Using IRA’s in your New Jersey Estate Planning

HNWElder Law, Estate Administration and Probate

By Fredrick P. Niemann, Esq., a New Jersey Estate Planning Attorney

An individual Retirement Account (IRA) is a well-known and utilized investment for retirement but needs to be understood when doing estate planning.  IRA’s can be used to provide for heirs either directly or through a trust.  Understanding to what extent your heirs will benefit from the IRA and avoiding unnecessary taxes depends on proper planning.

What is an IRA?  An IRA is a form of a personal saving plan that is designed to set aside money for your retirement in a tax-deferred and tax savings manner.  The advantage of IRA’s is that you may be able to deduct some or all of your contributions to an IRA from your income taxes and also be eligible for a tax credit equal to a percentage of your contribution.  Earnings withdrawn from a traditional IRA generally are not taxed until distributed to you.  At age 70 ½ you have to start taking distributions from a traditional IRA.  Earnings in a Roth IRA are not taxed nor do you have to start taking distributions at any point, but contributions to a Roth IRA are not tax deductible.  Any amount remaining in your IRA upon your death can be paid to your beneficiary or beneficiaries.

Here is an important thing to remember:  With an IRA you must name a beneficiary.  While a spouse is usually the logical choice for a beneficiary, you should be sure to name contingent beneficiaries as well.  If you and your spouse died at the same time and there was no contingent beneficiary, then the IRA would go to your estate and be subject to probate (the legal process of administering the estate of a deceased person).  When a spouse inherits an IRA, he or she can roll it over into his or her own IRA.  When a non-spouse inherits an IRA, the heir will need to start taking distributions within a year after the IRA owner dies.  See my recent posts on the importance of beneficiary designations found.

Extending the timing and payout of your IRA if you don’t need the funds in your IRA for retirement and want to use them to provide for your beneficiaries instead, you may be interested in “stretching out” your IRA.  To do this, when you reach 70 ½, take only the required minimum distributions, leaving more assets in your IRA.  When you die, your beneficiary can also stretch distributions out over his or her lifetime and then designate a second-generation beneficiary.  It makes sense to name a young beneficiary because the younger the beneficiary, the smaller each distribution must be, which gives the funds in the IRA extra tax-deferred years to grow.
Trusts as Beneficiaries – In some cases, it may make sense to name a trust as a beneficiary.  This is particularly true if you have minor children, children with special needs, or a beneficiary with poor spending habits.  But the trust must be properly drafted to avoid negative tax consequences.  If the trust is a “see-through” trust or “conduit” trust, then the distributions from the IRA to the trust after the participant’s death can be stretched out over the life expectancy of the oldest trust beneficiary.  If you are planning to leave your IRA to a trust, you must consult with your attorney to ensure that the trust is properly drafted and the beneficiary is properly named.  An IRA can be a valuable part of a New Jersey estate plan, but the rules can be complicated.

If you have any questions regarding IRA’s in estate planning, please contact Fredrick P. Niemann, Esq. today. He can be reached toll free at 888-800-7442 or by email at Mr. Niemann will be more than happy to meet with you to answer any questions you may have.

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