Retirement Account Problems & Solutions

So many Americans today have the majority of their wealth stored in IRAs and other retirement assets. One of the largest problems associated with retirement accounts is the tax burden placed on the account.

Income from IRA is taxed at the highest income bracket upon receipt by the owner or beneficiary and is possibly subject to estate taxes as well. The sad truth is that 72%-80% (depending on state taxes) of your IRA is may be taken to satisfy income and estate taxes. This is a travesty! So, we have come up with ways to get around some of the problem.

Annuitize Your Retirement Assets
If you do not need your IRA to live on but are going to have to take Required Minimum Distributions (RMD) in the near future, then Advanced Legal Planning can help you:

Increase your income stream
Increase your family’s future asset protection
Increase your family’s inheritance
Decrease income taxes and eliminate estate taxes
Guarantee your return from your IRA (untie it from market performance)

This is how it works:

The IRA balance is exchanged for an immediate annuity.
The annuity payments are used to:

Pay income taxes
Pay Life Insurance Premiums to replace full IRA amount
Increase standard of living

A Life Insurance Trust owns the Life Insurance Policy

This is what it looks like:

Real life example:

68 year old healthy female
IRA value $1,000,000
Tax Rate 30%

Existing Plan

Taking no distributions yet to maximize IRA “stretch.” Must take RMD at 70 1/2

Annuitized IRA

Not worried about IRA “stretch” because of annuitization of IRA

Purchase Annuity within IRA

$76,850 annually
- 23,000 tax
- 22,500 Life Insurance Premiums
$ 31,350 increase in Net annual Income

When She Dies:

$1,000,000 IRA

300,000 Income tax

500,000 Estate Tax

$200,000 To Beneficiaries

When She Dies:

$1,000,000 Life Insurance Policy goes to beneficiaries free from income tax and free from estate tax.

The drawback to annuitizing an IRA is that it depends largely on Insurability. Insurability is an asset that you should utilize for your best benefit while you still have it.

If you are not insurable or are not old enough to annuitize your retirement assets, you should do your best to protect tax deferred growth.

How to Protect Your Retirement Assets for Generations to Come
Conventional wisdom for IRA beneficiaries is that everything will first go to the spouse (to take advantage of the spousal rollover) and then to the heirs at law.

The next level of planning for IRAs or other retirement asset is to designate the spouse as the first beneficiary then a Revocable Living Trust as a secondary beneficiary. When this is done, the drafter of the Revocable Living Trust carefully drafts “conduit trust” provisions into your Revocable Living Trust document. These provisions allow the trust to control the flow of the IRA to your beneficiaries but also allow it to be “stretched out” based on their life expectancies instead of yours. This allows for more time with tax deferred growth.

There are problems with both of those options. For instance, at one seminar I attended on the subject, it was espoused that 80% of all inherited IRAs are completely wiped out by the beneficiary within 18 months. Also, do you want to leave half of your IRA to your child’s ex-spouse? (The potential problems go on.)

One alternative is a Stand Alone Retirement Trust.

With very careful drafting a Retirement Trust may begin as a conduit trust and then “toggle” on some event to become an “accumulation” trust so that the Trustee does not have to pass on the IRA distributions if there are reasons they should stay in trust subject to some ascertainable standard like Health, Education, and Maintenance.

Distribution from an accumulation trust can work the same as the distribution from your Revocable Living Trust for your beneficiaries.

The determination of which type of structure is appropriate for your retirement assets can be a very complex issue and should be discussed with your legal and financial advisors.