Funding the Next Generation's Retirement

Two strategies come readily to mind as ways of funding the next generation’s retirement, and possibly removing appreciating assets from your estate.

 First is buying a life insurance policy and putting it into an irrevocable trust.  The annual exclusion amount ($13,000 this year rising to $14,000 in 2013) can be used to pay the premiums.  Because the gift that will fund the premiums must be a “completed gift”, you need to grant the beneficiaries of the life insurance policy a degree of access to the gift.  “Crummey” letters are issued to the beneficiaries to advise that a gift has been made, and that they have a set period of time to request a distribution.  When they do not request a distribution, the gift is used to pay the annual premium

 Another option is to create a stretch IRA trust.  If you are lucky enough to have an IRA that you will not need to use for a comfortable retirement, consider creating an IRA Trust, naming the trust as the beneficiary of the IRA, and designating within the trust the named beneficiaries.  Most defined contribution retirement plans can be left to a trust, including 401(k), 403(b), TSP, SEP, SIMPLE, KEOGH plans, in addition to an IRA.  

Usually, you name specific people as the primary and contingent beneficiaries so the named person inherits the IRA upon your death. In some cases, you may prefer that the money go into a trust so you can exercise more control over how the money ends up being spent.

There are specific federal tax rules that govern naming the trust as your IRA beneficiary. You can name a trust as the beneficiary of your IRA, but the trust can't be the “designated beneficiary” for purposes of calculating the required minimum distribution, because a trust is not an individual and does not have a life expectancy. If the trust does not meet the federal rules, the trust must distribute the entire value of the retirement account within five years (or if the owner had already started RMDs, through annual distributions over the decedent's remaining life expectancy).

The designated beneficiary's life expectancy is used in figuring the distribution period for the IRA if the account owner died before beginning RMDs or if the designated beneficiary's life expectancy is longer than that of the deceased if the owner died after starting RMDs. And if the the trust meets the specific federal tax rules, the life expectancy of the trust beneficiary can be used when figuring RMDs so as to stretch out a longer distribution period.

 The criteria:

  • The trust must be valid under state law
  • It must be irrevocable or become irrevocable on the account owner's death
  • The beneficiaries of the trust must be clearly identified in the trust document,
  • The IRA trustee must have a copy of the trust document and any amendments.
  • The IRA trustee must receive the information on or before Oct. 31 in the year after the owner's death.

If you want to leave your IRA to someone who may not be able to use the money appropriately, such as a young child or someone with a disability, putting it into a trust allows you to entrust the money to a trustee to spend it. In addition, if you are concerned that a beneficiary might not spend the money in the way you would like, you can specify which expenses can be paid with the IRA funds. For example, you could specify that only college education costs be paid with funds until the beneficiary obtains a college degree.


Law Office of Eileen Guerin Swicker 20 W. Market St. Suite E, Leesburg, VA 20176 Tel: 571-918-0616 Fax: 703-459-9620