Today, many individuals have retirement assets in the form of a 401K, Traditional IRA, or 403(b). In terms of retirement assets, it is important that the best interests of the designated beneficiary be taken into consideration, especially when the named beneficiary is a minor child or grandchild. It is important to never directly name a minor as a beneficiary on retirement accounts, annuities, IRA accounts, bank accounts or insurance policies. Directly naming a minor beneficiary could have negative consequences. Instead, a trust must be created and named for the minor’s benefit.
A non-spouse beneficiary has the option to take an inherited IRA. An inherited IRA requires an individual to begin to take distributions one year from the date of the original account holder’s death. The length of time in which the distributions must be taken is determined by the beneficiary’s life expectancy as provided by the Internal Revenue Code. This is known as a stretch benefit. A stretch benefit is a way to pass on a tax-deferred account from generation to generation. This benefit allows the IRA account to mature tax-deferred for a longer duration of time. For instance, if distributions are taken over the life expectancy of a child, the account may be worth almost thirty times its original value.
If a minor is directly named as a beneficiary, the entire amount of the IRA account will be distributed. To access the account, a court-appointed guardian would have to oversee the property. In most cases, this would be a parent. The process of having a guardian appointed by a court is costly. In addition, income tax would have to be paid on the distribution of the account. If a child is under the age of fourteen years old, the income tax is based on the parent’s income. The money from the IRA account must then be put into a bank and will be turned over to the child at the age of eighteen years old. This could negatively affect the individual’s ability to qualify for financial aid in college.
As part of a comprehensive estate plan, a trust should be created where distributions for a minor child can be deferred. This can be accomplished through the use of an inter vivos trust or a Will. By utilizing a trust, the minor beneficiary will get the stretch benefit. It is important to remember that trusts are not created equally, which means that a trust must be created in a manner that allows retirement accounts to be received and complies with IRS requirements.
If you are in the process of planning for your future needs or the needs of a loved one, an experienced New York estate planning attorney can give you the legal guidance necessary to help plan for their future. From the simple to complex, the attorneys at Blodnick, Fazio & Associates are skilled in all aspects of estate planning and dedicated to representing their clients with diligence and compassion. For more information or to schedule a consultation, contact our Garden City estate planning law firm, at (516) 280-7105.