Personal Finance

Money Matters: Retiree seeks advice on making changes to living trust

Q. I’ve finally retired at age 68 and I now have a rather large roll-over IRA. My husband is currently the primary beneficiary and our three grown children are equal contingent beneficiaries. My husband is nine years older than me and doesn’t think he will need any of my IRA to meet his living expenses if I should be the first to die. We’ve been gifting to our children and plan to continue this over our remaining lives on this planet. We have 10 grand-children ages 16 to 8 and I’d like to go ahead and make them the primary beneficiaries of my IRA. If I were to die today they would each get around $100,000. My concern is that they would go crazy with this amount of money at such a young age and/or perhaps be targets for unscrupulous people after their money (my ex-husband and my husband’s ex-wife being prime candidates). Is a letter of instruction binding? I was thinking of telling them in a letter that they should only take out the required amount each year or I will haunt them forever. Just kidding, but is there a way to do this that is legally binding? One thought I have is to make some changes to my living trust and make my living trust the IRA beneficiary. Will this work?

A. Congratulations on your retirement and your savings. You should meet with an estate planning attorney and discuss the benefits of establishing an IRA standalone trust also referred to as an IRA trust, IRA stretch trust or IRA protection trust. This type of trust may be more appropriate than naming individuals or a revocable living trust as beneficiaries of IRAs. If you name your revocable living trust as a beneficiary you must make sure that it has the appropriate conduit-trust language and that the wording of the beneficiary designation is correct to take advantage of the stretch-out of the required minimum distributions. If you name individuals as beneficiaries you are correct that you may create other problems such as: the need for a guardian to request permission from the courts to make distributions if the beneficiary is a minor; the beneficiary may take higher distributions than necessary creating greater taxation, eliminating the value of tax-free compounding and possibly running out of money; lost benefits if the beneficiary is disabled and receiving needs based government benefits; loss of control as to who will ultimately inherit the IRA after the death of the primary beneficiary and if the beneficiary is a non-spouse the IRA could be subjected to the claims of creditors.

Distributions from an IRA inherited by a non-spouse must begin the year following the death of the IRA owner and the RMD is based on the beneficiary’s life expectancy. Assets in a standalone IRA trust are protected by trust law not state law and assets will be protected from creditors. The trust can also demand that distributions are limited to the RMD based on the beneficiary’s life expectancy which will defer the payment of income tax within the IRA providing the greatest “stretch-out” of benefits to the beneficiary. You may want to make exceptions to the limitation of the RMD as the only distribution amount. This is a complex issue and a good estate attorney can work with you to develop the appropriate plan of action based on your personal situation and goals.