Financial Advice for Retirement, Social Security, IRAs and Estate Planning

How to Protect Your Most Valuable Asset

Published on: Jan 01 2000
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Would you spend a minute or less deciding the fate of your most valuable asset? Do you want a mutual fund or other financial institution to make the decision?

Most people actually spend less than a minute designating the beneficiaries for their IRAs or other qualified retirement plans. And they give little or no thought to how required minimum distributions after age 70½ are to be calculated. Yet IRAs and pension plans often are among their most valuable assets.

I’ve told you about the ways to make an IRA last for many years with a minimum tax cost. You do this by selecting a younger beneficiary, calculating required distributions the right way for your circumstances, and advising heirs on how to handle the IRA once it is inherited. For details, see the June and October 1999 issues and my Retirement Tax Guide.

Even after working through the options and making the right decisions, you’re still not done. Chances are your plan won’t work if you stick with the standard IRA forms provided by most financial institutions. Most IRA forms aren’t designed to be part of sophisticated plans and don’t have provisions for all your legal options.

What problems can these forms cause? Consider these examples of strategies that aren’t available under many standard forms:

  • A trust can be an IRA beneficiary, resulting in estate tax savings and ensuring the money eventually goes to your children, instead of to the children from another marriage of your spouse.
  • The IRS recently ruled that multiple beneficiaries of an inherited IRA can split it into separate IRAs for each beneficiary. That allows each beneficiary to establish his or her own distribution schedule. Otherwise, the oldest beneficiary’s age determines the distribution schedule.
  • You can choose how required minimum distributions will be calculated. The difference often is thousands of dollars annually and years of added tax deferral.
  • At a number of financial institutions, the tax deferral benefits of an IRA can be retained only if the IRA remains in the decedent’s name. But that prevents the beneficiaries from moving the IRA to another institution, since the decedent cannot sign the forms to open a new IRA.
  • You name each of your children as equal beneficiaries of your IRA. But one of the children dies before you. Does his share go to your other children, or to the deceased’s children? Standard IRA forms often make the decision for you.

To get the full benefit of the tax law, you have to design a custom IRA form or make amendments to your financial institution’s standard form. (Remember that nothing in your will or a trust means anything to the financial institution holding the IRA or to the IRS. Only the IRA form counts.)

The best way to design a custom IRA form is to work with a lawyer or accountant who is experienced in this area. Most estate planning specialists incorporate IRA planning as part of their work. They can help you design the right plan for you and also produce documents that will make your intentions clear and serve as effective amendments to the standard IRA form. It’s well worth the expense if you have a large IRA.

You might need to switch IRA sponsors to get the results you want. Vanguard, for example, says its standard form has all the needed options, so it doesn’t accept amendments. Others have different policies about the amount of customization they will accept. You might want to talk with an IRA specialist at the institution who is likely to be well-versed in all your options and what the firm will accept.

Once the document is drafted and the sponsor indicates it will accept the changes to the standard form, take one more step. Send two copies to the financial institution with a request that one copy be stamped with “received” and the date, then returned to you. That gives your estate protection if the sponsor loses the form.

This takes more than the minute or so most people spend completing their IRA forms. But remember that after estate and income taxes heirs often get only about 40% of many IRAs. This is a way you can beat that average.

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