IRAs – A Valuable Tool in Estate Planning

Individual Retirement Accounts (“IRAs”) are a very popular investment vehicle for retirement, but IRAs also need to be taken into account when contemplating one’s estate plan.  Although IRAs can be used to provide for one’s intended heirs either directly or through a trust, proper planning is still required to ensure that the beneficiaries truly benefit from the IRA and avoid unnecessary taxes.

An IRA is a personal savings plan that allows an individual to set aside money for retirement and simultaneously create tax savings. The advantage of an IRA is that often an individual can deduct from his/her taxes all or a portion of the contribution made to the IRA and may also be eligible for a tax credit equal to a percentage of the contribution. Further, earnings in a traditional IRA are generally not taxed until the earnings are distributed to the IRA holder. This typically does not start until the IRA holder reaches the age of 70 ½ when distributions of income become mandatory. Earnings in a Roth IRA are not taxed nor does one have to start taking distributions at any age, but contributions to a Roth IRA are not deductible. Any amount remaining in one’s IRA upon his/her death can be paid directly to a beneficiary or beneficiaries.

From an estate planning perspective, the most critical thing to remember with an IRA is to name a beneficiary (or beneficiaries). While a spouse is usually the logical choice for a married beneficiary, each IRA holder should be certain to name contingent beneficiaries as well.  If the named beneficiary predeceases the IRA holder and there is no successor beneficiary, the IRA will pass to the holder’s estate and will be subject to the lengthy probate process.  

If an IRA holder does not need the funds held in the IRA for his/her retirement and instead wants to use them to provide for future beneficiaries, “stretching out” the IRA might be an idea that warrants exploring. To do this, when the IRA holder reaches the age of 70 ½, he/she should withdraw only the minimum required distribution thereby leaving more assets in the IRA.  When the IRA holder dies, the beneficiary can also stretch out the distributions over his/her lifetime and then designate a second-generation beneficiary. If appropriate, it is prudent to name a young beneficiary, because the younger the individual, the smaller each distribution must be, which gives the funds in the IRA additional tax-deferred years to grow. 

In some cases, it may make sense to name a trust as a beneficiary. This is particularly true if the IRA owner has minor children, children with special needs or a child who has poor spending habits. However, the trust must be properly drafted in order to avoid negative tax consequences. If the trust is drafted as a so-called “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched out over the life expectancy of the oldest trust beneficiary. Anyone contemplating leaving his/her IRA to a trust should seek the counsel of an experienced estate planning attorney to ensure that the trust is properly drafted.

Authored by: Ron Fatoullah

Ron Fatoullah- Esq.

For more than 30 years, Ronald Fatoullah & Associates has been providing New Yorkers with legal advice that transcends traditional ways of thinking.

The firm’s attorneys are accomplished in Elder Law, Estate Planning, Medicaid Eligibility & Applications, Special Need Planning, Preparation of Wills & Trusts, Planning for Same Sex Couples, Long Tern Care, Guardianships, Veteran's Planning, Real Estate & Probate.

To help encourage the public to plan ahead, Mr. Fatoullah is a familiar face on the lecture circuit, and lectures frequently on elder law, estate planning and special needs. He is an in-demand consultant to attorneys, accountants, social workers, hospital administrators, financial planners, and to numerous organizations and corporations. He has an eight year inclusion in New York Magazine as "One of the New York Area's Best Lawyers®" in the fields of elder law, trusts and estates, and a five year inclusion in the New York Times Magazine, as a “Superlawyer”, in the fields of elder law and estate planning. Attorney Fatoullah is the co-author of the “CPA’s Guide to Long Term-Care”, published by AICPA, and he has been quoted in the New York Times, Newsday, USA today, The New York Law Journal, The Wall Street Journal, and various additional publications. His column,“The Elder Law Minute™ is published in the Queens Courier Newspaper, and he currently teaches elder law and estate planning courses.

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