Talk to several. Visit them if you can. Ask how long the trust department has been in business, how many trusts they manage, minimum and average size of trusts they manage (most require a certain amount of assets) and how much experience their people have in the trust business.
Compare investment returns, fees (including when and how much the last increase was), and services. Ask to see samples of statements or reports you would receive and see how easy they are to understand.
Facts and numbers are important, but so are the people. Do they seem to genuinely care about you and your family? Do they listen and seem to understand your concerns? Can you understand them? How confident are you that they will be there for you and your family when they are needed?
Yes. Even though the rules are now simpler, they are still loaded with tax traps and penalties. Make sure you get expert advice, especially if you have a sizeable amount in tax-deferred plans and your estate is large enough to pay estate taxes.
If you qualify, you may want to convert some or all of your tax-deferred money into a Roth IRA, but you’ll have to pay taxes on the amount you convert. Also, if you qualify, you can make after-tax contributions to a Roth IRA.
Unlike a traditional IRA that requires you to start taking money out on April 1 after age 70 1/2, there are no minimum distributions required during your lifetime with a Roth IRA. And, generally, after five years or age 59 1/2 (whichever is later), all withdrawals are income tax-free. So you can leave your money there, growing tax-free, for as long as you wish.
Effective in 2020 with the passage of The Secure Act, beneficiaries can no longer “stretch” a Roth IRA to keep the account growing income-tax free with only required minimum distributions (RMDs) based on the beneficiary’s life expectancy. Under the new rule, the beneficiary of a Roth IRA must deplete the account within 10 years; however, all distributions to the beneficiary will be income tax-free. There are a few exceptions to the new rule. For example, the new rule does not apply to spouse beneficiaries or disabled beneficiaries (provided the disabled beneficiary is not more than 10 years younger than the original Roth IRA owner). Minor children named as beneficiaries are also exempt until they reach the age of majority, at which time they will have 10 years to fully withdraw the account. The beneficiaries exempt from the new rule will still have the option to stretch an inherited Roth IRA.
You can change your beneficiary at any time while you are living, and the distributions after you die will be paid over that beneficiary’s life expectancy (unless they cash out).
It is very important to name both primary and contingent beneficiaries while you are living to allow for greater flexibility and “clean up” after your death. For example, your spouse could disclaim some benefits so a grandchild could inherit. No new beneficiaries can be added after you die (unless your spouse names new ones with a rollover), so make sure you include all appropriate ones.
Some employer-sponsored plans (401(k), pension and profit sharing plans, etc.) have restrictions on beneficiary distribution options. But under a new rule, any beneficiary may now inherit employer plan assets and roll them into an IRA in the name of the decedent, continuing the tax-deferred growth over the beneficiary’s own life expectancy. (Some restrictions apply.)
If your plan will not let you do what you want, rolling your account into an IRA will usually give you more options. If your money is already in an IRA and the institution will not agree to your wishes, move your IRA to one that will.
If you are single, naming your beneficiary(ies) will be less complicated because you have just one estate tax exemption and there will be no spousal rollover option to consider.
Any assets you own, including a tax-deferred account, that you leave to anyone other than your spouse (your children, grandchildren or a trust) can use your exemption. Splitting a large IRA into smaller ones will make this easier to do.
You can reduce your taxable estate by giving some assets to your loved ones now, often at discounted values. You can buy life insurance to pay estate taxes at a reduced cost. And, if you are married, make sure you use both your estate tax exemptions by utilizing credit shelter trusts or making a portability election at the death of the first spouse (assuming the first spouse did not use up his/her entire lifetime exemption).
Estate taxes are different from, and in addition to, income taxes. When you die, your estate must pay estate taxes if its net value (including your tax-deferred accounts) is more than the amount exempt at that time. In 2020, the federal exemption is $11,580,000; every dollar over this amount is taxed at 40%. Some states also have their own estate/inheritance tax; your estate could be exempt from federal tax but not from state tax.
Estate taxes must be paid in cash, usually within nine months of your death. If money must be withdrawn from a tax-deferred account to pay the estate taxes, the result can be disastrous – because income taxes must be paid on the money that is withdrawn to pay the estate taxes.
If you are planning to leave an asset to charity after you die, a tax-deferred account can be an excellent one to use. That’s because the charity will pay no income taxes when it receives the money, and the account will not be included in your taxable estate when you die, reducing the amount your family may have to pay in estate taxes. (More later.)
You will not be able to provide for your spouse and stretch out the tax-deferred growth beyond your spouse’s actual life expectancy. That’s because you must use the life expectancy of the oldest beneficiary of the trust which, in this case, would probably be your spouse.
Also, many trusts pay income taxes at a higher rate than most individuals, but this only applies to income that stays in the trust. Distributions from your tax-deferred account that are paid to the trust are subject to income taxes and if the money stays in the trust, the higher tax rates would apply. But usually this is not a problem because the trustee has authority to distribute the money to the beneficiaries of the trust, who pay the income taxes at their own rates.
Finally, the trust must meet certain IRS requirements, including that it is a valid trust under state law. It is advantageous to create an irrevocable Retirement Benefit Trust, also called a Stand-alone Retirement Trust, and to name this trust as the beneficiary on your beneficiary designation form.