I received a reminder from the IRS this week that required minimum distributions (RMDs) from certain retirement plans for people age 70 ½ or over must generally occur by December 31. Those who reached age 70½ during 2018 are covered by a special rule that allows them to wait until April 1, 2019, to take their first RMDs. This means that those born after June 30, 1947, and before July 1, 1948, are eligible for this special rule for 2018. If they wait until early 2019 to take that first RMD (up until April 1, 2019), it can be counted toward their 2018 RMD, but is still taxable in 2019. The special April 1 deadline only applies to the RMD for the first year. For all subsequent years, the RMD must be made by Dec. 31.
Substantial wealth is held in Individual Retirement Accounts or other qualified retirement plans. These accounts have very specific rules that must be followed or substantial penalties can occur. If you have questions about whether you are required to take an RMD before December 31, you should be in touch with your financial advisor and accountant.
This can also be a time when you consider how your retirement plans are addressed in your estate plan. In most instances, the extent of the planning, and often the planning advice, has been to name proper beneficiaries. It is important to understand that in estate planning your beneficiary designation trumps all. Even if your will or trust calls for a different result, the beneficiary designation will control. Experience has shown that planning only with beneficiary designations often undermines other planning and leaves the retirement account subject to the potential claims of creditors, a divorcing spouse, or the imprudent spending decisions of short-sighted beneficiaries.
Fortunately, there is a better way! The Retirement Plan Legacy Trust™ is a stand-alone trust drafted specifically to comply with the complex rules regarding qualified plans and IRAs. Establishing a Retirement Plan Legacy Trust™ and naming it as the beneficiary of an IRA or qualified plan can provide a number of benefits. These include:
- Protecting the individual trust beneficiary from his or her temptation to waste “found money.” The Trustee you name is in control of how quickly monies can be disbursed from the Trust.
- Predator protection – Even if the individual beneficiary does not have spendthrift tendencies, there are many out there whose interest lies in separating the beneficiary from their money and property.
- Creditor protection – Ours is a litigious society in which we never know who is going to be the target of a lawsuit. A trust makes the beneficiary a less attractive “target.”
- Divorce protection – With the national divorce rate above 50%, it is impossible to determine which marriages will stand the test of time. A Retirement Plan Legacy Trust™ keeps the inherited IRA from being divided or even lost in a divorce.
A Retirement Plan Legacy Trust™ allows you to coordinate with your retirement accounts with your other planning to provide the maximum benefit to your beneficiaries. Please let us know if you are interested in learning more details about the Retirement Plan Legacy Trust™.