Retirement Planning is a critical area that you should be making a part of your future estate plan. The reason it is so critical lies in the fact that the assets within your retirement portfolio probably constitute a large percentage of your wealth. Transferring this type of wealth to your future heirs in the correct way is not simply a matter of placing beneficiary designations on your IRA, 401(k), etc.
To understand why, you must first understand some very basic information when it comes to distributions from an IRA upon the death of the Retirement Plan owner. Upon death, the beneficiary can normally receive distribution in three (3) ways: in a lump sum, over a five (5) year period, or according to the life expectancy method. When taking distributions according to any method, there will be a taxable event. The taxable event will depend upon the method chosen by the beneficiary. Accordingly, if the beneficiary takes an immediate lump sum, there will be a great taxable event that occurs immediately....this is obviously the worst case scenario because it simply wastes wealth. The lifetime expectancy method is the best method because it only requires the least amount of distribution from the IRA and thus allows the IRA to do what it does the best; provide for tax free growth of as much money for as long as possible over the life of the beneficiary.
The problem is not in the method but making sure that your beneficiaries choose the right method. In most cases, they are going to take the lump sum, regardless of the tax consequences, because it provides them with immediate gratification. They generally don't care about the hard work and sacrifices you made to grow that money and would rather see the government collect the hefty tax bill by taking the immediate lump sum. In addition, when they take that lump sum, the beneficiaries are making that money available to their creditors and predators. Perhaps they are in financial trouble, perhaps they are getting sues, perhaps they have huge medical bills that remain unpaid, perhaps they are in the middle of getting a divorce, perhaps they have no control on their spending....the list goes on and on and on that put your beneficiaries at risk for allowing your beneficiaries to receive that lump sum upfront.
The correct way to plan with this type of wealth is by naming a Retirement Trust as the beneficiary of your IRA, 401(k), Roth etc. By naming the Retirement Trust as the beneficiary, you can actually force the beneficiary to take a "stretch out" of the IRA distributions over their lifetime. By using the trust to force this "stretch out", you are creating enormous wealth for your beneficiaries. In addition, they are protected from these creditors and predators that I previously mentioned.
In addition, the Retirement Trust can be used to create enormous flexibility for your Retirement Plan. For example, we can create a planning strategy that forces your IRA to convert to a Roth upon your death. In addition, we can keep life insurance in a separate trust that is used to pay for the taxes of the Conversion. The Retirement Trust is then named as the beneficiary of the Roth to create a "Super" Stretch Out of the IRA. This especially builds enormous wealth for younger beneficiaries who are named on Retirement Plans.
If you are interested in seeing more of the nuts and bolts numbers associated with this type of planning, please see the Example of Joe Smith under the Retirement Planning headline. There, you can what happens when your IRA is forced to "stretch out" over the lifetime of your beneficiaries.
