Look Before You Leave... Your Assets

This week, Gail reminds you that a trust is only as good as the person who writes it. Be careful when drafting your trust!

Dear Ms. Buckner,

Thank you for the advice in your column “Check Your Beneficiaries” and the reminder to review my IRA beneficiaries.

I think my beneficiary IS my "estate," which you say is not a good idea. So here's my question: If my revocable living trust is named as beneficiary, will that cause any problem?

Thank you.


Dear Shannon,

The short answer to your question is that it depends upon how good your lawyer is. If she/he understands the special regulations that pertain to IRAs and has incorporated these into your trust, then there shouldn’t be a problem.

But frankly, why take the chance?

Boston attorney Natalie Choate is nationally recognized as an expert in this arena. She’s literally written the book on how to pass on your retirement benefits and travels the country teaching what she knows to other lawyers, CPAs, and financial planners.

"The main thing," according to Choate, "is whether your IRA can be stretched out so that payments to your beneficiaries could be made over their life expectancies, resulting in a long period of deferral." While your beneficiaries get this option if they are directly named on your IRA, they may or may not be able to take advantage of this if their share of your IRA first passes through your trust. "Your trust must be drafted carefully," says Choate.

For instance, let’s say you want your IRA evenly divided among your two children and your grandchild. In the year after your die, your son is 45, your daughter is 43, and your grandson is 10.

If you named each individual as a one-third beneficiary of your IRA, your IRA would be divided in thirds and each could do what he or she wanted with his/her share of your account: cash it out and pay the taxes due (assuming you’ve got a traditional, tax-deferred IRA) or start taking out just the minimum amount required each year.

The latter is called "stretching" the IRA because the annual withdrawal amount is designed to gradually reduce the IRA until there’s nothing left in it by the time your beneficiary dies. In essence, the inherited amount gets "stretched out" over the life of your beneficiary. Of course, the assets that remain in the account continue to benefit from tax-sheltered compounding.

A 45-year old has (according to the IRS) a life expectancy of 38.8 years. So your son could "stretch" out his one-third of your IRA by just taking the minimum amount required each year for roughly the next 39 years. In the first year, the minimum amount he is required to withdraw is the year-end value of his portion of the IRA divided by his life expectancy for that year (38.8).

Let’s say your IRA was worth $300,000, meaning each beneficiary inherited an account worth $100,000. In Year #1 your 45-year old son would have to withdraw $100,000/38.8 = $2,577.

Your 43-year old daughter has a life expectancy of 40.7. (All life expectancies can be found in IRS "Publication 590" at www.irs.gov.) If she wanted to just withdraw the minimum amount, she would only have to take out $2,457 ($100,000/40.7).

Your 10-year old grandson has a life expectancy of 72.8. So his first year required minimum distribution is $100,000/72.8 = $1,374.

Two things should be obvious: 1) the less you have to withdraw, the less income tax you have to pay and, 2) the longer money is allowed to compound in this tax-sheltered account, the more you’re likely to end up with.

Because you named your son, daughter, and grandson as direct beneficiaries of your IRA, each can independently decide what to do with his/her one-third of your account.

Maybe your son wants to cash out his portion of your IRA in order to buy a vacation home. No problem. His sister and your grandson can still "stretch out" their shares.

This is not necessarily the case when you leave an IRA to your trust. At best, if your trust is drafted properly, your IRA can only be stretched out based over the life expectancy of the oldest beneficiary. In our example, this would be 38.8 years- the life expectancy of your son. As a result, your grandson would lose about 34 years of tax-deferred compounding.

At worst, if your trust does not follow the precise rules for distributing IRA assets, there will be no stretch of the IRA at all and taxes will have to be paid at once.

Among other things, if you want your beneficiaries to get at least some stretch, your trust must be irrevocable either prior to or upon your death. In addition, says Choate, "all of the beneficiaries of your trust must be individuals and it must be clear who is the oldest beneficiary." If there is any ambiguity, the trust will "fail" and your trust beneficiaries will lose the opportunity to stretch out your IRA assets.

On the other hand, if you or your beneficiaries aren’t concerned about being able to stretch out the IRA and if your trust simply calls for the IRA to be paid out to them immediately, in Choate’s words, "Why risk it?"

Since bequeathing IRA or any other retirement assets via a trust can, in her words, "be tricky," unless you have a good reason for doing so, it is easier and safer to simply leave them outright by naming your beneficiaries directly on your account designation form.

Hope this helps!


Hi, Gail —

Many years ago, I was one of several recipients of a deceased relative's bank account which had been set up as a "Payable on Death to ..." The bank simply wrote checks in the proper amounts to the designated recipients, simplifying settlement of the estate. Are there downsides to such an arrangement — and if so, what?

Thanks - Dave

Dave —

A "Payable on Death" or P.O.D. account is a very simple way to designate who gets what when you die. According to Bill Wagner, an editor of National Underwriter’s "Tax Facts," there’s really no downside provided you want your beneficiary to have full use and possession of the money. The asset avoids probate and is quickly and easily transferred to the beneficiary.

Moreover, unlike a joint tenancy acocunt, the individual who receives the asset at your death has no rights to it or control over it while you’re alive. (Even if you’re not worried that your daughter might raid your bank account to pay her mortgage, joint tenancy would be a factor if she were sued.)

The only downside to a P.O.D. account it that it has limited use. Generally this designation is only available on accounts held at financial institutions, such as banks and savings and loans.

Wagner points out that assets such as stocks, bonds, and other securities that are held at a brokerage firm have a similar option called a "Transfer on Death" designation. T.O.D. operates the same way as P.O.D. and avoids probate.

Wagner points out that you could not use either a P.O.D. or T.O.D. designation with a retirement account such as an IRA (sorry about all the initials!). These accounts require you to give the name and Social Security number of your beneficiary.

All the best,


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