Retirement accounts, including Individual Retirement Accounts (IRAs), 401(k)s, profit-sharing plans, 403(b)s and related assets (collectively referred to as an IRA), 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.

An individual named as a beneficiary of an IRA may, generally, withdraw IRA monies over a 10 year period after the death of the person whom he or she receives the IRA. 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. If the beneficiary would like to, he or she does not have to withdraw any of the IRA monies until the end of the 10 year period.

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, and thereby have access to large amount of monies you would not want him or her to have access to.

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 10 year period after your death, and transfer control of the IRA and its monies to the beneficiary at a time that is consistent with your other planning objectives. For example, if your son does not receive his monies from your trust until ages 30, 35 and 40, you can structure the same ages for when he will receive the IRA monies.

Contact us today to make an appointment with one of our IRA and retirement account planning attorney 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 to prevent 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 for them until they reach a certain age, then 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 until they reach specified ages.

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, and 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, 35 and 40.

If you wish to establish a DBT for your IRA, know that you can count on our Encino trusts attorney to help you. Call Tisser Law Group, APC today for a consultation.

Advantages of a Designated Beneficiary Trust

There are also income tax benefits to establishing a DBT. If you name a trust, such as a family 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 and 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 a 10 year period after you pass away. The monies can be withdrawn at any time during the 10 year period, or they can be entirely withdrawn at the end of the 10 year period.

In addition, the money in the IRA would continue to grow during the 10 year period so that the income tax savings to your child through the DBT will result in your child ultimately receiving more money from the IRA than if he or she took the money out of the IRA and paid the income tax when you die.

To learn more or to begin establishing a DBT for your IRA, talk to any of our knowledgeable Encino trusts lawyers from Tisser Law Group, APC when you call (818) 226-9125.

Contact an Experienced Encino IRA Planning Attorney Today

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) 226-9125 to schedule an initial consultation with our trusts lawyers in Encino.