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Business Owners Can Leave a Lasting Legacy with an Inherited IRA

Small Business Financial Article
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Business Owners Can Leave a Lasting Legacy with an Inherited IRA

Business Owners Can Leave a Lasting Legacy with an Inherited IRA

For business owners, investing in an Individual Retirement Account (IRA) is a favorable way to accumulate retirement assets. IRAs are particularly favored because of the ease of designating beneficiaries to pass them on after death. However, once it’s passed on to the beneficiary – typically the spouse – and beyond to the children, a lot can go wrong that can turn a legacy into a nightmare. If your goal is to create a lasting legacy with your IRA, you need to give more consideration to your beneficiary designations.

What Can Go Wrong?

Under a simple beneficiary transfer, many of the properties of an IRA change in a way that can harm the beneficiaries financially. For example, an IRA is a protected asset, free from the claims of creditors, lawsuits, bankruptcy and divorce. However, in most states, it loses its protected status once it passes to a beneficiary, which can threaten the legacy.

Studies show that excessive spending and bad decisions by beneficiaries wipe out most inheritances are wasted within 17 months. Once beneficiaries reach the age of 18, there is nothing to prevent them from spending the money as they choose.

Younger beneficiaries, who want to let the assets continue to work for them, will be faced with required minimum distribution (RMD) rules, requiring them to withdraw funds – and pay taxes on the withdrawals – based on the original owner’s life expectancy.

When a spouse from a second marriage is the named beneficiary, there is nothing to stop him or her from passing the inherited IRA to whomever he or she wants, including a new spouse.

Using an IRA Inheritance Trust to Protect Your Legacy

There’s really just one tool that can help you avoid these problems and gain control over how your IRA assets are distributed – an IRA Inheritance Trust, also referred to as a Standalone Retirement Trust. When you name the trust as your beneficiary, you have the ability to control all aspects of how, when and to whom your IRA assets are to be distributed. You can even dictate how the assets are to be used. You can be as specific as instructing the trust to distribute assets along a timeline in predetermined amounts different beneficiaries.

When your assets are held in an IRA Inheritance Trust, you can direct the trust to stretch RMDs over the life expectancy of the youngest beneficiary, which could be a grandchild. If any of your beneficiaries have special needs, you can create a sub-trust that will allow the beneficiary to have access to available government assistance.

Finally, assets transferred through an IRA Inheritance Trust maintain the protections of the original owner, keeping them free from claims and liabilities. The protections remain in place as long as the assets are held in the trust.

Ensuring Your Legacy for Future Generations

For many business owners, their IRA is one of their largest assets with the potential to provide lifetime income opportunities for their spouses and heirs. There is no hope for a lasting legacy without proper planning and the use of an IRA Inheritance Trust. The trust is irrevocable, so it is important to seek the guidance of a qualified estate attorney.


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