Leveraging Income Tax Deferral Can Be Great for Grand-Children

If you have a retirement account and a grand-child, then you have a wonderful opportunity to do something that could provide your grand-child with tremendous long term benefit. In other words, income tax deferral can be a tremendous tool to leverage for the benefit of a grand-child. What can you do?

You can direct a percentage of your retirement account to go into a trust for the benefit of your grand-child. If that trust is drawn properly, then the minimum required distributions from that retirement plan can be based on the life expectancy of the grand-child. What this means is that you can leave some assets to your grand-child in an income tax deferred environment.

Okay, let’s break this down.

Retirement accounts are governed by the beneficiary designation on file with the custodian or plan administrator. Spouses and non-spouses (including children, grand-children and trusts for their benefit) can be named the beneficiary of all or part of an IRA. The beneficiary has settlement options that they generally must exercise within a certain period of time. Spouses and non-spouse beneficiaries may elect to rollover these plans so they continue tax deferred. In effect, if you direct a percentage of your IRA to go into a trust for your grand-child’s benefit, then those funds will be able to grow tax deferred. It is not absolute income tax deferral. The grandchild would be required to take minimum required distributions from the trust which holds a portion of your IRA, but the distributions could be based on THEIR AGE. That’s the key. So, let’s say a client directs that upon their passing, 10% of their IRA (or $100,000) will go into a trust for their grand-child. That $100,000 can grow and the only tax that it is subject to is the income tax due on the distributions that the grand-child must take each year. But since the grand-child is so young, the distributions, which are based on his life expectancy, can be pretty small. Hence, the income tax bite each year can be pretty small. Hence, over time, these funds can grow tremendously. So, when that grand-child is in their middle age and in the midst of raising a family, the trust you left them funded with retirement assets can end up being much much more valuable than when you gave it to them. This is what we call leveraging income tax deferral. It is a good and powerful planning strategy for anyone who owns a retirement plan and has grand-children they would like to benefit.

Contributed by: Mark F. Winn, Master of Laws (LL.M.) in Estate Planning, a local asset protection, estate planning and elder law attorney.