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An Individual Retirement Account (IRA) may be one of your client’s largest assets. While its primary role is providing income for their retirement, it is also an asset they may pass on to their loved ones. When leaving an IRA to a beneficiary, your client will likely turn to you for options that optimize tax-efficiency and meet their family’s unique needs. After all, you are not only looking after your client, but their family’s future generations.

Forced Taxation of an IRA

Generally, the IRS allows favorable tax treatments for retirement assets while your client is alive. This includes possible tax deductions, tax-deferred growth, and tax-free growth and income, depending on the client’s plan. These special tax treatments will change once the assets are passed down to a designated beneficiary.

IRA Planning Case Study

Let’s say your client’s child (the beneficiary) inherited $1.3 million from your client’s IRA. When they inherited the IRA, they had two options. First, they could take the money from the IRA immediately and pay income tax. Second, they could wait and pay the tax no later than the end of the 10th year.

In this scenario, let’s assume the beneficiary decides to take the IRA immediately and pay the income taxes. Once paying the income tax, only $689,000 of the $1.3 million IRA remained.

Where did that number come from? $611,000 of the $1.3 million went to taxes.

Let’s take a closer look. $1.3 million is taxed at the top tax bracket for federal taxes – 37%. That means $481,000 went to federal taxes (assuming that the heirs are already in the top tax bracket). If we also hypothetically assume that the beneficiary lives in a state where the top state tax bracket is 10%, another $130,000 goes to taxes.

In summary, while the IRS allows special tax treatments for the retiree while they are alive, the account is passed to an heir in a tax-punitive manner. Dunham Trust Company (DTC) partners with financial advisors like you to structure and manage long-term trust plans that optimize tax-efficiency on the assets your clients leave to their heirs.

Preserving Your Client’s IRA

When it comes to IRA planning and transferring a client’s IRA to beneficiaries, there are a variety of different options. Among them is utilizing a trust, or a series of trusts. Because every situation is unique, DTC formulated three different trust types that can be used individually or combined according to the desires of your client. We call this strategy the Dunham Trust Company IRA Trust Trilogy ®.

Utilizing the DTC IRA Trust Trilogy® allows you to create a plan that ensures your client’s loved ones will be taken care of. Each trust allows you to continue managing your client’s assets and can be set up for a fee of $500 per trust, which may provide substantial savings to your clients.

The three trusts within the DTC IRA Trust Trilogy® are the DTC IRA Charitable Trust®, the DTC IRA Replacement Trust®, and the DTC IRA Special Situations Trust®.

DTC IRA Charitable Trust®

The DTC IRA Charitable Trust® eliminates the SECURE Act tax at the end of the 10th year, while providing clients more lifetime income for their loved ones and a charitable contribution in lieu of taxation.

In a DTC IRA Charitable Trust®, the trust is established and named as the beneficiary of the IRA. When the client passes away, you continue to manage the assets. The beneficiary receives the lifetime income, and there is a tax deduction to their estate. When the heirs pass away, the assets in the DTC IRA Charitable Trust® go to the charity your client selected.

DTC IRA Replacement Trust®

This is an Irrevocable Life Insurance Trust, or, ILIT. The DTC IRA Replacement Trust® may assist in replacing IRA assets that were lost to taxes or given to charity, providing your client’s loved ones with tax efficient assets.

Once the trust is established, your client will name a beneficiary of the trust and you will assist your client in choosing a life insurance plan. The trust will own the policy and will be the beneficiary of the life insurance policy. When the client passes away, the beneficiary receives the money free of estate, income, or capital gains tax.

DTC IRA Special Situations Trust®

The DTC IRA Special Situations Trust® allows your client to care for a loved one when they are no longer there, and provide guardrails for loved ones who may need them.

In a DTC IRA Special Situations Trust®, the trust is established and named as the beneficiary of the IRA. When the client passes away, the trustee gains the authority to control how the beneficiary can use the IRA. As the financial advisor, you will continue to manage the assets under the conditions set forth by the client.

Planning for Multiple Generations

The Dunham Trust Company IRA Trust Trilogy® provides a trust solution that is completed easily and quickly with Dunham Trust Company. It allows you to continue managing your client’s assets, it is affordable, it avoids planning fatigue, and provides your clients with a deeper level of beneficiary planning.

If you would like to receive more information about how you and your clients may benefit from utilizing the Dunham Trust Company Trust Trilogy®, contact us today. We look forward to talking with you soon.

Disclosure: This document is provided for informational purposes only by Dunham & Associates Investment Counsel, Inc. solely in its capacity as a Registered Investment Adviser and should not be construed as legal and/or tax advice. Dunham & Associates Investment Counsel, Inc. does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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