SPONSORED CONTENT By William H. Kain, Kain & Burke, PC, Attorneys at Law

Estate planning with IRAs and other retirement funds has become largely important for attorneys and their clients. The average IRA account balance for people age 65 to 69 is approximately $212,000, though we often see clients with substantially more in their IRAs and other retirement accounts. But even small accounts require careful planning for one’s heirs.

You can contribute $5,500 to IRAs in 2016, or $6,500 if you are age 50 or older. Generally you will receive a tax deduction for your contribution and the balance in your IRA will grow tax deferred. Withdrawals before age 59 1/2 cause a 10 percent penalty, plus income tax is imposed on the money withdrawn. After that age, you can withdraw as much as you want, but you will pay taxes on what you withdraw.

The idea of Congress is to encourage Americans to save for retirement. The deduction for annual contributions and the ability of the savings to grow tax-free are great incentives. But you aren’t allowed to leave the money in forever, which is why you must start taking minimum mandatory distributions at 70 1/2, which are calculated based upon a life expectancy table published by the IRS. You must pay taxes on what you’re required to withdraw, plus on any additional amounts you choose to take out of your IRA. The life expectancy changes annually.

Theoretically, one could save every year until that age and then start taking distributions and run out of money on the day you die. However, in the real world, most people still have money in their retirement accounts at death, and sometimes the amount is quite substantial.

What happens to that money when you die?

John and Mary have three children: Abraham, Isaac and Jacob. Abraham is responsible, Isaac has creditor problems and may be on the verge of a divorce, and Jacob is on SSI and Medicaid because of a disability. Careful planning would seem particularly important for this family.

John will most likely name Mary as his primary beneficiary, and Mary will name John. They plan for the surviving spouse to continue to defer taxes, taking only what is required as a minimum mandatory distribution each year, with the ability to take more only if needed.

When both John and Mary die, they would like whatever is left in their retirement funds to go to their children. If they name their children to each receive one-third of their retirement accounts, the children will be able to stretch out withdrawals for maximum deferred tax benefit. But John and Mary are reluctant to place their retirement funds at the disposal of their sons. Receiving money outright would disqualify Jacob from receiving government benefits. Isaac’s creditors and possible divorce also worry them. They could leave one-third outright to Abraham, but even for him a trust would give him substantial protection and would preserve a fund for his children if he were to die prematurely.

After much thought, John and Mary would like to create a separate trust for each of their sons, and have a responsible trustee handle the IRAs and other retirement accounts.

There is concern that without a life expectancy of the trust (which is the IRA beneficiary), the stretch out might be lost and the full amount in the IRA could be taxable in the year of death. Under these circumstances, we often recommend an IRA trust, or a see-through trust. We would probably recommend a separate trust for each of the sons, possibly with grandchildren as contingent beneficiaries. There are a number of technical requirements for drafting such a trust, and only an attorney who specializes in this field is qualified to draft one.

When properly drafted, the trustee would determine what amounts should be withdrawn from the IRA each year, and how it should be spent. Each son would be protected from improvidently spending all of his inheritance. Trusts have creditor protection provisions and are helpful in the event of divorce. Minor grandchildren can be taken care of in the event that one of the sons was to die prematurely. All in all, an IRA trust will be beneficial to John and Mary, their sons and grandchildren.

An attorney who specializes in estate planning would be able to set up an IRA trust for each son so that the money can continue to grow tax deferred for years to come, thus saving substantial amounts of taxes while protecting the corpus from creditors, from the divorce court and from a son who might otherwise squander the money.

For more information and for help with your estate planning needs, contact the attorneys at Kain & Burke, PC, at 241-2969.