There are many reasons besides unfavorable tax consequences why it is not a good idea to transfer Roth IRA, IRA and other non-retirement invested assets directly to heirs without restrictions.
We are all adults here, so lets be honest about the reality of many painful issues families are quietly struggling with: high potential for divorces of an adult child, a downs syndrome dependent relative or other lifelong disability, a drug-addicted potential heir, a child who cannot handle money and filed for bankruptcy…for the second time and is still unable to manage funds, a gambler, the dreamer who has unrealistic big financial plans and no real ability to manage that business dream, Grandchildren who you would like to see go to college and you are concerned the parents would spend the money before they got there, individuals who are not able or do not possess the experience to manage inherited investments, your child is doing well and really does not need a large lump sum IRA inheritance and the tax bill with
it in their combined 40% tax bracket at the present time, the child of a divorced spouse from a first marriage…your concern list may be similar to the above, or very different. The need and desire to provide some restriction on the distribution of your hard-earned assets at your death is the common denominator of all these scenarios.
One way is of course a trust. This is a good solution for many, but a trust does have its own financial needs for preparation and finalizing all of the documents to create the trust, ongoing costs of administration and asset management for the life of the trust, costs of annual tax preparation, appointment and compensation of trustees, etc. The immediate and long-term costs associated with it cause many potential estates that desire some structuring of specific assets to never implement a trust.
Another concern is the finality of a trust. Often these need to be irrevocable. That is where the fear lies. The very term irrevocable frightens many because mentally it means “If things change in the future, and I made a mistake setting this up now, I can’t change my mind.” So, often the need for the trust to be irrevocable turns many more potential individuals who still have not had their distribution needs met away from setting up a trust.
An alternative to a trust-created asset distribution arrangement is to use a “Predetermined Death Benefit” on invested assets. You have control over who receives the assets outside of probate, and when. Plus, you can change your mind as easily as completing a new form to
change your beneficiary structure when and if desired. This could be an especially helpful planning tool if you do not want to bear the burden of making an irrevocable election.
“Predetermined Death Benefit” is a new option for investors you may not be familiar with. You could have the assets pay a guaranteed income stream for the heirs lifetime without any access to the full account at your death, or perhaps you want them to have a percentage, say 20% of the account at once, then if they blow it all there is still an income stream coming from the remaining 80% left on deposit to be paid over their lifetime, or if you prefer having the income stream continue for a specified period of time, maybe 20 years, or to age 60. You could then indicate they may have access to the remaining account in a lump sum if desired at a predetermined time in the future, or specific age. It is really your choice on how your assets will be distributed in the future.
Another advantage could be your ability to quietly and privately treat heirs differently in the method of asset distribution. The way you would handle an adult child’s inheritance could be quite different than the way you would want distributions paid to minor-age children.
A special note, the “Predetermined Death Benefit” structure cannot be used if the recipient is a trust, estate, or charity. Their portion would need to be transferred without restrictions, although any other beneficiaries would not be affected by this requirement on that portion of the invested funds.
This option is available without additional costs in some annuities for both qualified monies such as IRA’s or Roth IRA’s and also for non-qualified monies. Surprised? You shouldn’t be.
Annuities are like any other investment tool available to you. All investment tools have many features that when used correctly may be a perfect application for your situation, if not, then use the correct investment tool to accomplish your specific needs.
Are you ready for another surprise? Annuities using this distribution strategy are available with and without early surrender charges.
Consult with a professional to identify what distribution methods and investment tools may be best for your concerns and needs.