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Estate planning and shielding heirs from themselves

Texans who are estate planning will have much to consider. One of the most common concerns for these individuals when planning distribution of assets to heirs is how to make certain that the heirs are not going to misuse what might be more assets than they have ever had before. Understanding various strategies to avoid this type of issue coming to pass is vital to a coherent and well-crafted estate plan that goes the way the testator wants it to go.

An IRA trust is one way to protect the heirs from themselves. In the past, these trusts were not used with any great frequency. However, in 2014, a ruling from the Supreme Court sparked more people to use the IRA trust rather than naming a specific individual. The IRA trust stops the heir from getting money immediately upon the testator's death. If this trust is not in place, the heirs can use the IRA for whatever reason they choose to - even if it likely goes against common sense and the wishes of the testator.

With the Supreme Court ruling, creditors will also have access to those funds. Before that, they were protected assets in a bankruptcy. Prior to using an IRA trust, it is wise to know that the beneficiaries listed on these accounts will take precedence over what a will says. If the will says one thing, but the IRA says another, the IRA will go to the person listed on the IRA. With an IRA trust, there will be a trustee. That individual will distribute the assets to the beneficiary with the trust as a protective device.

There are two options for an IRA trust: a conduit trust and an accumulation trust. The conduit trust has distributions going from the IRA to the beneficiary and the money being taxed at the rate of the beneficiary. The accumulation trust takes distributions from the IRA, but holds the money to be distributed later. The distribution will be taxed at the income rate of the trust, a maximum 39.6 percent. A trust also has costs to maintain it, so this alternative should be well considered and fits the specific situation.

Those who are facing beneficiary concerns and are looking to protect their assets and their heirs simultaneously might want to think about an IRA trust. If this is not a fit, there are a multitude of other ways to protect heirs and make certain that the assets are used in a safe and intelligent way after the person has passed on.

Source: cnbc.com, "IRA trusts can protect your heirs from themselves," Sarah O'Brien, June 14, 2017

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