A personal finance blog dedicated discussing such topics as budgeting, asset allocation, 401K, IRA, cash flow, insurance, financial planning, portfolio management, and other areas in personal finance.


Tuesday, March 01, 2005

Trusts & IRAs - Part 2

Again, another EXCITING title!

When thinking about trusts, it is important to remember that they are not for everyone. As Ed Slott says, "Their main purpose is post-death control." And, even if you set up a trust, it must be set up properly in order to insure that your beneficiaries can stretch their IRAs.

In his book, Ed Slott lists five reasons why a person might want to set up a trust:

1. Your IRA beneficiary is a minor child
2. Your IRA beneficiary is disabled or incompetent
3. Your IRA beneficiary will need help managing the stretch IRA
4. You want to make sure your estate taxes are paid
5. Second marriages

It is very important to know that if you want your beneficiaries to be able to stretch your IRA, the trust must be set up properly. Therefore, it is important that the trust qualifies as a "look-through" trust, allowing the individual beneficiaries to qualify as designated beneficiaries for IRA distribution purposes. What is a look-through trust? For IRA purposes, a look-through trust meets the following criteria:

1. The trust must be a valid trust under state law
2. The trust must be irrevocable at death
3. The beneficiaries of the trust must be identifiable
4. The required trust documentation has been provided to the plan administrator no later than Ocotber 31 of the year after the IRA owner's death.

In a future post, I'll explain the different types of trusts for IRA purposes. Meanwhile, I suggest you read Ed Slott's Parlay Your IRA Into a Family Fortune.

And now for the lovely DISCLAIMER Be sure and consult your CPA or Tax Attorney BEFORE you set up a trust. I am not a tax attorney.