Protect Your IRA for Future Generations

Chances are, your IRA represents one of your most valuable assets. It is relatively safe from a wide range of threats while you are alive. However, this changes when you pass your IRA on to heirs. While your spouse will continue to enjoy certain protections, IRAs passed on to children and future generations become vulnerable to creditors, lawsuits, divorce, predators, and even your heirs’ poor decisions.

So, how can you ensure that your IRA assets are protected for the benefit of future generations after you pass away? A popular and highly effective approach is to place the IRA into a revocable living trust. Let’s look at a few examples of how this planning strategy works.

Understanding Your IRA Options

If your IRA is left directly to your children outside of a trust, they can liquidate it immediately and spend the money however they choose. Your son might opt for a shiny new Ferrari and your daughter could purchase a luxury beach condo in the Dominican Republic. (Hopefully your children wouldn’t do this, but you never know.) Not only has a portion of the IRA been squandered, but the ability to stretch the required minimum distributions over the beneficiary’s lifetime has been lost. 

What does that mean? Taxes will be due on the IRA funds cashed out. How will the taxes be paid? Well, your son could sell the Ferrari, although your daughter’s condo may not be worth much since people visiting the Dominican Republic these days seem to die under mysterious circumstances.

If your IRA is placed in a revocable living trust, and you have chosen a qualified trustee, IRA assets can be protected against the poor decisions of heirs and unnecessarily high taxes on large withdrawals.

Benefits of a Revocable Living Trust 

Or consider this scenario: If you name a minor grandchild as the direct beneficiary of your IRA, a guardianship will need to be established to manage the IRA until he or she reaches the age of 18. Then, when the grandchild reaches 18, he or she can cash out the IRA. As we have seen, placing your IRA in a revocable living trust can put restrictions on how assets are spent, how much a beneficiary can withdraw at one time, and minimize taxation. In addition, the protected assets have the potential to create an ongoing legacy for your family, because IRA assets not used during a beneficiary’s lifetime can continue in trust for the benefit of future generations.

If you are in a second marriage, this strategy is particularly attractive. In a typical second marriage situation, you’ll want to leave your spouse the annual IRA income, but after his or her death you may well want to make sure that the IRA goes only to your children, not the children from the spouse’s first marriage. Placing your IRA in a revocable living trust can help you accomplish this.

Or what about a situation in which you dislike or do not trust your son or daughter in law? If you leave your IRA outright to your child, his or her spouse may be able to talk them into liquidating it. However, if you put your IRA into a revocable living trust, your child won’t be able to liquidate the IRA—and suffer the potentially painful financial consequences.

Finally, even though IRAs are protected from the claims of creditors in most states, when the IRA account owner dies and the assets go to an individual beneficiary, the IRA typically loses its protected status. By putting these assets into a revocable living trust, they will continue to be protected. The result? The IRA assets can remain intact for the benefit of the beneficiary in the event a lawsuit is filed against the beneficiary, or a married beneficiary later divorces, or a single beneficiary gets married and then divorces.

To determine whether you and your family would benefit from using a revocable living trust to protect your IRA’s assets, contact us for a personal meeting.

Helping to Solve All Your Estate Planning Needs

The estate planning lawyer at The Law Offices of Clifford M. Cohen can help you with all issues regarding future planning. Clifford M. Cohen has more than 35 years of experience and dedicates his practice to guiding individuals in the Maryland and D.C. area. Contact us today at 202-895-2799 for a free case evaluation.