IRA Planning for Estates

IRA planning is important. Have you ever had a dream that you forgot to attend a class all semester and came on the last day unprepared for the final? Nightmares like these are no fun. You may not dream about your IRA often, but the pot of gold that you have been stoking away for your retirement may become a nightmare for your heirs. Many professionals with larger IRA’s and qualified plans don’t realize that the government laid a trap for them in the Tax Reform Act of 1984 making their IRA and retirement plans part of their taxable estate.

You may be using an IRA or a qualified plan, such as a 401(k), as your primary investment conduit for retirement. Of course, the first goal is to provide a retirement while you and your spouse are alive, and the secondary goal is to leave an estate for your family. You may have never thought about what will happen to your retirement when you and your spouse have both died. IRA planning for your estate is important. You could have a big surprise when you figure out that the government gets what is left. Well ok, they don’t get it all, just most of it.

IRA Planning Can Change Your Estate

For people with a several million dollar estate, that means a loss of well over a million dollars. You can have a multi-million dollar estate and not consider yourself to be rich. The estate includes not only the house, bank accounts, and cars; it also includes the life insurance (face value), the value of your small business, and your retirement funds. (By the way, the IRS evaluation of a small business starts with the assumption that the business is worth five times the business’ annual gross.) Everything is there in the estate to be taxed. If your retirement funds or IRA make up a large part of the estate, your family faces a real disaster. This is a good reason for IRA planning for your estate.

Not only is there an estate tax on the retirement funds, the family often has to take what is left of the retirement funds out of the IRA or plan, and they have to pay income tax on the funds they take out. So, the estate tax can weigh in at 50% and then if you add another 30% for income taxes on the funds that are actually taken out by the family, the government’s chunk of your retirement will be a whopping 80%. Isn’t this fun?

By the time all is said and done, your family may not really be losing 80%+, but they may realistically only be losing 75% or just 65%. This isn’t exactly what you planned when you started stoking money away for retirement twenty years ago. You thought you were saving for yourself and your family. The problem is, you just never thought of Uncle Sam as one of your immediate family.  IRA planning is worth the time.

Solution? A Living Trust

I am a legal bulldog. I have the tenacity of a bulldog and will never give up helping you grow your wealth and protect it. I want you to know about the simple things that you can do today to help your heirs save a few hundred thousand dollars here or there. Check out everything on

First make sure that your estate is set up so that both you and your spouse will pass your  full estate to the family. This can only be done by establishing a trust and having it in place at the time of the death of either spouse. The trust could be established as a testamentary trust in your will, or it could be established using a living revocable trust.

Many attorneys argue in favor of the testamentary trust to pass property. A testamentary trust is convenient, because you don’t ever have to worry about it until after you die, and then you don’t worry, your heirs do. True, a testamentary trust allows you to pass your property, but it cannot avoid probate. You will be locked into the lawyer forever, and a lawyer’s clock running forever is really expensive.

In most cases it is better to use a living revocable trust because you avoid probate and also permit your family to have privacy, which is important these days. Frank Sinatra’s $230 million estate was settled without a fight and the publicity the press wanted, because it was all held in a living revocable trust. The living trust can also protect the trust property when you or your spouse become incompetent, and in spite of what many attorneys say, the living trust can provide you with some asset protection benefits that you cannot get using a testamentary trust. For a full discussion on the advantages and disadvantages of both types of trusts and the money making tips you can employ, read Protecting Your Financial Future.

When you use a living revocable trust, you should still name your spouse as the primary beneficiary on your retirement funds and then name the children as the secondary beneficiaries. Name the spouse as the primary beneficiary and children (or grandchildren) as secondary beneficiaries, because the “people” have a number of options, which a trust or other entity does not have, that may help cut the family’s tax burden after your death. The surviving spouse should be able to receive your retirement funds using the unlimited marital deduction rules, so that there won’t be any estate taxes when your retirement passes to him or her.

The Roth IRA Planning Alternative

From an inheritance perspective, it is very advantageous to use a Roth IRA. Although the Roth funds will be part of your estate, the heirs will not have to pay income tax after your death on distributions made from the IRA funds you pass to them. In fact, with proper planning your family could presumably withdraw tax-free amounts for some years after your death with tax free growth continuing to accumulate. It may be advantageous to convert your traditional IRA to a Roth IRA, if possible, and pay the income tax prior to your death, because the income taxes will have to be paid anyway, and if they are paid by you, that will drain value from your estate and save estate taxes.

For estates of a few million dollars, the living trust and a few simple techniques implemented before either you or your spouse die can save literally hundreds of thousands of dollars for your family.Whether it is a will , trust or IRA planning, the stroke of a pen is all it takes, provided you know what to do.

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