Baby boomers and seniors tend to have a large concentration of their wealth in tax-qualified accounts like IRA, 401k, and 403b accounts. I’ve met hundreds of clients who have worked their entire life to accumulate a nice nest egg in these types of accounts. Unfortunately, many don’t understand what happens when these accounts transfer to their children upon their life.
These accounts are typically left to their kids through a beneficiary designation. When the child inherits the money, they typically are given a choice of taking the money as a lump sum or as an “inherited IRA”. If the child selects it as a lump sum, all the taxes are due within one year. The smart choice is to take the money as an “inherited IRA” which will allow the kids to stretch the taxes over their life expectancy.
The problem here is that your child is financially incented to not spend the money. All the while, the money will be subject to the child’s lifetime creditors like divorce or lawsuits. This problem can be resolved by sending the IRA dollars to a trust for the benefit of your child, rather than to your child outright.
If done correctly, leaving your retirement account to a IRA trust can allow your child to access funds over time, defer taxes, and protect the money from creditors. To learn more about these trusts, please register for one of our upcoming workshops.