Question: My married daughter with no children will inherit my IRA. Can steps be taken so that upon my passing she receives the required yearly distributions and upon her passing the remaining balance can be given to a school or non-profit?
Answer: Great question and the answer is yes. I asked nationally-acclaimed IRA expert and author Michael J. Jones, CPA, with Thompson Jones, LLP in Monterey California to explain how you can accomplish this. I recommend Mike’s new book, “Inheriting an IRA” which is hot off the press and available starting today at www.InheritinganIRA.com . The rest of today’s column is his answer:
Here are some ways to accomplish your twin goals.
Method 1: Customized beneficiary forms
Ask whether your IRA custodian allows customized beneficiary forms, as well as whether they will take on the tasks of annually computing the required minimum distribution (RMD) and for making sure your daughter receives only that amount.
Method 2: Establish a trust
Establish a trust that will pay your daughter annual RMDs and also distribute what remains of your IRA to charities you chose. You’ll need to hire an attorney to draft such a trust, and the trust will have to contain provisions that will qualify the trust to base RMDs on your daughter’s age.
For example, in order to qualify for making RMDs based on your daughter’s age, IRS regulations regarding such a trust must be satisfied. You’ll also have to name a trustee to carry out the purposes of the trust. Once the trust is signed by you, name it as the beneficiary of your IRA on its beneficiary form.
Method 3: Set up a trusteed IRA
Invest your IRA with a bank or trust company willing to set up an IRA trust, act as trustee and carry out your wishes. These are called trusteed IRAs, as opposed to custodial IRAs. You won’t need to have a trust drafted, but the IRA can’t be moved to a different bank or trust company after your death.
Method 4: Charitable Remainder Trust (CRT)
Set up a so-called charitable remainder trust (CRT) to become your IRA’s beneficiary. With this method, the payments are more even from year to year than RMDs. For example, if your daughter is age 55 the year after your death, her first RMD will be about 3.4 percent of the IRA’s value. The older she is, the bigger the payment. When she reaches age 75, she’ll receive about 10.4 percent of the IRA’s value during that year. Should she live to age 80, she’ll receive about 21.7 percent of the IRA’s value during that year. And if she lives to age 85, she’ll get the entire account.
Unlike RMDs, a charitable remainder trust would pay your daughter either a level annuity or a percentage of the trust’s value each year (you get to choose from the two methods). As with the other options, you get to choose the charity or charities that will receive the IRA eventually.
You should have your estate planner further explain this option. You should also explore some financial illustrations to get a feel for how things will work out. An estate planning attorney’s services will be needed to draft the trust.
Whichever method you choose, contact the charities you wish to benefit to obtain their proper names to insert into your documents.
Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning. Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to firstname.lastname@example.org.