Considerations When Creating A Legacy

Recently, a couple from Sandwich was referred into me, as an Ed Slott Elite IRA expert and conservative wealth and financial manager. Let’s call them Jim and Anne. Jim and Anne are 73 and 74, respectively, and have one daughter, Jen who is 45. Jim and Anne were great savers through life. Jim owned his own construction business serving the Upper Cape and Anne stayed at home raising their one daughter, Jen. They have about 1 million in their IRA’s and are concerned about control of their assets upon death. They want to be able to create a legacy for Jen and her three children ages 15, 12 and 10. Jim and Anne are concerned that Jen, while a great mother, is not very good with finances.
I suggested a special type of revocable living trust, called an IRA Trust, designed to be the beneficiary of their IRA’s. Let’s take at look why.
If Jim and Anne’s current IRA is left directly to Jen as a beneficiary with no IRA Trust, then Jen is in total control of Jim and Anne’s long hard earned asset and she can immediately do whatever she wants with her new inheritance. We spoke about a couple of scenario’s that could happen. Jen could just cash it out, triggering a tax explosion with a potential of up to 50% of the asset gone to Uncle Sam. Jen could spend it foolishly on cars, homes, or whatever Jen chooses; which are not the intentions of Jim and Anne. If this happens Jen can lose the “stretch out” option for the required minimum distributions (RMDs) potentially losing a significant opportunity to transfer Jim and Anne’s wealth to future generations, such as their three beautiful grandchildren. Jim and Anne have worked too hard to see this happen. While they hope Jen would not do this, they are taking precautions.
If Jim and Anne have their IRA’s pass to Jen through an IRA Trust, then they can put restrictions on how their IRA’s are spent. This creates an opportunity for a family legacy since whatever Jen does not use under the provisions of the Trust could pass to their three grandchildren, as Jim and Anne wish.
Let’s put this to a test. After I repositioned Jim and Anne’s assets from a commonly used buy and hold portfolio strategy to a more appropriate low risk, low volatility portfolio strategy, we began to look at real numbers. In our assessment, we assumed Jen’s life expectancy would be 25 years upon Jim and Anne’s death. We assumed a 5% withdrawal each year for Jen. This give’s Jen about $50,000 of income each year, indexed for inflation. With a low risk, low volatility portfolio potentially earning 8%-9%, this would allow Jen to withdraw a potential of about $2,500,000 over her lifetime, not too bad for Jen. Even more staggering is the legacy passed to Jim and Anne’s three grandchildren. From setting up this type of structure, that single asset of Jim and Anne’s could pass to their grandchildren with a potential of $4,200,000 upon Jen’s death. What an opportunity to create a family legacy for Jim and Anne while still giving Jen income for life. Their new IRA Trust coupled with a low risk, low volatility portfolio will be used to insure the Required Minimum Distribution’s are stretched out over Jen’s lifetime, thereby preserving the remaining assets for future generations, such as their grandchildren.
The IRA trust protects the wishes of Jim and Anne by preserving the value of the IRA over the long-term. Geoff Nickerson, a partner with the law firm of Oppenheim & Nickerson LLP in Falmouth notes that “IRAs are protected from claims filed by creditors of the IRA account owner, but the same protection is not afforded to someone who inherits the IRA.” So properly structured, an IRA trust can shelter the IRAs value held in the trust from legal claims filed against Jen, including personal injury claims or divorce proceedings.
Nickerson also points out that carefully considering the type of trust used to achieve Jim and Anne’s goals is important as, “naming a family trust or a revocable living trust might not achieve the stretch that Jim and Anne are looking for. It’s important to discuss your goals with your advisors so that they can use an IRA specific trust when appropriate.”
There we have it; we have successfully protected the legacy of Jim and Anne through an IRA Trust. This coupled with a low risk, low volatility investment portfolio now gives Jim and Anne the peace of mind they deserve.
It is tricky out there folks, so please consult a retirement professional who is specifically trained in retirement and IRA’s.