If you are married with children and you have a significant portion of your net worth in your traditional IRA, you generally have the options regarding how to set up your beneficiaries:
1- You can name your spouse as your primary beneficiaries and your children and your contingent beneficiaries. This is common. This is the best scenario for allowing your spouse to defer income tax, but you have zero guarantee that your children will wind up with any of it because since your spouse can treat the IRA as her own, she can designate anyone she wants, including a future spouse as the beneficiary.
2- You can name a combo see-through/QTIP/conduit trust as the beneficiary. This concept sounds great initially – you leave your IRA to a trust; your spouse can use the trust assets for her needs; when your spouse dies, trust assets must revert back to your children or heirs. The two problems with this are (1) your surviving spouse will have to take RMDs faster than she would if she could treat the IRA as her own; and (2) your spouse’s RMDs will deplete virtually all of the trust assets if your spouse lives to or beyond life expectancy, leaving nothing for your children or heirs.
3 – Name your spouse as a partial primary beneficiary AND name your children as partial primary beneficiaries. This can work well because it provides a chunk for your spouse from which RMDs will be small under the Uniform Life Table, and it provides an immediate benefit for your children when you pass away.
So, there you have it. My suggestion is that if you know anyone who is married and has most of their money or most of their net worth tied up in their traditional IRA (as so many people do) forward this video to them (after you like it and subscribe) so that they can make informed and important decisions regarding how to leave their IRA when they pass away.
0:00 Married Traditional IRA Owners
0:50 Typical Will and Living Trust Planning
3:11 Bob has a $2 million Traditional IRA
3:42 3 Options of Married IRA Owners
4:37 Name Spouse as 100% Primary Beneficiary
7:49 Name a Combo See-Through/QTIP/Conduit Trust as Beneficiary
8:45 A See-Through Trust
9:24 A QTIP Trust
10:01 A Conduit Trust
10:59 Hazards of Naming a Trust as Beneficiary of IRA
12:21 Name Spouse and Children as Primary Beneficiaries
13:49 Summary of the Three Options
This post is for informational purposes only and does not provide legal advice. Please do not act or refrain from acting based on anything you read on this site. Using this site or communicating with Rabalais Estate Planning, LLC, through this site does not form an attorney/client relationship….(read more)
LEARN MORE ABOUT: IRA Accounts
CONVERTING IRA TO GOLD: Gold IRA Account
CONVERTING IRA TO SILVER: Silver IRA Account
REVEALED: Best Gold Backed IRA
Does this apply to my 401k?
Would you still use a combo see-through/QTIP/conduit trust in the case of a Roth IRA instead of a traditional IRA?
thank you. your talks are so informative and really help with understanding estate planning. Wish we could clone you. i worked for a very brief moment with an attorney but it just didn’t click for me so i never followed through. i would have your clone set my estate plan up in a heartbeat if you were in our state. thanks for sharing your knowledge to help us learn and have hopes of getting this task done. I will be checking out the web site you mention on the self serve estate planning.
Hi Paul. Love your videos. Extremely informing. What do I di if I bought a house from the diseased oerson but the beneficiary air don't recognise it?
Is a video about an unmarried IRA account holder in the works? The Secure Act really messed up the previous path for those people. You do not get the benefit the spousal meld process, the most powerful remaining piece. For me it was a combo of a trust that gets a ten year rule and a direct to non-spousal eligible (within 10 years of age) beneficiary to get a modified stretch. As noted in your talk, the non-spousal eligible does not get the superior RMD schedule. Another problem is the beneficiary of that person is a successor beneficiary (regardless of spousal status) for 10 year plan.
The direct beneficiaries’ purpose is to mitigate the 10 years RMD impact on the trust beneficiary. The purpose of the combo of the other beneficiaries to kick the can down the road for their half of the trad IRA. If the elder direct beneficiaries can live long enough, the trust can get through its 10 years of RMDs. Also, retired direct beneficiaries, retired and parents of the trust beneficiary, run their smaller and slower distributions through lower tax rates than the non-retired trust beneficiary has for the same distribution amount. Then they can gift the higher, net of tax, distributions to the trust beneficiary or put in a taxable account that gets a stepped basis once they die.
The asset protection of the traditional IRA within the trust is a positive feature of an irrevocable trust that can be a conduit or accumulation trust. For traditional IRA, keeping the non distributed IRA funds inside the irrevocable trust plus spendthrift provisions protects the IRA. It would be great if the trust could transfer the distribution tax impacts to the beneficiary without having the funds leave the trust. Unfortunately, it does not work that way. Roth IRAs can stay in the trust since they don’t have taxable distributions. That happy fact drives the ongoing process of Roth conversions to lower the amount in the traditional IRA that must go through the above process.
Single people also have families that deserve the results of the single person’s hard work more than the Government. They have to be more ingenious about .it. It takes a team effort to maximize the next benefit to the next generation.
Thank you for this!!
Great job.
Very helpful. I appreciate how well you breakdown and explain complex topics in such an understandable manner.
I am glad I listened- I have done #3! That makes me feel good!
Also, this video's quality is top notch; your speaking pace was perfect; details in example given were short, clean, not redundant. Love love your written info in the description box (this took time to do; so thank-you). You are a super-pro now in this arena.
thanks for your time Mr. Rabalais; such great public service; I wish you good health; so more videos can come out. I have been binge watching your videos (some…twice); now i am at the point of hearing your voice in my head (in a nice way though). I wish I live in Louisana so I can have you set up my trust etc…
Consider making a video about RMDs required each year with 10 year payout when passing after the RBD on IRAs that was just issued by IRS.
Paul, great job of explaining a complex topic in clear and understandable language! Thank you!
Good information. Thank you.
Fabulous
You are fabukous
Very informative. Thank you.