Putting IRA in stretch-out trust protects spendthrift daughter

Question: Our IRA assets come to about $2 million and are the bulk of our estate. My husband and I are 72 and we’ve been frugal all our lives. Unfortunately our daughter is not. She’s 38 and never been a good money manager. Can we put the money in a trust? We want her (she’s an only child) to get the IRA, but expect she’ll just go through it with unwise spending. We’re thinking that with a trust, we can put some controls on how much money she gets and when, so it doesn’t all just vanish. Also, we wonder if putting the money in a trust will make it lose its tax-deferred status? I should mention that we also have $200,000 in other assets we’d like to leave her.

Answer: You cannot put it in a trust while you are both alive without creating negative tax consequences. You can name each other as beneficiaries, and you can name an IRA trust as the contingent beneficiary when you both pass away.

I recommend that you establish an IRA stretchout trust. You will name a trustee and direct the trustee to release only the required minimum distributions to your daughter. (Make sure you name back-up trustees, too, in case your original choice cannot serve.)

The required minimum distributions will be based Joseph Karp

The Karp Law Firm, P.A. on her life expectancy. Your daughter can serve as the trustee because the financial institution must have a copy of the trust, and will limit her withdrawals in keeping with the trust provisions. Income tax will only be paid as the distributions are withdrawn. You can also create a provision that directs any monies remaining in the trust at your daughter’s death to go to someone else – for example, her children, someone else, or a charity. Meanwhile, she can get an upfront lump sum of $200,000 from your other funds.

Joseph Karp, a member of the Florida and New York Bars, is a Nationally and Florida Bar Certified Elder Law Attorney and founder of The Karp Law Firm, located in Palm Beach and St. Lucie counties. The firm assists clients with wills, trusts, Medicaid and VA benefits planning, special needs planning, asset preservation, probate/trust administration and estate litigation.