The tax code allows IRAs to be created as trust accounts, custodial accounts, and annuity contracts. Regardless of the form, the federal tax rules are generally the same for all IRAs. But the structure of the IRA agreement can have a significant impact on how your IRA is administered. This article will focus on one type of trust account commonly called a "trusteed IRA," or "individual retirement trust."
Why might you need a trusteed IRA?
In a typical IRA, your beneficiary takes control of the IRA assets upon your death. There's nothing to stop your beneficiary from withdrawing all or part of the IRA funds at any time. This ability of your beneficiary to withdraw assets at will may be troublesome to you for several reasons. For example, you may simply be concerned that your beneficiary will squander the IRA funds.
Or it may be your wish that your IRA "stretch" after your death--that is, continue to accumulate on a tax-deferred (or in the case of Roth IRAs, potentially tax-free) basis--for as long as possible. Your intent to stretch out the IRA payments may be defeated if your beneficiary has total control over the IRA assets upon your death.
Even if your beneficiary doesn't deplete the IRA assets, in a typical IRA you normally have no say about where the funds go when your beneficiary dies. Your beneficiary, or the IRA agreement, usually specifies who gets the funds at that point. So, in a typical IRA, if you name your spouse as your primary beneficiary, your spouse could name children from a previous marriage, or a new spouse if he or she remarries, as the ultimate beneficiary of your IRA assets. A trusteed IRA allows you to control the ultimate beneficiaries of your IRA, by letting you specify contingent beneficiaries that cannot be changed by your primary beneficiary.
With a trusteed IRA, you can't stop the payment of required minimum distributions (RMDs) to your beneficiary but you can restrict any additional payments. You can direct the trustee to pay only RMDs to your beneficiary. Or you can provide the trustee with discretionary authority to make payments to your beneficiary in addition to RMDs, e.g., for your beneficiary's health, welfare, or education. Or you can impose restrictions on distributions that last only until your beneficiary reaches a specified age. Trusteed IRAs can also be set up to qualify as marital, QTIP, and credit shelter (bypass) trusts, potentially simplifying your estate planning.
A trusteed IRA can also be a valuable tool during your lifetime. It can be structured so that if you become incapacitated, the trustee will step in and take over the investment of assets and distribution of benefits on your behalf, ensuring that your IRA won't be in limbo until a guardian is appointed.
Is a trusteed IRA right for you?
While trusteed IRAs can be as flexible as a particular trustee will allow (not all provide the same level of IRA planning services), they aren't right for everyone. The minimum balance required to establish a trusteed IRA, and the fees charged, are usually significantly higher than for other IRAs, making trusteed IRAs most appropriate for large IRA accounts. You may also incur attorney's fees and other costs.
And in some cases, another approach might be more appropriate. For example, you may be able to assure that your IRA "stretches" after your death by instead naming a trust as the beneficiary of your IRA. If specific IRS rules are followed, RMDs can be calculated using your trust beneficiary's life expectancy (this is commonly called a "see-through" trust).
See-through trusts are generally more expensive, and more complicated, than trusteed IRAs. It's important that you consult an estate planning professional who can explain your options and make sure you choose the right vehicle for your particular situation.
(c)Forefield Inc.
LPL financial
Member FINRA/SIPC
Monday, July 26, 2010
Monday, July 5, 2010
One way to boost retirement income!
Social Security: File-and-Suspend for Higher Benefits
If you're married and looking for opportunities to
increase retirement income, you may want to
look closely at your Social Security benefits.
One opportunity for maximizing Social Security
income, called "file-and-suspend," may enable
a married couple to boost both their retirement
and survivor's benefits.
What is file-and-suspend?
Generally, a husband or wife is entitled to
receive a Social Security retirement benefit
based either on his or her own earnings record
(a worker's benefit), or on his or her spouse's
earnings record (a spousal benefit), whichever
is higher. But under Social Security rules, a
husband or wife who is eligible to file for
retirement benefits based on his or her
spouse's record cannot do so until his or her
spouse begins receiving benefits. However,
there is one exception--someone who has
reached full retirement age may choose to file
for retirement benefits, then immediately
request to have those benefits suspended, so
that his or her eligible spouse can file for
spousal benefits.
File-and-suspend is a strategy that may be
used in a variety of situations, but is commonly
used when one spouse has much lower lifetime
earnings, and thus will receive a higher
retirement benefit based on his or her spouse's
earnings record. (A husband or wife's spousal
benefit may be as much as 50% of what his or
her spouse is entitled to receive at full
retirement age.) Using this strategy not only
allows the eligible spouse with lower earnings
to immediately claim a higher (spousal)
retirement benefit, but can also increase the
amount of available survivor protection. The
spouse with higher earnings who has
suspended his or her benefits can accrue
delayed retirement credits at a rate of 8% per
year (the rate for anyone born in 1943 or later)
up until age 70. Because a surviving spouse
will generally receive a benefit equal to 100% of
the retirement benefit the other spouse was
receiving (or was entitled to receive) at the time
of his or her death, suspending a benefit to
accrue delayed retirement credits may
substantially increase the survivor's benefit.
Example
Let's look at one hypothetical example of how
filing for, then suspending, Social Security
benefits might help a married couple increase
their retirement income and survivor's benefits.
Henry is about to reach his full retirement age
of 66, but he wants to postpone filing for Social
Security benefits. At full retirement age his
monthly benefit will be $2,000, but if he waits
until age 70 to file, his benefit will be $2,640
(32% more) due to delayed retirement credits.
However, his wife Julia, who has had
substantially lower lifetime earnings than Henry,
wants to retire in a few months at her full
retirement age (also 66). Based on her own
earnings record, Julia will be eligible for a
monthly benefit of $700, but based on Henry's
earnings record she will be eligible for a
monthly spousal benefit of $1,000 (50% of
Henry's entitlement).
So that Julia can receive the higher spousal
benefit as soon as she retires, Henry files an
application for benefits, but immediately
suspends it. That way, he can also continue to
earn delayed retirement credits, which will
result in a higher monthly retirement benefit for
him later.
Using the file-and-suspend strategy not only
increases Julia and Henry's retirement income,
but it also offers increased survivor protection.
Upon Henry's death, Julia will be entitled to
receive 100% of what Henry was receiving (or
was entitled to receive) at the time of his death.
So by suspending his own retirement benefit in
order to increase it through delayed retirement
credits, Henry has ensured that Julia will
receive a survivor's benefit that is up to 32%
higher for the rest of her life should he die first.
(Note, though, that this hypothetical example is
for illustrative purposes only and does not
account for cost-of-living adjustments or taxes.)
Points to consider
• Deciding when to begin receiving Social
Security benefits is a complicated decision.
You'll need to consider a number of
scenarios, and take into account factors such
as both spouses' ages, estimated benefit
entitlements, and life expectancies. A Social
Security representative can help explain your
options.
• Using the file-and-suspend strategy may not
be advantageous when one spouse is in poor
health or when Social Security income is
needed as soon as possible.
• The spousal benefit will be reduced if the
spouse claiming it is under full retirement age.
If you're married and looking for opportunities to
increase retirement income, you may want to
look closely at your Social Security benefits.
One opportunity for maximizing Social Security
income, called "file-and-suspend," may enable
a married couple to boost both their retirement
and survivor's benefits.
What is file-and-suspend?
Generally, a husband or wife is entitled to
receive a Social Security retirement benefit
based either on his or her own earnings record
(a worker's benefit), or on his or her spouse's
earnings record (a spousal benefit), whichever
is higher. But under Social Security rules, a
husband or wife who is eligible to file for
retirement benefits based on his or her
spouse's record cannot do so until his or her
spouse begins receiving benefits. However,
there is one exception--someone who has
reached full retirement age may choose to file
for retirement benefits, then immediately
request to have those benefits suspended, so
that his or her eligible spouse can file for
spousal benefits.
File-and-suspend is a strategy that may be
used in a variety of situations, but is commonly
used when one spouse has much lower lifetime
earnings, and thus will receive a higher
retirement benefit based on his or her spouse's
earnings record. (A husband or wife's spousal
benefit may be as much as 50% of what his or
her spouse is entitled to receive at full
retirement age.) Using this strategy not only
allows the eligible spouse with lower earnings
to immediately claim a higher (spousal)
retirement benefit, but can also increase the
amount of available survivor protection. The
spouse with higher earnings who has
suspended his or her benefits can accrue
delayed retirement credits at a rate of 8% per
year (the rate for anyone born in 1943 or later)
up until age 70. Because a surviving spouse
will generally receive a benefit equal to 100% of
the retirement benefit the other spouse was
receiving (or was entitled to receive) at the time
of his or her death, suspending a benefit to
accrue delayed retirement credits may
substantially increase the survivor's benefit.
Example
Let's look at one hypothetical example of how
filing for, then suspending, Social Security
benefits might help a married couple increase
their retirement income and survivor's benefits.
Henry is about to reach his full retirement age
of 66, but he wants to postpone filing for Social
Security benefits. At full retirement age his
monthly benefit will be $2,000, but if he waits
until age 70 to file, his benefit will be $2,640
(32% more) due to delayed retirement credits.
However, his wife Julia, who has had
substantially lower lifetime earnings than Henry,
wants to retire in a few months at her full
retirement age (also 66). Based on her own
earnings record, Julia will be eligible for a
monthly benefit of $700, but based on Henry's
earnings record she will be eligible for a
monthly spousal benefit of $1,000 (50% of
Henry's entitlement).
So that Julia can receive the higher spousal
benefit as soon as she retires, Henry files an
application for benefits, but immediately
suspends it. That way, he can also continue to
earn delayed retirement credits, which will
result in a higher monthly retirement benefit for
him later.
Using the file-and-suspend strategy not only
increases Julia and Henry's retirement income,
but it also offers increased survivor protection.
Upon Henry's death, Julia will be entitled to
receive 100% of what Henry was receiving (or
was entitled to receive) at the time of his death.
So by suspending his own retirement benefit in
order to increase it through delayed retirement
credits, Henry has ensured that Julia will
receive a survivor's benefit that is up to 32%
higher for the rest of her life should he die first.
(Note, though, that this hypothetical example is
for illustrative purposes only and does not
account for cost-of-living adjustments or taxes.)
Points to consider
• Deciding when to begin receiving Social
Security benefits is a complicated decision.
You'll need to consider a number of
scenarios, and take into account factors such
as both spouses' ages, estimated benefit
entitlements, and life expectancies. A Social
Security representative can help explain your
options.
• Using the file-and-suspend strategy may not
be advantageous when one spouse is in poor
health or when Social Security income is
needed as soon as possible.
• The spousal benefit will be reduced if the
spouse claiming it is under full retirement age.
Subscribe to:
Comments (Atom)
