IRAs are great vehicles for personal retirement finances. Depending on the nature of your IRA, they might enable you to make withdrawals without any additional taxes or the funds were allowed to grow without an initial tax bill. Your tax strategy enabled your savings to grow throughout the life of the investment. But if you want to pass on your assets without losing that strategic edge, you need to choose the right vehicle for those retirement assets.
What happens if you make someone a beneficiary of your IRA without an IRA trust?
Without a trust, IRA funds are given to the beneficiary without any tax protections. Under most circumstances, unless the beneficiary has a tax strategy of their own in place, the whole of the IRA's amount will be considered taxable income. This can drastically impact the recipient's tax obligations during the first year following your death, which is the time they are least equipped to handle the shift. Investopedia lists other reasons to create a trust, including how the amount could otherwise be accessed by creditors. This means your gift could be diminished before it even reaches your beneficiary.
How does an IRA trust help?
Instead of receiving just the money in an IRA, the trust will also give your beneficiary the protective structure of an IRA. You, as the trustee, can organize the trust to either give the recipient access to the funds in a lump sum or in a series of distributions. Choosing the latter helps create long-lasting or even dynastic accounts that pass down from family member to family member without an income tax bill every time it changes hands. No matter which structure you choose, it also protects the beneficiary against that immediately increased tax bill: they can withdraw the money when they are able to handle it or are given funds in more manageable amounts.
If you want to make sure your assets have the best protection possible, go to the Law Offices of James C. Shields. We can help you set up the right IRA trust for every circumstance and each of your beneficiaries.