by James Lange, CPA
Please consider the following:
- The primary beneficiary of the IRA would be the surviving spouse.
- The secondary or first contingent beneficiary could be a trust where the surviving spouse gets the income and at the death of the surviving spouse the proceeds go to the children equally. (A “B” or unified credit or exemption equivalent trust).
So far, this is identical to one of my standard “old rule” plans where I did not name children or grandchildren as primary beneficiaries on separate IRAs.
Now, I am suggesting:
- The third beneficiary or second contingent beneficiary would simply be the children equally “per stirpes.”
- The fourth or third contingent beneficiary could be a special trust for the grandchildren to protect against inappropriate spending or investing at a young age.
Under the cascading scheme, the surviving spouse could either keep everything or disclaim all or a portion to a “B” trust. A “B” or unified credit shelter trust specifies that the income from the trust will be paid to the surviving spouse and at the surviving spouse’s death, the principal is divided equally among the children. The advantage of disclaiming to a B trust is that it keeps the proceeds of the trust out of the estate of the second spouse when he or she dies.
Alternately the surviving spouse could disclaim all or a portion to their children. The children, if they desired, could keep the inherited IRA and take minimum required distributions based on their individual life expectancies. That means the child would likely have a much lower minimum required distribution than the surviving spouse. As a family, you are paying far less in federal income taxes than if the surviving spouse or the trust was the beneficiary.
We call this series of disclaimer possibilities “cascading beneficiaries” and we have produced a “master document,” that serves as the beneficiary designation of the IRA or retirement plan. With our help anyone can make the plan a reality.
If you are intrigued by the idea of an extended tax deferral period for the children based on their long life expectancies, consider the potential for the phenomenal benefits for the grandchildren. If the second-generation children were in a suitably strong financial position and they disclaimed all or a portion of their inherited IRA to their children (the IRA owner’s grandchildren) then the third generation children could then take MRD over their quite long life expectancy. This would lead to enormous income tax deferral. In addition to the tax benefits, it is possible to safeguard the money for the grandchildren through extensive trust provisions that will not allow a grandchild to have access to a large amount of an inherited IRA when they were 18 or 21.
Unlike conventional trusts, the trust we offer is designed specifically for IRA or retirement plan assets. The trust pays out the income (in the form of minimum required distributions) and the trustee has the right to invade principal (retirement assets still in the plan) for the beneficiary’s health, maintenance and support, education and post-graduate education (and, if you are a sport, one summer in Europe). At intervals between the ages of 25 and 35 the beneficiary can request percentages of the principal, still in the form of the inherited tax-deferred “stretch” IRA. The beneficiary can then terminate the trust and have direct access to the retirement assets at any point after attaining age 35. Of course variations of the described trust are easily accomplished, but this is a good starting point.
Under the old rules you could have had cascading beneficiaries, but it was not helpful in terms of slowing down the minimum required distribution of the beneficiary. The critical date for determining a distribution pattern for both the IRA owner and under many circumstances the distribution pattern for his heirs was the IRA owner’s required beginning date, April 1 of the year following the year the IRA owner turned 70 ½. For example:
Harold names Wilma primary beneficiary.
Harold lives past his required beginning date.
Wilma disclaims to her children and they disclaim to her grandchildren.
Under the old rules, Harold’s grandchildren must take minimum required distributions based on Wilma’s life expectancy. Under the new rules, the grandchildren could take minimum required distributions based on their own life expectancy.
Under the new rules, the critical date for determining the minimum required distribution pattern is December 31 of year following the year the IRA owner dies. The extended time frame allows a family to leave options open for getting the longest “stretch IRA.” However, if circumstances dictate, it also preserves the safety net for the natural heir of the IRA owner, i.e., the surviving spouse. The cascading beneficiary idea could maximize the value of an IRA or retirement plan for many IRA owners and their families.
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim’s advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger’s Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.