the Federal government. In a nutshell, the trust can include a virtual toggle switch that can be turned on or off to utilize advanced planning strategies such as a Bypass Trust, QTIP trust, etc., if its needed at the time of someone’s death. The reason you will not know if it’s needed lies in the uncertainty over Estate Tax Credits after 2011. It’s nice to know, however, that you can plan for this uncertainty with the power of this trust.
You might be asking yourself why you haven’t heard of retirement trusts before. That is due to the fact that the IRS very recently issued a private letter ruling that gave specific guidance and blessings for the use of these types of trusts and the way they may be incorporated into an estate plan. They are truly a phenom in estate planning and should absolutely be incorporated into your plan. Specific care should be made in creation of the trusts, what makes them qualified and specific language that should be used to name them as the beneficiary.
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Our attorneys are ready to help you get positive results. Contact us to discuss your case with our Pottstown retirement trust lawyers. We serve Montgomery County PA, Chester County, Berks County, Philadelphia County, Lancaster County and all surrounding counties in Pennsylvania.