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IRA & Retirement Asset Planning Attorney in Encino

The Importance of Planning for IRAs & Other Retirement Assets

Retirement accounts, including Individual Retirement Accounts (IRAs), 401(k)s, profit-sharing plans, 403(b)s and related assets, can make up a substantial portion of an individual’s assets. However, they are often overlooked during the estate planning process.

A properly-drafted estate plan should take these assets into account since, unlike almost all other inherited assets, the beneficiaries will pay income taxes upon receipt of the IRA monies. Retirement planning is a key part of estate planning.

How IRAs Pass to Beneficiaries

An individual named as a beneficiary of an IRA may, generally, withdraw IRA monies over their life expectancy. This allows the beneficiary to delay paying income taxes by paying them over time instead of all at once and continue to invest as much of the account as possible.

While naming individuals as beneficiaries on your IRAs avoids probate and makes accessing the IRA very easy upon your death, if you have a minor beneficiary or an irresponsible beneficiary, this plan could cause significant losses. You may end up in court with the minor beneficiary, and an irresponsible beneficiary may withdraw all of the funds at once, losing a large portion of the account to income taxes.

In order to achieve the same income tax planning as individual beneficiaries while placing restrictions on control and access to the IRA monies, a Designated Beneficiary Trust should be part of the estate plan. This type of trust allows your trustee to withdraw monies from the IRA over the beneficiary’s life expectancy, and transfer control over the IRA at a time that is consistent with your other planning objectives.

No matter your particular goals, our firm can help you determine the right option depending on your wishes.

Contact us today to make an appointment with one of our IRA and retirement account planning attorneys in Encino.

Understanding Designated Beneficiary Trust in California

A Designated Beneficiary Trust (DBT) is a trust established to be the beneficiary of an Individual Retirement Account (IRA) after you have died. This type of trusts prevents your beneficiaries from having immediate access to all the money in the IRA.

If your family trust provides that the inheritance your children will receive will be held in trust until they reach a certain age, you do not want them to have immediate use of your IRA when you die. Making your children the direct beneficiaries of your IRA would give them the right to withdraw the money from the IRA, thereby negating your wishes to having the money held.

To be certain that distributions from IRAs are consistent with the rest of your estate plan, you could create a DBT and make it the beneficiary of your IRA. The DBT would have a trustee, which is someone you would name, usually the same person as the trustee for your children in your family trust. They would provide how distributions are to be made to your children.

For example, the DBT could provide that your children receive only what the trustee thinks they need, and your children will receive what is left in the DBT at ages 30 and 35.

Advantages of a Designated Beneficiary Trust

There are also income tax benefits to establishing a DBT. If you name a trust to be the beneficiary of your IRA, and the trust does not qualify as a DBT, the trust will be treated as having withdrawn all of the money from the IRA. It will need to pay the income tax on the entire IRA at that time.

If, however, you name a DBT as the beneficiary of your IRA, the trust is only required to take withdrawals from the IRA over your child’s life expectancy.

For example, if your child has a 50 year life expectancy and there is $500,000 in the IRA, the trust would only need to withdraw $50,000 in the first year and pay the income tax on that amount. The remaining $450,000 would continue to be invested through the IRA and would be withdrawn in subsequent years, 1/49th in the second year after you die, 1/48th in the third year after you die, and so on.

In addition, the money in the IRA would continue to grow. The income tax savings to your child through the DBT will result in your child ultimately receiving more money from the IRA than if they took the money out of the IRA and paid the income tax when you die.

Let Us Help You With Your Retirement Account Planning

At Tisser Law Group, APC, we take the time to get to know our clients. Our IRA and retirement account planning lawyers in Encino offer sophisticated advice tailored to your unique goals. We can help you establish a Designated Beneficiary Trust and take the proper steps to protect your legacy.

Get in touch with us at (818) 528-5553 to schedule an initial consultation with Tisser Law Group, APC.

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