People who have individual retirement accounts (IRAs) or qualified plans are often concerned about taxes that will be incurred at their deaths. One way to protect the income of an IRA as much as possible and reduce taxes is to make a trust the beneficiary of the IRA rather than having the assets go directly to an individual. Here's why:
Care should be taken when naming a trust as the beneficiary of an IRA or qualified plan. Careful analysis of costs, benefits, and forward tax planning is essential. Be sure to consult with a qualified financial planner to discuss how this strategy can help you.
- It might be necessary to have a corporate trustee for long- term financial management.
- Income tax benefits may result through deferral, tax-bracket positioning, and trust-sprinkling powers.
- If some or all of the retirement assets are not channeled to the trust, it could potentially be underfunded.
- There may be concern that beneficiaries -- such as a financially incapacitated spouse, a minor, or a handicapped child -- will not be able to manage the funds.
- The holder of the IRA or qualified plan may want to ensure that part or all of the proceeds eventually go to others rather than the primary beneficiary (the spouse), as when the individual has children from a previous marriage.
This tax tip is from Adam Starchild, the author of numerous books and articles on personal finance and investing.
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