RX for Painful IRA Taxes

PRLog (Press Release) - Jul 07, 2009 -
Contact:  Steve Hoover
Company:  Wealth Partners Corp
Phone:  913-685-3207
Fax:  913-685-1670
Email:  steveh@wealthpartnerscorp.com
Website: www.stevehooverTV.com  



Leawood, KS.  In spite of the stock market decline, there are still trillions of dollars in IRAs.  Most IRA owners know these accounts are tax deferred until retirement.  What many IRA owners do not know, however, is that they can alleviate the sting of high taxes for their heirs by “child proofing” the account by naming an IRA Legacy Trust as the beneficiary.

Taxes are painful for everyone, and when it comes to tax laws and IRAs, what you don’t know can definitely hurt you.  IRA tax laws were designed for accumulation of wealth for retirement, not to pass to future generations. An IRA Legacy Trust can be the ‘ounce of prevention’ for out-of-control taxes on an IRA for your beneficiaries.

IRA owners usually name the spouse as beneficiary and children as contingent beneficiaries on the account.  The “contingency” plan works just fine as long as the children “stretch out” the IRA.   This means that they should not cash out the IRA or take more than the required minimum distributions (RMDs) based on their own life expectancies.  

Most people want quick relief from financial needs and wants, so they often “blow” inherited money with little thought for the future.  Ignorance of IRA tax laws is also involved in squandering an inheritance. The anti-dote to children cashing out an IRA is for the IRA owner to have the account specifically drafted as an accumulation-type IRA and to list the IRA Legacy Trust as the beneficiary.  

Setting up this type of IRA means that the Trustee can act as the ‘doctor,’ doling out ‘medicine’ as the children need it.  Reinforcing this, a 2005 IRS ruling allows the Trustee to switch to an accumulation-type IRA if he sees trouble on the horizon for the beneficiaries.

Another benefit of this type of IRA is that creditors and divorcing spouses of your children cannot reach the money since it is held in the Trust.  

This strategy also allows the Trustee to replace IRA funds with life insurance for a surviving spouse, therefore making the proceeds tax-free.  Beware of the misconception that when the IRA owner dies, the spouse inherits it tax-free.  A false diagnosis.  Income taxes will be paid by whoever inherits the IRA – be it the Legacy Trust or the spouse.  If a mistake is made with IRA distributions, up to 40% can be charged in income tax.

Want to reduce the pain of high IRA taxes for your spouse or your heirs?  For those with large IRA balances, it is wise to consider naming an IRA Legacy Trust to protect children not only from others, but from themselves. It would also reduce at least some of the stress for the surviving spouse during a difficult time.

For more information about the IRA Legacy Trust, please contact Steve Hoover at 913-685-3207 or at steveh@wealthpartnerscorp.com.