Some
of the most generous provisions of the tax code are those that permit beneficiaries
of IRAs and other qualified retirement plans to defer income tax on the plans
until time of withdrawal. This allows the IRA or qualified plan to grow
significantly more than if it were subject to tax on gains each year.
Another
equally generous provision of the tax code permits beneficiaries to withdraw
only a minimum amount from IRAs or qualified plans each year. By taking only
these “required minimum distributions” a beneficiary can stretch out distributions
over the better part of his or her lifetime, resulting in further deferral of
income tax on the amount remaining in the plan.
Unfortunately,
most beneficiaries fail to take advantage of this latter provision and withdraw
all of the IRA or qualified plan funds immediately, thereby losing the
significant tax advantages of tax-deferred growth.
A
recent Senate proposal would have required that beneficiaries withdraw the
entire IRA or qualified plan within five year’s of the plan participant’s
death. Fortunately the Senate proposal died upon arrival, but this is an
excellent reminder that retirement plans are assets that need proper planning.
A
common misperception is that one should not name a trust as beneficiary because
it’s overly complicated and doesn’t permit a stretch out. While naming a trust
does add a thin layer of complexity, a properly drafted trust not only permits
the stretch out but it is the only approach that ensures maximum income tax
deferral, if that is your objective.
Unfortunately
there is no “one size fits all” answer here. Rather, this is best decided after
consultation with professionals who understand these issues.
A
recent Wall Street Journal online article titled Inherited IRAs: a Sweet
Deal A Generous Benefit for Families Survives a Senate Challenge discusses
this issue but takes the overly simplistic approach when it comes to naming a
trust as beneficiary of an IRA or qualified retirement plan. The full article
is available online at http://online.wsj.com/article/SB10001424052702304587704577335751592771924.html.
If you have more questions about naming the beneficiary of your qualified plan, contact a Menlo Park Trusts Attorney who can help/
