IRAs and the Secure Act with Blended Families
For most of our clients, an IRA is the biggest asset they’ll ever have—bigger, often, even than real estate. Because of the way IRAs work, when a person passes, it’s usually all still there, which is why it’s so crucial to talk about who inherits these funds when you die, especially in blended families.
Up until 2019, inheritors of IRAs could draw these funds out over a lifetime. This made it a great planning tool, since it stretched that money for years, allowing the interest to grow. It also acted as a bit of a stopgap so that young or less-responsible inheritors didn’t spend it all in a matter of months.
If you think back to what you were like when you were 18, you’ll understand why this is so important.
All that changed, however, with the passing of the Secure Act on January 1, 2020. Now beneficiaries must draw the entire balance from the account within ten years of the account owner’s death. If they choose to, they can even draw it all out in one year.
That means someone like Mark’s youngest child could conceivably withdraw and spend the entire IRA before he’s a teenager. It also means he’ll have an enormous tax bill (the tax on a $1 million IRA is $500,000), and will most likely be bumped up into a higher tax bracket.
The Importance of an IRA Trust for Blended Families
That’s why we’re going to establish an IRA Legacy Trust for Mark.
This is an entirely separate trust than the one he has with Kim. Established in Nevada with a Nevada trustee to avoid California taxes, this trust will allow these funds to stretch as they could before the Secure Act was enacted.
By doing this, Mark has ensured that his minor son cannot draw his entire IRA inheritance as a child. In fact, because of the way we’ll structure the trust, he’ll have to wait until the age of 26 to get it. We’ve now also made sure that Mark’s special needs grandchild will not suddenly come into so much money that she is kicked off Medi-Cal or SSI.
This also allows the account to earn more interest, so even though they’ll have to pay taxes upon withdrawal, his children will ultimately collect much more money than if they had taken out all the funds in the first year.
Mark is also going to leave a percentage of his IRA to Kim and stipulate that when she passes away, the funds go to his adult children. This is something Kim can never change.
By establishing this retirement trust, Mark has much more control over how his retirement funds are handled after his death and has positioned everyone in his family to make the most out of his money.
Choosing your Trustee as a Blended Family
Most of us think of trustees as people who handle our affairs after we’ve died, but in fact, trustees step in as soon as you are incapacitated. Sometimes, depending on your Powers of Attorney, that person is not only making decisions about your money, but about your health and care.
Usually, this person is a spouse, but in blended families, you may choose different people for different purposes, and again, that’s where things get complicated.
Does Kim want Mark’s kids making decisions about his health if he becomes incapacitated? What about her health? What about decisions about his estate? As with so many issues in a blended family, the potential for conflict here is enormous.
Sometimes the best successor trustee to handle the financial affairs of someone a blended family will be a professional fiduciary. These are licensed professionals who can be hired to make financial decisions should you become incapacitated or pass away. They go through background checks and you can even interview them so you’re comfortable with who’s handling your care.
This is a great way for a blended family to avoid conflict and your estate attorney can help you arrange this.