IRAs and Estate Planning

IRAs can be incredible wealth accumulation devices. However, when it comes to dealing with IRAs in your estate plan, the rules are a bit complicated and a number of misconceptions abound.

Myth #1: My well thought out Will and Last Testament will take care of my IRAs.

Truth: While a Will is a very good thing, a Will, does not control the disposition of your IRAs. Rather, the transfer of your IRAs will be controlled by the beneficiary designation you probably filled out many years ago when you originally opened the account. The odds are it’s outdated and probably incorrect. If you didn’t complete the form? Your IRA will transfer pursuant to the rules of the investment company; which likely will be different than your wishes expressed in your Will.

Myth #2: I can simply name my kids as beneficiaries and there shouldn’t be any issues.

Truth: If you only have one child, he or she is in perfect health (and always will be), could never get divorced, always makes wise financial decisions, and will never experience creditor problems, then simply designating your child as beneficiary might work. For the rest of us, we hope for the absolute best for our children, but plan for things to possibly go wrong at some point; we’ll want an IRA Trust just in case.

Myth #3: IRAs are protected assets and creditors can’t get them.

Truth: In general, IRAs are protected from the claims of creditors with regard to the IRA owner during his or her lifetime. However, once the IRA assets are transferred upon death of the owner, the assets are no longer exempt from creditors – so declared the United States Supreme Court in the recent Clark v. Rameker decision.

Myth #4: I can simply use my existing Living/Revocable Trust for my IRAs.

Truth: The draconian rules that the government has in place for the transfer of IRAs are complex and often nonsensical. Obviously, it’s not in the best interest of the government for tax-free and tax-deferred investments to remain not taxed. Consequently, best practices are to always have a separate IRA Trust if IRAs make up any sizeable portion of your estate.

Summing it Up: With proper planning, you can pass along to your children the tax-deferred or tax-free advantages of IRAs, often allowing them to “stretch” the tax benefits over their lifetime. In addition, through the use of an IRA Trust, you can protect your children from creditors and predators, (whether that is an ex-spouse or Uncle Sam). Contact Epiphany Law to learn more.

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