Those with significant assets they wish to control and protect once they pass to the beneficiary should seriously consider setting up a revocable living trust. You may have heard them referred to as an IRA Trust, IRA Living Trust, Standalone Retirement Trust, or an IRA Stretch Trust. Regardless of the exact terminology, an IRA Trust provides you with the most control over your investments prior to your death and the most protection to your beneficiaries after your death.
Your basic IRA account is protected from creditors while you are alive, but as soon as the funds are transferred to a beneficiary upon your death this protected status is no longer in force (Clark v. Rameker, 134 S.Ct. 2242 (2014)). However, with an IRA Trust you can create a sub trust specifically for an individual beneficiary, which will protect them from divorcing spouses (the usual culprit) as well as creditors and lawsuits. This sub trust continues to protect the beneficiary as long as the funds remain in the trust and are distributed according to the discretion of the Trustee. In other words, the assets are safe from creditors should the beneficiary file bankruptcy, get sued, or face a divorce.
The IRA Trust can even protect the beneficiary from his or her reckless spending habits, incompetent investing, intrusive spouses, and other poorly made financial decisions.
Leaving your IRA directly to a beneficiary not only leaves it open to creditors, it gives the beneficiary the option to immediately cash out the funds and spend the money as they wish. Under this scenario, the beneficiary not only loses the opportunity to receive required minimum distributions (RMDs) over their lifetime, they will also be taxed at 100% of the amount withdrawn as part of that year's income tax.
Obviously, the benefits of an IRA Trust are many, however, you won't know for certain how well they will work for your individual investment plans until you speak with professionals who have your best interests at heart. At the Law Offices of James C.Shields, you'll work with professionals in estate planning and probate law. For more information about setting an IRA Trust in Los Angeles and Orange County, California, please contact us.