2 Replies Latest reply on Aug 18, 2015 6:38 AM by Susanna144

    Trusts, IRAs, and beneficiary designations


      I ran across this article in the WSJournal. As most people would not be able to access a link (subscriber site), I am posting an edited excerpt of this article.


      Many people confuse what a Revocable Living Trust is/does. It can be (not always, but in some cases) an efficient method of transferring assets to heirs. What it is not is an automatically efficient tax reduction vehicle. Be sure you don't confuse the two, as this couple in the article did. HTH someone!


      Avoid a Big Tax Hit by Properly Naming Beneficiaries

      Adviser Don Cloud addresses this issue with couple looking to provide for daughters, including one with special needs

      WS Journal July 29, 2015


      [NOTE: Visit www.wsj.com to read the article. Users are not permitted to republish articles in part or in full on the forum. Only short excerpts are permitted under Fair Use.] 


      -- MyR Community Manager


      Message was edited by: W2W Community Mgr

        • Re: Trusts, IRAs, and beneficiary designations

          When we set up our trust, it was apparent that our lawyer who supposedly did a lot of work for farmers and all of those difficult issues was NOT conversant with retirement accounts and the associated beneficiary laws. I had to involve a TIAA-CREF expert to help us. Even after the trust was set up and after several years of trying to understand the huge resulting trust document that the lawyer had missed the difference between the estate and the trust.


          The problem is that certain gifts are to be made as a percentage of the ESTATE. The estate includes all retirement accounts whereas the trust is excluded from the estate since beneficiary law applies. The learning process was tough for me as a non-lawyer and when I did figure it out, it cost me extra dollars to correct the LAWYER'S mistake (even after I proved via email copies that our wishes were clear but the trust as written was wrong).


          Another issue arose over how the estate would fund the substantial variable charitable gifts dictated by percentages of the estate without forcing fire-sales of assets that might be desirable to those inheriting. This was made an issue because a large portion of the estate is in retirement accounts and these are distributed automatically via primary and contingent beneficiary designations, This automatic distribution would probably leave the trust obligations weakly funded in order to satisfy these stated gifts.


          Again, much self-education of this non-lawyer resulted in a solution which is not perfect but at least addresses funding the gifts required. The solution is what I call my "Charitable IRA". This is just an IRA with the primary beneficiary as my spouse AND the contingent beneficiaries as the named organizations getting gifts in the percentages implied by the amounts of the gifts. So after I pass and then the spouse passes (provided no changes are made to the contingent beneficiaries), the funds will be automatically be given to these organizations. One of the problems with this approach is that care has to be given to insuring that the value of this special IRA is close to the amount needed. One can either be short or have too much according to the performance of the IRA.


          Another potential problem with doing gifts using beneficiaries of retirement accounts arises when the gifts are specified in the trust but satisfied with retirement funds outside of the trust. One needs to insure that the language of the trust is such that it recognizes the automatic beneficiary distributions as satisfying the trust gift directives and thus not result in duplicate gifts by both the trust AND the beneficiary statements which are fairly independent of each other unless the trust is made clear.


          Due to the difficulties, I caution about making percentage charitable gifts defined in one's trust. I also caution that making gifts via contingent beneficiary designations is subject to the primary beneficiary maintaining the intent by not changing those designations after inheriting the retirement account.     WHEW!!!!  GOOD LUCK!!!!    :-))))

            • Re: Trusts, IRAs, and beneficiary designations

              What a complicated process you had to navigate Jerry!  It makes me doubt that I'll ever set up a trust, but I probably will never have a good reason for one either.  Designating charities to inherit an IRA seems like a good idea.  They won't ever pay tax, and you don't need to involve lawyers who may or may not understand what you want or how to give it to you.