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A Trust Just for Your Retirement Account. Is it right for you?

Unlike most of your assets, individual retirement accounts (IRAs) do not pass to your family through a will. Instead, upon your death, your IRA will pass directly to the people you named via your IRA beneficiary designation form.

Unless you take extra steps, the named beneficiary can do whatever he or she wants with the account’s funds once you’re gone. The beneficiary could cash out some or all of the IRA and spend it, invest the funds in other securities, or leave the money in the IRA for as long as possible.

So that’s why you might not want your heirs to receive your retirement savings all at once. One way to prevent this is to designate your IRA into a trust.

But you can’t just use any trust to hold an IRA. You’ll need to set up a special type of revocable trust specifically designed to act as the beneficiary of your IRA upon your death. Such a trust is referred to by different names—Standalone Retirement Trust, IRA Living Trust, IRA Inheritor’s Trust, IRA Stretch Trust—but for this article, we’re simply going to call it an IRA Trust.

IRA Trusts offer a number of valuable benefits to both you and your beneficiaries. If you have significant assets invested through one or more IRA accounts, you might want to consider the following advantages of adding an IRA Trust to your estate plan.

Protection from creditors, lawsuits, & divorce

While IRAs are typically protected from creditors while you’re alive, once you die and the funds pass to your beneficiaries, the IRA can lose its protected status when your beneficiary distributes the funds to him or herself. One way to counteract this is to leave your retirement assets through an IRA Trust, in which case your IRA funds will be shielded from creditors as long as they remain in the trust.

IRA Trusts are also useful if you’re in a second (or more) marriage and want your IRA assets to be used for the benefit of your surviving spouse while he or she is living, and then to distributed or be held for the benefit of your children from a prior marriage after your surviving spouse passes. This would ensure that your surviving spouse cannot divert retirement assets to a new spouse, to his or her children from a prior marriage, or lose them to a creditor before the funds ultimately get to your children.

Protection from the beneficiary’s own bad decisions

An IRA Trust can also help protect the beneficiary from his or her own poor money-management skills and spending habits. If the IRA passes to your beneficiary directly, there’s nothing stopping him or her from quickly blowing through the wealth you’ve worked your whole life to build.

When you create an IRA Trust, however, you can add restrictions to the trust’s terms that control when the money is distributed as well as how it is to be spent. For example, you might stipulate that the beneficiary can only access the funds at a certain age or upon the completion of college. Or you might stipulate that the assets can only be used for healthcare needs or a home purchase. With our support,  you can get as creative as you want with the trust’s terms.

Tax savings

One of the primary benefits of traditional IRAs is that they offer a period of tax-deferred growth, or tax-free growth in the case of a Roth IRA. Yet if the IRA passes directly to your beneficiary at your death and is immediately cashed out, the beneficiary can lose out on potentially massive tax savings.

Not only will the beneficiary have to pay taxes on the total amount of the IRA in the year it was withdrawn, but he or she will also lose the ability to “stretch out” the required minimum distributions (RMDs) over their life expectancy.

A properly drafted IRA Trust can ensure the IRA funds are not all withdrawn at once and the RMDs are stretched out over the beneficiary’s lifetime. Depending on the age of the beneficiary, this gives the IRA years—potentially even decades—of additional tax-deferred or tax-free growth.

Minors

If you want to name a minor child as the beneficiary of your IRA, they can’t inherit the account until they reach the age of majority. So without a trust, you’ll have to name a guardian or conservator to manage the IRA until the child comes of age.

When the beneficiary reaches the age of majority, he or she can withdraw all of the IRA funds at once—and as we’ve seen, this can have serious disadvantages. With an IRA Trust, however, you name a trustee to handle the IRA management until the child comes of age. At that point, the IRA Trust’s terms can stipulate how and when the funds are distributed. Or the terms can even ensure the funds are held for the lifetime of your beneficiary, to be invested by your beneficiary through the trust.

See if an IRA Trust is right for you.

While IRA Trusts can have major benefits, they’re not the best option for everyone. Laws regarding IRA Trusts vary widely from state to state, so in some places, they’ll be more effective than others. Plus, the value of IRA Trusts also varies greatly depending on your specific family situation, so not everyone will want to put these trusts in place.

Consult with us to find out if an IRA Trust is the most suitable option for passing on your retirement savings to benefit your family. But of course, if what you need is your foundational estate planning documents (like your Will, Power of Attorney, Health Care Directives), we can help you with that first!

Attorney Myrna Serrano Setty doesn’t just draft documents, she helps you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why our firm offers a Planning Session. The Planning Session helps you get more financially organized than ever and helps you make the best choices for the people you love.  Start by calling us today to schedule a Planning Session and mention this article to learn how to get this $500 session for free.

Contact us at (813) 514-2946 or info@serranosetty.com.

 

Using Your IRA to Buy Long Term Care Insurance

Long-term care insurance (LTCi) is an important element of good retirement planning. That is because it offers financial protection against unexpected illness or disability that would otherwise eat into savings. But many LTCi plans are too expensive for most retirees or people nearing retirement age, and the costs just seem to be going up.

At the same time, the cost of medical care and assistance over a long period is even higher, and an unexpected illness could wipe out everything you’ve saved. You may not have enough after-tax dollars to pay for LTCi, but you can protect your retirement income by using money from your IRA to fund coverage.

Is It Possible to Avoid Taxes and Early Withdrawal Penalties?

Typically, withdrawals or non-qualified investments (including insurance purchases) made with IRA funds before the age of 59½ are subject to taxes and penalties. Certain allowances are made if you use IRA savings to pay for medical expenses that exceed 10 percent of your adjusted gross income, or if you’re unemployed and using these funds to buy medical insurance.

Although these exemptions don’t apply if you’re buying LTCi directly with your IRA savings, there are some indirect options available that allow you to avoid taxes and penalties. Here are two: fund a 20-pay life insurance plan or a qualified Health Savings Account (HSA) with part of the money saved in a traditional IRA.  Both options can be done penalty-free before age 59 ½

Option 1: Convert Your IRA into LTC Insurance with a Tax-Qualified Annuity

If you invest in a tax-qualified annuity that makes internal distributions to an insurance carrier, you can indirectly pay for long-term care coverage using IRA money without additional tax penalties. Here’s how the process works:

  • Step 1: Apply for 20-pay life insurance with LTC features

Apply for a 20-pay life insurance plan with an LTC rider, which can accelerate the death benefit to pay for long-term care.  This policy will be funded with tax-qualified annuities that make annual distributions to the insurance policy over a 20-year period. After you apply, complete the underwriting process, and receive approval, you will be given a quote for the annual premiums required for this plan. The premiums may be higher than those for term insurance, but limited-pay plans offer lifetime security.

  • Step 2: Apply for IRA-based annuity plans to fund the policy

The second step is to determine the up-front cost of an IRA-based annuity where the annual dollar amount of income is the same as the insurance premiums, over a period of 20 years. Apply for this annuity type and include instructions for the company to directly credit your 20-pay life insurance plan with the annual gains from the annuity.

  • Step 3: Use a direct transfer of IRA funds for annuity premiums

Directly transfer funds from your IRA to purchase your 20-year annuity. By paying an equal dollar amount directly into your life insurance policy, this annuity will fund your insurance coverage and keep it active for 20 years, after which the LTCi policy is paid in full.

You will receive IRS tax form 1099-R from the annuity company every year on the amount of taxable IRA money moved into the life insurance policy. While you still pay income tax on this amount, the payout and benefits from the policy will be tax-free for you and your beneficiaries. After you’ve made premium payments over a 20-year period, the death benefits will apply for your entire lifetime.

Option 2: Move IRA Funds into an HSA with LTC Benefits

You’re allowed to make a one-time tax-free transfer of IRA funds into a qualified HSA, which provides tax-advantaged savings for health care expenses in the future. Check if your HSA includes an option for long-term care, and consider this method only if you meet the eligibility rules.

The maximum transfer allowed is the same as the HSA contribution limit, which in 2017 is $3,400 for single people and $6,750 for families, with an additional $1,000 in catch-up contributions for those aged 55 and up. Remember, this limit will decrease based on how much you move from your IRA. You may also be liable for taxes and penalties if you’re no longer eligible for the HSA within 13 months from December 1st of the transfer year.

The amount saved by these strategies will vary depending on the individual’s or family’s needs, the amount transferred and the expense of the annuity applied for. But they are worth the trouble, in most cases; anytime you can use tax deferred dollars, it is a good thing.

If you want to be financially comfortable, safe and happy after you retire, it may be time to take another look at your IRA savings and investment portfolio. A self directed IRA might be your best option, since you retain full control over investments. Consult a professional advisor if you want to learn more about how it works.

 

Strategic Retirement Planning

Are you approaching retirement, and questioning how you can ensure a smooth transition from working life to retired life?  Walking away from regular paychecks and employer-provided benefits can feel a little nerve-wracking. You can minimize the impact of these major life changes though by planning accordingly, and by keeping these things in mind.

Time It

Get your timing right. Review and understand your employer’s policies on 401(k) matching and profit sharing. Make sure you plan to retire at a time when you can reap all the vested benefits you have coming to you before they expire. Sit down with your company’s HR department to discuss your retirement benefits.

Bridge the Insurance Gap

If you are retiring before the age of 65, you could have a lapse in insurance coverage before you are eligible for Medicare. If your employer, like most employers, doesn’t offer retiree health insurance benefits, look into COBRA insurance to extend your current coverage, or an individual insurance plan to carry you over until Medicare kicks in. Don’t forget about life insurance and long-term care insurance either. If you do not have an insurance advisor you trust, we can refer you to someone, and we can also provide an objective backstop review on any insurance you do have in place to make sure it’s the right amounts and right types for you.

Petition for Your Pension

Apply for your pension at least five months before you retire. Get a benefits statement, and consider your payout options if you have them (e.g. lump sum vs. annuity). Coordinate your pension payout to minimize your tax liability while still meeting your financial needs.

Rearrange Your Retirement Funds

Consider the pros and cons of consolidating accounts and rolling 401(k) funds into an IRA for more investment freedom and easier management. Some retirees find the investment options with employer-provided 401(k)s are cheaper than those bought independently. Make sure you discuss your options with a financial professional and choose the option that maximizes your income and gives you the flexibility you need. As always it is important, of course, to ensure your beneficiary designations are set up to make sure your retirement benefits go exactly where you choose.

Closing Thoughts

Planning a strategic retirement takes forethought, but make sure you don’t short sell yourself on all the perks you may be owed. Make sure you take advantage of all the benefits your employer offers and carefully plan how you will manage your retirement income to minimize tax liabilities. Following these simple steps can help ensure you are financially prepared for retirement.

Attorney Myrna Serrano Setty realizes that estate planning has many moving parts that are impacted by life changes, like retirement.  And that is why she works with a network of trusted advisors in the insurance, tax and financial planning fields. If you haven’t already done so, contact our firm to schedule a Life & Legacy Planning Session. We’ll get you thinking about what you own, what matters most to you and help you make informed and empowered decisions about life and death, for yourself and the people you love.  Call our office today to schedule a Planning Session and mention this article to find out how to get this $500 session at no charge.