After complying with certain provisions in the Internal Revenue Code, creators can continue to grow their IRA accounts and defer taxes for decades after death and thus, grow a modest retirement account into a fortune. However, based on the creator’s life expectancy, their beneficiaries will have to take a small taxable distribution each year, but the vast majority of the account grows without any IRS intervention.
Although stretching an IRA sounds like a good idea, upon death the beneficiary can “cash out” the IRA for personal or selfish reasons, incurring significant taxes on penalties on this “found” money. Furthermore, this beneficial, multi-generational, tax-deferred growth can prematurely terminate by reasons of divorce, bankruptcy, legal judgment, creditors, etc. Although the concept of stretching an IRA logically results in multi-generational tax-deferred growth, in practice, it is easily subject to frustration. Enter The Stretch IRA Trust.
Up until a few years ago, the Internal Revenue Code did not allow anything other than an individual to be the beneficiary of an IRA that is being stretched. However, now, trusts with very specific provisions are allowed to act as such beneficiaries. With an IRA Trust as the beneficiary of an IRA, the benefits of stretching still are available, along with the protection a trust provides–beneficiaries will not be able to prematurely liquidate the account or lose it to divorce or to creditors. Furthermore, the flexibility of distribution provisions also allow the trust, to a certain extent, to accumulate IRA distributions, and distribute them to the ultimate beneficiary per terms the creator chooses.