Spendthrift planning
Client has 2 sons one responsible and one is a spendthrift. Client’s IRA and 401k currently worth about 600k and she is still working. Wants to leave 1/2 to Husband and 25% ot each son. Has a living trust and will probably have to use it for estate tax purposes. Wants to use it as well to control the distributions of the 401k/IRA to spendthrift son. I think if we just use one trust the husbands age will determine the RMD for all. Any ideas? Seperate IRA trust for son’s ?? Any other suggestions??
Permalink Submitted by Bruce Steiner on Wed, 2008-06-11 02:18
She can leave 50% of the IRA to her husband, 25% to or in trust for son 1, and 25% to or in trust for son 2, if that’s what she wants to do. Of course, in deciding how to leave her IRA, she should consider the nature and extent of her other assets.
She can create separate trusts for each child under her Will or under a separate trust instrument.
Of course, if she’s planning to leave IRA benefits in trust rather than outright, she should make sure that the provisions of the trust(s) are such that it will be possible to stretch the benefits out over the oldest beneficiary of the trust.
Bruce Steiner, attorney
NYC
also admitted in NJ and FL
Permalink Submitted by Alan Spross on Wed, 2008-06-11 03:05
The risk to the responsible son who is a designated beneficiary is a function of the following.
If this son fails to establish a separate account by 12/31 of the year following death, there are various scenarios:
1) If neither husband or trust elects separate accounts, resonsible son will be subject to husband’s life expectancy if trust is qualified
2) If trust is not qualified, then the trust is viewed as a non individual entity, and the responsible son’s options depend on when the owner died.
a) if prior to RBD, then the 5 year rule will apply
b) if post RBD, then the owner’s remaining life expectancy will apply.
Therefore, the vital action for this son is to establish a separate account for himself. If he fails that, then his fate rests with the trust conditions and the separate account actions of the others. In other words, he has lost control of the outcome at this point.
One simple way to eliminate that risk is to partition the IRA into a 25% IRA account and leave that account outright to this son.