Take the following example: Parent has $100,000 in an IRA, has two children, and two grandchildren. The parent wants to leave each child 35% of the IRA, and each grandchild 15% of the IRA. However, the company holding the IRA informs Parent that the company’s beneficiary policy requires that all beneficiaries receive an equal percentage of the IRA.
What Can Parents Do To Distribute Their IRA As They Wish?
There are at least three (3) solutions to this problem. (1) Parents can use other assets to create the 35-35-15-15 distribution scheme. This involves a distribution formula in the Parent’s trust that takes into account all assets, whether in trust or outside the trust, to be distributed after death, and instructs the trustee to adjust distributions from the trust so that each child ends up receiving 35% of all assets, and each grandchild ends up receiving 15% of all assets.
A second solution is for the Parent to create a so-called Qualifying Trust as a sub-trust of the Parent’s revocable trust, or create a separate Qualifying Trust, name that Qualifying Trust as the beneficiary of the Parent’s IRAs, and have the Qualifying Trust distribute the IRA proceeds under the 35-35-15-15 formula. This can also enable the Parent to dictate the rate of distribution to each beneficiary rather than leaving that election to the beneficiary.
A third solution is to allocate total IRA assets separately (in this example, four (4) separate IRAs) so the IRAs hold assets in the 35-35-15-15 ratio and then name a single beneficiary to each IRA (each child designated as beneficiary of the “35” IRAs, and each grandchild designated as beneficiary of the “15) IRAs).
What the Parent should not do is to name the Parent’s probate estate or the Parent’s revocable trust as a beneficiary of all IRAs. There may be negative income tax consequences of this.
For estate planning advice when an IRA or other qualified money is at issue, contact our Ohio estate planning attorney today at 330-637-9030 to schedule a comprehensive consultation with John Grundy. Let us help you secure peace of mind and ensure that your wishes are honored.