How to Create an IRA Trust or SRT at CunninghamLegal
By James Cunningham Jr., Esq.
At CunninghamLegal, we offer an increasingly popular practice in the creation of what we call “IRA Legacy Trusts.” These complex, but powerful tools have become far more important following the passage of the SECURE Act, which eliminated a number of previously available tax strategies for inherited IRAs.
Sometimes these trusts are called SRTs (Stand-Alone Trusts for Tax Qualified Plans), or simply “IRA Trusts,” and we invite you to contact us to create one for you and your family.
Put simply, when you form an IRA Legacy Trust, you are building a special vessel to receive your IRA account when you die. This trust is named as the sole IRA beneficiary, with individuals named as beneficiaries of the IRA Legacy Trust itself.
Because an IRA Legacy Trust is irrevocable, it then takes on a life of its own, entirely separate from you or your living trust, and having its own trustee. Instead of each of your beneficiaries being on their own to figure out the byzantine IRA laws, everything in this durable vessel can be controlled by that trustee, and distributed appropriately.
Don’t worry that the IRA Legacy Trust is irrevocable—you can always change your beneficiary designation before death and name another IRA Legacy Trust with different terms.
If we consider the IRA Legacy Trust like a tax-advantaged sailing ship, your “Good Ship IRA” will voyage onward long after you are gone, protecting and delivering your tax-deferred funds in the best possible manner. Let’s summarize the benefits before we get into detail:
- Tax Planning Advantages
- Moving the Situs of the Trust to a State without State Income Tax
- Creditor Protection, Even from Divorcing Spouses
- Supporting Loved Ones with Special Needs, Minors, & Aging Heirs
- Providing Overall Management of IRA inheritances
Tax Planning Advantages of an IRA Trust
Because assets accumulate within this “non-grantor” IRA Legacy Trust with its own tax ID number, there is more flexibility in using tax-advantaged strategies for things like oil & gas investments, solar tax strategies, opportunity zones, real estate, and low-income housing.
Such strategies may not mean much to the average wage earner, but they could be extremely important to a high-wealth individual, and useful to any IRA over $100,000.
The rules for such maneuvers are complex, and often vary by state; so yes, you need serious experts involved in each step.
Moving the Situs of an IRA Trust to Avoid or Delay State Tax
Perhaps most importantly for tax planning, an IRA Legacy Trust receiving money from a traditional IRA can be created in another state from your residence—a state where state income taxes are low or nonexistent. An individual heir may live in high-tax California, but their IRA Legacy Trust may have its “situs” in say, zero-tax Nevada. Some other current options are Tennessee, South Dakota, and Alaska.
Locating a trust in Nevada is far easier than telling an heir to move to Nevada before they pull out your money. In fact, if your heir did move, their original state would probably hunt them down for the taxes.
I can’t go into all the details of the trust’s structure and legal status, but federal tax liability for a traditional IRA does arrive for your heir when the money comes out of the trust’s traditional IRA account and gets deposited into its bank account. Roth IRAs, of course, are already exempt from both state and federal taxation.
As a simple example: Suppose Phil inherits a $1 million IRA, and it becomes $2 million over the ten years in the traditional IRA Legacy Trust created by his father. If Phil were to take that money out as a California resident, over the years he would pay over $200,000 in California income tax alone.
With the trust located in Nevada, Phil will save, or at least defer, around $200,000!
Yes, some states do challenge the legal rulings around this from time to time, but as of this writing, it works in most states.
Creditor Protection, Even from Divorcing Spouses in an IRA Trust
The creditor protections of an IRA Legacy Trust could be vital to any heir at any level of wealth.
Here at CunninghamLegal we put a great deal of effort into setting up clients to protect their heirs from unworthy creditors, including divorced spouses.
Often, people don’t realize that all the same issues apply to IRAs. In fact, the creditor or predator situation can be even worse with IRAs than with other assets because the act of withdrawing the money from an IRA to pay off creditors will also trigger tax payments. As of this writing, the question of who gets stuck with the resulting tax remains unsettled in law. It might be your heir—a terrible, double hit.
Imagine your heir losing their IRA to creditors and getting stuck with the resulting tax bill!
The IRA Legacy Trust is designed to keep even ex-spouses from going after that money while it is in an irrevocable trust.
IRA Trusts for Minors, Elderly, and Loved Ones with Special Needs
Do you have a loved one who is disabled or has special needs?
For such an heir, it might actually be a catastrophe for them to directly inherit IRA money from you. Why? Because that money could easily kick them off of public assistance.
The solution is a type of IRA Legacy Trust known as an “IRA Accumulation Trust.” Such a trust allows for crucial tax and benefits planning not normally available to individuals.
Basically, in an Accumulation Trust, a trustee is named who does not have to distribute any particular Required Minimum Distributions (RMDs), even for Eligible Designated Beneficiaries, and can instead allow distributions to accumulate in the trust until they decide to dole out money, in careful increments, to the beneficiary.
Lifelong support can be provided in this manner not just for special needs beneficiaries, but for minor children, along with elderly heirs.
I should point out, however, that an uninformed attorney can easily mis-construct an Accumulation Trust for an otherwise Eligible Designated Beneficiary, as the rules are extremely complex regarding successor beneficiaries and the like. As with all trusts, only consult an attorney with specialized expertise.
IRA Legacy Trusts Provide Vital Management
Finally, an IRA Legacy Trust offers crucial control over your legacy.
Let’s assume you understand about Pay-on-Death accounts (PODs), and you carefully update POD information in your IRA accounts as your heirs are born, get married, get divorced, contemplate divorce, hit old age, become disabled, become wealthy, or run into bankruptcy. Let’s even assume they’re all informed enough to hit the proper RMD deadlines and take the proper withdrawals without a trustee to manage the process after you die.
Doing that management at multiple institutions, with multiple heirs and possibly their children, is truly fraught with peril. The slightest mistake can cause enormous headaches, including massive tax penalties for errors. Never forget that the people who run banks and brokerages are not there to make sure the right people get your money when you die: the rules are different at every institution, and any delay is in their favor as the holder of your funds. Do not blindly rely solely on these institutions.
You also have no idea if your heirs will face a divorce or bankruptcy years after you are gone, and they need you to protect that inherited IRA for them now, while you can.
The Good Ship IRA
Let me repeat: with an IRA Legacy Trust, you can create a single, manageable vessel that you can captain during your lifetime. You then pass on that captaincy to a trustee, just as you will do with your living trust.
With good planning, your Good Ship IRA will sail smoothly onward even after you’ve left the helm.
Please contact us to learn more.
What Do We Do?
The lawyers and staff at CunninghamLegal help people plan for some of the most difficult times in their lives; then we guide them when those times come.
Make an appointment to meet with CunninghamLegal for California Estate Planning and Trust Administration. We have offices throughout California, and we offer in-person, phone, and Zoom appointments. Just call (866) 988-3956 or (530) 269-1515, or book an appointment online.
Please also consider joining one of our free online Estate Planning Webinars.
We look forward to working with you!
James Cunningham Jr., Esq.
At CunninghamLegal, we guide savvy, caring families in the protection and transfer of multi-generational wealth.
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Importantly for tax planning, an IRA Legacy Trust can be created in another state from your residence—a state where state income taxes are low or nonexistent.