Ep. 21 - Trusts and Your IRA

Ep. 21 - Trusts and Your IRA - Transcript

Narrator: [: 00:00:00

to the Good Steward Law and Wealth Podcast, where host Ledley Jennings explores law and finance to help listeners become better stewards of their wealth. Each episode covers the latest trends and strategies in estate planning, elder law, investment and wealth management. Tune in for the knowledge and tools for financial success and security.

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Ledly Jennings: to the Good Steward Law and Wealth Podcast, excited to have y'all here today for our second installment where we're going to talk about IRAs and your estate plan. Thanks And today we're going to talk specifically about trust and how they relate to your estate plan and your IRA. Um, trust have to be very carefully drafted in order to get all the benefits that the laws of IRAs are offering.

de your IRA a beneficiary of [: 00:01:00

Um, so last episode, we talked about the secure act and what it did to update, um, the inheritance laws around IRAs. So if you didn't listen to that, go back and listen to it. But generally, we talked about the three types of beneficiaries, the eligible designated beneficiaries, the non eligible designated beneficiaries, and the non designated beneficiaries.

but why we're talking about [: 00:02:00

So. Let's just go off the example here of you were leaving your IRA to your adult child, maybe he's 40, um, and you're leaving your IRA to him, then how do you leave it to him and why do people even want to leave it to a trust? Well, they want to leave it to a trust for, I think of a couple of main reasons IRAs is, If the child is not good with money, they're just not good with managing money.

They don't need to be managing money. Maybe there's a drug or alcohol problem, but the end result is they want someone else to manage the money for their child and their child still get the benefit, but someone's in charge of investing it and making distributions. So that's one reason you would leave it to a trust.

it varies the depth by state [: 00:03:00

So, a lot of people still want to get that same type of creditor protection, um, is why they would leave it to a trust. And so, that's how I think about those two things. Even divorce protection, um, once IRAs have been transferred, if it becomes, you know, part of the marital estate, it's open to divorce. So, I think about mismanagement of money, creditor protection, divorce protection.

Um, and then if we get into spouses, which will be another episode. People want to protect against second marriages or blended families, that type of thing. But for here, let's just say the adult child is just not good with money. Um, and the deceased parents want to leave them the IRA, but they want someone else to manage the money.

they leave it to this adult [: 00:04:00

Um, so it's a strategy of how you take it out over those 10 years. But if it was left to him personally, he gets that 10 year stretch. Now, if it's left to a trust, he may or may not still get that 10 year stretch. It just depends how it's drafted. And that's why people ask, you know, why are your estate plans so expensive when I can go online to LegalZoom and get it done for free?

rectly and it qualifies, you [: 00:05:00

So that's a big difference. Um, they call the trust a see through trust. So it has to meet certain standards to qualify for the 10 year stretch. And to be a see through trust, it means kind of like you can see through the trust and pick out the beneficiaries. And to meet those standards, they listed, uh, four different, uh, standards you have to meet.

One, it has to be valid under state law. Um, so any trust drafted by an attorney should meet this standard. The second, it has to become irrevocable at the grantor's death. So, how this works, practically speaking, is I set up a revocable trust for husband and wife. And this is most common, what everyone has.

Um, the second or the third [: 00:06:00

Um, and so obviously, if you leave everything to your son, You can pick out that human. It says my son. Um, but some most trust that we draft. I leave things to all descendants per Sturpey. So that just means I'm leaving it to my descendants and that can still qualify because we can identify those beneficiaries.

We can look in and say. These are the descendants of the grantors. And even it could qualify if you generally say, I leave this to all my grandchildren. You should be able to pick out grandchildren. So you can leave it to a class of people. You just have to be able to pick out people in that class. They have to be identifiable.

ly go about beneficiaries is [: 00:07:00

Um, it's just a validation document that I tell clients are like the title to the trust. So I don't usually provide the whole trust when, until you have to, to the financial institution and the certificate will suffice. But when the beneficiaries pass away, you have to provide the whole trust. Um, I just say, go ahead and provide the whole trust.

Some experts are kind of debating on whether that's required or not. Some say you can just provide relevant sections of the trust or a certification of explanation of the trust. But I just say, once they're passed away, just go ahead, provide the whole trust to the financial institution, um, just to. Make sure it's done correctly and easily.

ngly to that. And that's why [: 00:08:00

So you need to update your trust if it involves an IRA. Um, now we're going to get on to the second aspect of trust planning when it comes to IRAs is the tax side of things. So generally a trust is taxed at the highest rate. Um, forget the number, but we'll just, I've been ballparking 30%. So we'll just go 30%.

The highest tax rate is what a trust is taxed at. So you don't want to tax things at the trust level unless you have to. So to get in the details of that, there's two different types of trusts that you can draft that do qualify as a see through trust. Um, one is a conduit trust. So what this means is I think of this like a water slide.

jump in the water slide, you [: 00:09:00

They will be taxed at the beneficiaries rate. And that's usually lower, but there's no asset protection because as soon as those benefits are going in the trust, they go out. So they're open to creditors, uh, divorce, the mismanagement of your beneficiary. So there's no need to leave, um, an IRA to a trust if it's drafted as a conduit trust, because it loses all the asset protection anyway.

cretion Of how they make the [: 00:10:00

The bank is the trustee, then the IRA would pay the trust. So it pays the bank. They then have the discretion of whether to distribute to the sign or keep it in the trust. And that's why you name a bank or someone you trust because you trust their discretion. Um, they kind of weigh the options. So they would look at this distribution and they say, well, if I keep it in the trust, I'm going to be taxed at this higher trust rate.

And if I distribute it to the beneficiary will be taxed as his rate. So it's more tax beneficial to distribute it. But then they say, well, if I keep it in the trust, I mean, if I don't keep it in the trust and distribute it to the beneficiary, it's theirs, it's open to their creditors, they can go buy drugs with it, they can do whatever they want to with it.

the beneficiary for the tax [: 00:11:00

I have specific language that I know works that still Gets all the benefit and the asset protection of the trust, but gives the trustee discretion to make distribution. So it's important to make sure your trust is expertly drafted and up to date, even if it was done by the best attorney in the world, but it hasn't been updated since 2019.

You need to update your trust. So to answer most questions that I get, yes, you can leave an IRA to a trust. And in fact, we do it a lot, but it needs to be drafted appropriately in order to get all the tax benefits. And, uh, next episode, we are going to hit on, um, what is the spouse beneficiary of an IRA.

And then I [: 00:12:00

There's no RMD, so they don't have to pull, um, distributions out like they do your regular IRA. So then this whole issue of. Does the trustee have the discretion to do this or this? Or should I do that? It's not really an issue. Because the distributions aren't required. So that's why Roth it just, uh, hitting on the edge there is why it's the best inheritance tool out there.

But this has been the Good Steward Law and Wealth podcast where we consider everything a gift and it's our job to manage what we've been given to the best of our abilities. Thank you for listening.

odStewardFirm. com to book a [: 00:13:00