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Please consider the following:
- The
primary beneficiary of the IRA would be the surviving spouse.
- The
secondary or first contingent beneficiary could be a trust where
the surviving spouse gets the income and at the death of the
surviving spouse the proceeds go to the children equally.
(A "B" or unified credit or exemption equivalent trust).
So far, this is identical to one of
my standard "old rule" plans where I did not name children or grandchildren
as primary beneficiaries on separate IRAs.
Now, I am suggesting:
- The third beneficiary or second
contingent beneficiary would simply be the children equally
"per stirpes."
- The fourth or third contingent
beneficiary could be a special trust for the grandchildren to
protect against inappropriate spending or investing at a young
age.
Under the cascading scheme, the surviving
spouse could either keep everything or disclaim all or a portion
to a "B" trust. A
"B" or unified credit shelter trust specifies that the income
from the trust will be paid to the surviving spouse and at the
surviving spouse's death, the principal is divided equally among
the children. The
advantage of disclaiming to a B trust is that it keeps the proceeds
of the trust out of the estate of the second spouse when he or
she dies.
Alternately the surviving spouse
could disclaim all or a portion to their children.
The children, if they desired, could keep the inherited
IRA and take minimum required distributions based on their individual
life expectancies. That
means the child would likely have a much lower minimum required
distribution than the surviving spouse.
As a family, you are paying far less in federal income
taxes than if the surviving spouse or the trust was the beneficiary.
We call this series of disclaimer
possibilities "cascading beneficiaries" and we have produced a
"master document," that serves as the beneficiary designation
of the IRA or retirement plan. With our help anyone can make the
plan a reality.
If you are intrigued by the idea
of an extended tax deferral period for the children based on their
long life expectancies, consider the potential for the phenomenal
benefits for the grandchildren. If the second-generation children
were in a suitably strong financial position and they disclaimed
all or a portion of their inherited IRA to their children (the
IRA owner's grandchildren) then the third generation children
could then take MRD over their quite long life expectancy.
This would lead to enormous income tax deferral.
In addition to the tax benefits, it is possible to safeguard
the money for the grandchildren through extensive trust provisions
that will not allow a grandchild to have access to a large amount
of an inherited IRA when they were 18 or 21.
Unlike
conventional trusts, the trust we offer is designed specifically
for IRA or retirement plan assets. The trust pays out the income
(in the form of minimum required distributions) and the trustee
has the right to invade principal (retirement assets still in
the plan) for the beneficiary's health, maintenance and support,
education and post-graduate education (and, if you are a sport,
one summer in Europe). At intervals between the ages of 25 and
35 the beneficiary can request percentages of the principal, still
in the form of the inherited tax-deferred "stretch"
IRA. The beneficiary can then terminate the trust and have direct
access to the retirement assets at any point after attaining age
35. Of course variations of the described trust are easily accomplished,
but this is a good starting point.
Under the old rules you could have
had cascading beneficiaries, but it was not helpful in terms of
slowing down the minimum required distribution of the beneficiary.
The critical date for determining a distribution pattern
for both the IRA owner and under many circumstances the distribution
pattern for his heirs was the IRA owner's required beginning date,
April 1 of the year following the year the IRA owner turned 70
½. For example:
Harold names
Wilma primary beneficiary.
Harold lives past his required beginning date.
Harold dies.
Wilma disclaims to her children and they disclaim to her grandchildren.
Under the old rules, Harold's grandchildren
must take minimum required distributions based on Wilma's life
expectancy. Under
the new rules, the grandchildren could take minimum required distributions
based on their own life expectancy.
Under
the new rules, the critical date for determining the minimum required
distribution pattern is December 31 of year following the year the
IRA owner dies. The
extended time frame allows a family to leave options open for getting
the longest "stretch IRA."
However, if circumstances dictate, it also preserves the
safety net for the natural heir of the IRA owner, i.e., the surviving
spouse. The cascading
beneficiary idea could maximize the value of an IRA or retirement
plan for many IRA owners and their families.
Return
to: The Ideal Solution: "Lange's
Cascading Beneficiaries Plan" with Disclaimer Options
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