A Consumer’s Guide To The Retirement Asset Protection...

A Consumer’s Guide To The Retirement Asset Protection Trust

Willow Grove, Pennsylvania

www.JawAtLaw.com

(215) 706-0200

1 DISCLAIMER: This brochure and informational guide is intended for educational purposes only and is not legal, tax or financial advice. Always consult a qualified attorney and appropriate professional(s) to provide advice for your individual needs and circumstances.

A Guide to the

Retirement Asset Protection Trust

The Law Offices of Jeremy A. Wechsler, Your Estate Planning and Asset Protection Law Firm, is pleased to offer the Retirement Asset Protection Trust to our clients.

The Retirement Asset Protection Trust is for your qualified retirement funds, including your Traditional IRA’s and Roth IRA’s. This is a unique and specialized trust designed to strategically transfer, grow and protect wealth for your heirs.

Retirement Asset Protection Trusts are not for everyone. This guide can help you decide if it is right for you and your family.

But the bottom line is this: You’ve worked hard to save for your retirement, and chances are, you’ve accumulated significant funds in your IRA(s) that you want to pass on properly to your loved ones. If so, this trust may be for you.

Retirement Asset Protection Trust Guide: Table of Contents

Page 3: Understanding IRA’s Page 4: Quick Guide Page 5: “The Three” – Three Significant Features Page 6: Trust in Detail Page 8: Common Questions


Understanding IRA’s:

IRA’s, formally known as Individual Retirement Arrangements, were created in 1974 by Congress to provide a new way for individuals to save for retirement.

An IRA is a tax-deferred (Traditional IRA) or tax-free account (Roth IRA). Because of the tax-deferred or tax-free account, return on investment in IRA’s exceeds non-qualified (Non-IRA) accounts.

How RMDs are Calculated:

The RMD is calculated based on your life expectancy. At age 70 ½, you must withdraw approximately 3.65% of your IRA funds. The RMD grows as you age. At age 115, you must withdraw the entire IRA.

Upon Your Death:

When you pass on, your inherited IRA funds are distributed to your heirs in one of two ways:

1. Lump Sum Distribution 2. Beneficiary IRA (“Stretch IRA”)

Many heirs opt to take a lump sum distribution. The IRS is pleased with this, because that means that all of the tax-deferred money just became taxable, and the tax bill is due…NOW!

A Stretch IRA continues the tax-deferred treatment of the IRA for the beneficiary (your spouse, children, grandchildren), allowing for compounding growth opportunities. A Stretch IRA is the gift that keeps on giving. A beneficiary must take RMDs the year after your death, and every year thereafter. But younger beneficiaries have smaller RMDs, which allows the account to continue to grow.

An Example: Mom, 65, has a total of $250,000 in her IRA. Assuming 8% annual growth of the account. At age 70 ½, the account will be worth about $390,000. Mom takes her RMDs, which average about 4%. When she passes away at age 80, the IRA is worth $541,000. Her 45 year old child takes his RMDs and by the time he is 80, he will have taken RMDs totaling about $2.9 million, with over $700,000 remaining in the IRA to potentially pass down to the next generation. Mom’s original $250,000—with proper RMD and investment planning— may be worth over $3.5 million to her family over time.

A Beneficiary IRA is potentially a great gift for your heirs. But there are dangers lurking. Read on for more information.


Quick Guide to the Retirement Asset Protection Trust:

The Retirement Asset Protection Trust is designed to ensure that your IRA is passed onto your heirs as a Beneficiary IRA, such that you essentially create a “pension for life” for potentially multiple generations of beneficiaries. What a great gift to give your children or grandchildren! Not only is the IRA protected, but you can ensure that the potential for growth of the IRA is not squandered. Even if your heirs have good intentions, they may receive bad advice. Once an heir decides to take a lump sum distribution, there is no putting the toothpaste back in the tube.

Without this trust, there is no guarantee that your heirs will make the right decision. If they decide to take the IRA as a lump sum distribution upon your death, they lose significant benefits: tax-deferred or tax-free growth of the account over many years, and asset protection. Also, you have no control what happens to the funds upon your beneficiary passing (would you like the remainder to go to your son-in-law or daughter-in-law, or directly to your grandchildren?).

A Retirement Asset Protection Trust is a specialized trust designed to protect IRA’s. Many estate planning attorneys do not understand IRA’s nor trusts for IRA’s. It’s best to work with a professional who is an expert in advanced estate planning.

The IRS has made trust planning with IRA’s challenging, but not impossible. Trusts for IRA’s are very different than a Revocable Living Trust, because the IRS rules for preserving the “stretch out” are complex. You would never want to put an IRA into a Revocable Living Trust. IRA’s require special treatment when they’re in a trust to ensure that they remain Beneficiary IRA’s, and that all of the beneficiaries maximize their distributions.


The Trio: Three Benefits of the Retirement Asset

Protection Trust

Stretch-Out: By ensuring the IRA becomes a Stretch IRA, you guarantee that

your heirs will maximize the benefits from a tax-deferred account. Because the IRA is tax-deferred while it’s held in that account, and younger beneficiaries are required to withdraw less money, your heirs will see significant growth of the account over many years. If they opted to take the IRA as a lump sum, they would have to pay all of the taxes up front! Beneficiaries may be uninformed, misinformed or careless if they have the choice of taking the IRA as a lump sum or keeping it as a Stretch IRA. Why take that risk?

Asset Protection: Without the shield of

a well-designed trust, anything passed on outright to your beneficiaries is subject to divorce proceedings, creditor claims, lawsuits, bankruptcy, etc. A trust can provide protection against all of the above. Additionally, if you have spendthrift heirs or special needs heirs, a trust can protect your heirs from themselves. Unless an asset is in a trust, your heirs have no protection against all of the above.

Keep The IRA In The Bloodlines: You can set conditions on

when your heirs can withdraw funds, and you can also dictate what happens upon the passing of your heirs. You can ensure that the remainder of the trust goes to whom you want it to go to. For instance, directly to your grandkids instead of your son-in-law. You cannot achieve any control of where the money goes unless you use a trust.

Asset Protection

Keep In Bloodlines

Stretch-Out


The Retirement Asset Protection Trust In Detail:

Trust Basics

A Retirement Asset Protection Trust is a specialized trust that you have full control over during your lifetime. The trust will be the beneficiary of one or more of your qualified retirement accounts. During your lifetime, you will serve as Trustee. After you become incapacitated or die, you will have appointed successor Trustees.

Upon your death (and your spouse’s death if applicable), the trust will be divided into sub-trusts for each beneficiary. Each beneficiary will have a sub-trust so that his or her individual life expectancy is used for the calculation of the RMD.

The key to success with a Retirement Asset Protection Trust is ensuring that the sub-trusts are created properly, and that the beneficiary designation form for each IRA is completed properly to ensure the sub-trust is funded. This is called getting “look-through” treatment by the IRS, which means that even though the IRA is now in a trust, the IRS will still use each individual’s life expectancy to calculate the RMD and not force a lump sum distribution.

A Retirement Asset Protection Trust must be carefully designed and crafted to maximize the benefits, and also to ensure that it does not fail as laws change in the future.

When To Use a Retirement Asset Protection Trust

In general, our firm recommends using a Retirement Asset Protection Trust if your heirs will each inherit $100,000 or more in qualified assets. For example, if you have three children, we would recommend using this trust if we estimated that at your death, your IRA would be valued at approximately $300,000.

Advantages of the Retirement Asset Protection Trust

The advantages of using the Retirement Asset Protection Trust are the following:

Stretch-Out: The term ‘stretch IRA’ is used because of the combination of smaller withdrawals and tax-deferred status. By having both of these elements, the holder of a “Stretch IRA” can watch the IRA potentially explode in growth, while still pulling out the yearly distribution. A 20-year old receiving a $100,000 IRA at 7% annual growth may be able to net over $1 million in distributions over his or her lifetime.


Asset Protection: Without the shield of a well-designed trust, anything passed on outright to your beneficiaries is subject to divorce proceedings, creditor claims, lawsuits, bankruptcy, etc. A trust can provide protection against all of the above. Additionally, if you have spendthrift heirs or special needs heirs, a trust can protect your heirs from themselves. Unless an asset is in a trust, your heirs have no protection against all of the above.

Control From Your Grave: You can set conditions on when your heirs can withdraw funds, and you can also dictate what happens upon the passing of your heirs. You can ensure that the remainder of the trust goes to whom you want it to go to. For instance, directly to your grandkids instead of your son-in-law. You cannot achieve any control of where the money goes unless you use a trust.


Common Questions:

1. Q: Why can’t I leave the IRA directly to my heirs? It seems more logical and simple. A: There’s no doubt that from your standpoint as a grantor, it is easier to avoid using trusts in general. Simply writing a name on a beneficiary form is pretty easy. But if you have a significant IRA that you think you will end up passing onto your heirs, you have the unique ability to protect your heirs from themselves and others. If you leave the IRA to them outright, they cannot later decide to put it in trust to protect themselves from creditors, spouses, etc. This is a gift that you can provide to your heirs that they cannot provide to themselves. In addition, you ensure that the IRA achieves the “stretch-out” and growth, providing possibly a pension for life to your children and/or grandchildren.

2. Q: Is it more appropriate to name children or grandchildren as beneficiaries of the trust? A: Either is appropriate, and it’s a matter of considering your goals and the needs of your heirs. Grandchildren are great candidates for beneficiaries of this trust, because younger beneficiaries withdraw smaller RMD’s than older beneficiaries. This allows the funds to sit in a tax-deferred or tax-free account and grow significantly over the course of the life of the beneficiary.

3. Q: Why can’t I leave the IRA in my Revocable Living Trust? A: There are many problems with doing this, but the easiest explanation is that mixing qualified and non-qualified funds (i.e., assets that are taxed differently) can cause major problems, and essentially can force the IRA to be taken as a lump sum. Therefore, it is highly recommended that you avoid naming your Living Trust as beneficiary of your IRA.

4. Q: What will this cost while I’m alive? A: There is little to no administration needed of this trust while you’re alive. You have complete control of the IRA, and you are the beneficiary of the IRA during your lifetime. The only cost is essentially to design and execute the trust, and update it over time as needed (due to changes in your family, circumstances, etc.)

5. Q: What will this cost for my heirs? When your heirs inherit the IRA, there will be annual trust administration fees. Trust administration costs vary, and depends on the complexity of the matter. Trust administration fees include accounting, filing annual tax returns, legal interpretations of the trust, etc. Typically, most of the administration fees will be for accounting and taxes.


6. Q: How can you ensure that this trust will provide my heirs asset protection? Asset Protection can be viewed on a scale of 0 to 10, 0 being no protection to 10 being absolute protection. When designing a trust, we will work with you to determine how much protection is needed, and balance that against how much control you’d like your beneficiaries to have. The key principal for asset protection is the more control the beneficiary has of the asset, so does the creditor, divorcing spouse, etc. However, beneficiaries who are in control but handle the trust responsibly can potentially achieve asset protection against spouses and claims.

7. Q: I am not really worried about my children or grandchildren facing any problems. They’re responsible, live normal lives and I just don’t see a need for asset protection. Why would you still recommend it? A: Many beneficiaries have good intentions, but receive bad advice or make rash decisions during a difficult period of time (after a loved one’s death). Using the trust, you will ensure your beneficiaries receive asset protection on these assets, and ensure they will have the opportunity to maximize or stretch out the IRA. Although you may not see a current need for a trust, we do not know what the circumstances will be in the future, so it’s best to protect the assets now while you have an opportunity to do so.

8. Q: Are Pennsylvania Inheritance Taxes or Federal Estate Taxes due on these accounts, particularly if they’re in trust? A: Yes, an IRA, whether in a trust or outright, is not exempt from Inheritance or Estate Taxes.

9. Q: If I name more than one beneficiary, who’s life expectancy is used to calculate the RMD? A: By establishing this trust properly, each beneficiary’s RMD will be calculated based on his or her individual life expectancy.

10. Q: Is there a certain amount in the IRA where it makes sense to use this trust? A: The rule of thumb is if a beneficiary will inherit $100,000 or more, then a trust could make sense.

You’ve worked hard to save for your retirement, and chances are, you’ve accumulated significant funds in your IRA(s) that you want to pass on properly to

your loved ones. The Retirement Asset Protection Trust is an amazing tool to provide strategic wealth transfer and asset protection. For more information,

contact us today at (215) 706-0200 for your complimentary consultation.

A Consumer’s Guide To The Retirement Asset Protection...

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