| With the population aging and over 4000 people a | | | | account to be rapidly distributed rather than enjoy |
| day being forced to take IRA distributions (such | | | | the potential stretch over the lifetimes of |
| distributions are mandatory by April 1 after reaching | | | | beneficiaries. Additionally, the IRA will now be a |
| age 70 1/2), mistakes in taking IRA distributions can | | | | probate asset and subject to claims of creditors. So |
| total in the billions. Yet, because people have had no | | | | what do rich people do to avoid the three gloomy |
| prior experience, mistakes are rampant. Here are 4 | | | | scenarios above? They leave their IRA in a trust and |
| commom IRA distribution mistakes to avoid. | | | | appoint a trustee like an accountant, financial advisor, |
| IRA Distribution Mistake #1 | | | | attorney, etc., a person that has good common |
| Every IRA owner can name a beneficiary and | | | | sense and tax knowledge. Within the boundaries of |
| "stretch" the IRA for maximum tax deferral over the | | | | mom's and dad's wishes and IRS-required minimum |
| next generation. | | | | distributions, the trustee will determine who among |
| Informed IRA owners believe that the following will | | | | the beneficiaries will get the IRA and how much they |
| occur with retirement assets they do not use during | | | | get. The trustee will determine how quickly this IRA |
| their lifetime. Say they leave $500,000 of retirement | | | | money gets distributed over and above the annual |
| assets to heirs. They believe junior will make small | | | | minimum amount of required IRS IRA distributions. |
| withdrawals each year (required by IRS) and at 6%, | | | | Mom and dad can even give very detailed |
| the account with a 42-year-old beneficiary, will | | | | instructions. For example, they could dictate no IRA |
| generate $2.5 million during junior's lifetime (IRA | | | | distributions for purchases of homes with the |
| distributions plus ending balance at life expectancy). | | | | despicable spouse. Or if the money is to be used for |
| This sounds great but it may never happen. | | | | education they may stipulate that up to $15,000 a |
| There are at least 2 ways that the stretch IRA can | | | | year can be distributed, or to start a business up to |
| fail. The first way is because of a custodian with | | | | $25,000 can be distributed, and they can go on and |
| rules that do not permit lifetime IRA distribution | | | | on with such instructions. |
| payments. This is particularly common in qualified | | | | IRA Distribution Mistake #3 |
| plans where the rule may be that "all IRA distributions | | | | The IRA owner has checked with the custodian and |
| to beneficiaries are to be completed within 5 years." | | | | yes, they do allow lifetime distributions to non-spouse |
| Since no one ever reads that fine print for their | | | | beneficiaries. Additionally, their two unmarried sons |
| qualified plan, they have no idea that a fast IRA | | | | understand tax deferral and there is no need for a |
| distribution will be forced to non-spouse beneficiaries. | | | | trust. Everything is okay. |
| The other problem is the beneficiary. Just because | | | | Many plan owners don't consider what happens if |
| mom and dad have the good sense to understand | | | | their beneficiary pre-deceases them. |
| tax deferral does not mean that junior will comply | | | | Let's say you chave two sons, Jack and Tom. Your |
| with this wisdom. The minute junior finds out that he | | | | name them as primary beneficiaries for the IRA |
| can close the IRA, distribute all the money and buy a | | | | distributions by completing an "IRA Beneficiary |
| Ferrari and Lamborghini at the same time, he does | | | | Designation Form" at the bank or securities firm. |
| so, pays a fortune in taxes and blows the money to | | | | Jack and Tom each have a son. Jack's son is Bob. |
| have fun. | | | | Tom's son is Dan. So you write the grandson's names |
| The way to control this is to have leave retirement | | | | on the line of the beneficiary designation form that |
| assets in an IRA trust. In a trust, mom and dad can | | | | says "secondary beneficiaries." |
| control how the heir gets paid. | | | | If Jack dies before his parents who own the plan |
| IRA Distribution Mistake #2 | | | | assets, they probably think Jack's share goes to his |
| I am leaving my IRA to my wife. I only have one | | | | son, Bob. Wrong. |
| son and he can do with the IRA what he wants | | | | It goes to Tom, because on the beneficiary |
| when we are both gone. My situation is simple.When | | | | designation form, there is no place to specify how |
| most people select beneficiaries for their IRAs, they | | | | the primary beneficiaries and secondary beneficiaries |
| select their spouse or their children. As simple as this | | | | are related. There is no place for you to explain your |
| seems, it can create problems. Consider these two | | | | intentions or write "per stirpes" to clarify intentions |
| scenarios. | | | | with respect to those beneficiaries. Those beneficiary |
| When a plan owner leaves an IRA account to the | | | | designation forms with the bank or the securities firm |
| spouse, it inflates the spousal assets. And when the | | | | are not sufficiently detailed to carry out your wishes. |
| spouse later dies with an estate exceeding $2 million | | | | At minimum, you should replace those forms with |
| (the estate exemptions limit in 2006), they pay | | | | your own forms, called an "IRA Asset Will." This can |
| estate tax. By leaving the IRA to the spouse, the | | | | be inexpensively prepared by any attorney. And if |
| deceased spouse has created unnecessary estate | | | | the custodian won't accept it, move your account to |
| taxes by making the survivor's estate larger. | | | | another custodian. |
| So instead, they leave the IRA to the son. But as | | | | IRA Distribution Mistake #4 |
| indicated before, this leaves the son total control | | | | Failing to use IRA funds for charitable intent |
| over the asset. He may withdraw the funds | | | | If you want to leave even $1 to charity, do it from |
| immediately and decide to buy a mansion jointly with | | | | your IRA money. You can specify one or more |
| his spouse (who was despised by mom and dad). To | | | | charities to receive portions of the IRA and the heirs |
| complete the misery, let's say that the following | | | | will thank you. When taxpayers leave heirs a dollar of |
| week, the daughter-in-law files for divorce and gets | | | | IRA funds, the heirs will pay, for example, 35 cents |
| to keep the mansion in the settlement. Mom and dad | | | | to tax and have 65 cents left to spend. If the estate |
| just gave the despicable daughter-in-law a mansion | | | | is over $2 million, heirs will also pay estate tax on this |
| with their IRA money. Even in death they have | | | | money and may have only 30 cents left from each |
| money problems. | | | | dollar. However, when mom and dad leave heirs a |
| To avoid the above two scenarios, they decide to | | | | dollar that is non-retirement money, heirs can spend it |
| leave the IRA to their "estate." Many attorneys | | | | with no income tax. Therefore, heirs would much |
| advise that you never leave a retirement plan to | | | | rather have "regular" money and not IRA money. |
| your estate. Because at death, the IRS requires the | | | | |