To Stretch or Not to Stretch 

            When it comes to planning to maximize the benefit your retirement plan can have for you and your family, stretching out the distributions as long as the law permits is advisable.  Why? 

The longer you can defer the distributions, the longer you can defer income taxes.  The longer you can defer income taxes, the better for your family, etc.  Albert Einstein once said that compound interest is the eight wonder of the world.  When it comes to the distributions federal law requires, structuring your affairs to minimize taxable distributions and maximize deferral can have astounding benefits for your family.  The numbers can be truly extraordinary.

            In the realm of federal estate taxes, clients usually want to “avoid” these taxes.  In the realm of income taxes, clients usually want to “defer” these taxes as much as possible.  One major faux pas would be for someone to name their estate as the beneficiary of their IRA.  Why?  The result would be that the entire retirement plan would need to be liquidated and the income taxes due on the entire plan would have to be paid fully within five years. 

            The moral of the story is that mindful estate planning considers:

(1)  income tax planning (deferral),

(2)  estate tax planning (avoiding),

(3)  local real estate tax planning (minimizing),

(4)  using trust law to shield and protect assets from creditors or loss to divorce (protecting),

(5)  using trust law to keep assets in the family, and

(6)  privacy planning.

Every case is unique and all these issues need to be looked at closely in every case.  It would be nice if there was an easy guide on how to accomplish all of the above objectives.  Unfortunately, there is no such guide. 

Instead, there is a large body of rules that govern.  Accordingly, when applying these rules to individual cases, care needs to be taken to ensure the maximum benefit will occur.  Given the fact that there are many unknown variables in every case, that makes it even more difficult.  In any event, deferral of income taxes can be quite valuable in the arena of planning for retirement benefits and IRA’s and 401(k)’s.  To stretch or not to stretch (an IRA or other retirement plan) should be considered in every case. 

Contributed by:

Mark F. Winn

Attorney at Law, PLLC