The Ideal Solution: "Lange's Cascading Beneficiaries Plan" with Disclaimer Options
The new IRS regulations allow IRAs and retirement plans to grow tax-deferred for longer than ever before—you can take advantage of this extended tax deferral while you are alive, and your family can take advantage of tax deferral after you die. With proper planning you can provide your surviving spouse with the ultimate flexibility to make decisions, after the death of the IRA owner, armed with the full knowledge of his or her financial circumstances.
Fortunately, this ideal solution will work for many IRA owners.
In developing this new concept, I borrowed heavily from our well-established “disclaimer” strategy that we have been applying to IRA beneficiary designations for the past seven years. Our current work is an adaptation of these time proven concepts to the new tax law. Using a combination of legal, income tax saving, and accounting principles, we have developed what we think is the ideal solution for naming beneficiaries to IRAs and/or Retirement plans.
It is critical to understand that it is the beneficiary designations of your IRA and/or retirement plan and not your will or living trust that governs the disposition of your retirement assets at your death. When properly in place, our “cascading beneficiary” document defines and controls the beneficiary designation of an IRA and/or retirement plan.
You should consider our innovative disclaimer cascading beneficiary method if:
- Your primary goal of estate planning is to protect your spouse.
- You want flexibility in your estate plan.
- You are interested in saving estate taxes and deferring income taxes for your family after you die.
- You have complete trust in your spouse and feel confident your spouse would never disinherit your children.
- The combined total of your IRAs, Roth IRAs and retirement plans is $500,000 or more.
- You and your spouse have the same children.
- Your spouse is a U.S. citizen.
- You would like a plan that doesn't have to be rewritten if estate taxes are reduced or repealed.
- You prefer to avoid probate with your IRA and retirement plan assets.
- You don't want to have an 18 or 21 year-old child or grandchild have access to an enormous inherited IRA without any restrictions.
- You would like the ability to name a trustee now rather than leaving the decision to a bank, an attorney, or a court.
You should not use this strategy under the following circumstances:
- Second marriages when one spouse has children from a prior marriage.
- Marriages when there is insufficient trust between spouses.
- Your children or grandchildren have profound disabilities or special needs.
- A beneficiary has a serious drug or alcohol problem that might impair their judgment or use of funds.
The beauty of the system is that it gives the surviving spouse virtually complete control over the disposition of the IRA or retirement plan assets after the death of the IRA owner.
The following quotation is from Jane Bryant Quinn's syndicated newspaper column, which included a reference to my idea of cascading beneficiaries.
“For families in which the heirs won't need the IRA right away.
When you die, your spouse could refuse to accept (“disclaim”) all or part of the IRA. That money could go to a trust that pays your spouse a lifetime income and then passes to the children, Lange says.
Alternatively, your spouse could disclaim the IRA proceeds directly to your children, who could either take the money or disclaim to your grandchildren. They would still have to take their minimum distributions, but the bulk of the IRA could be tax-deferred for generations.”
This strategy allows the surviving spouse to make important decisions regarding family money with “current” information, i.e., finances at the time of death, the future financial picture, tax laws, family needs, etc. The “current” information will be more accurate than anything we could possibly predict in advance.
With help from family and professionals, the surviving spouse could make an informed decision within nine months of the IRA owner's death. Those decisions could potentially:
- Significantly reduce estate tax at the second death.
- Allow a child or grandchild to keep money either outright or in trust that will have the benefit of tax-deferred (or in the case of the Roth IRA tax-free) growth for their whole lives subject to their small minimum required distributions.
- The children (on an individual basis) could decide to disclaim all or a part of their interest to their children, the IRA owner's grandchildren.
- Encourage or in some cases force heirs to take advantage of the “stretch” IRA.
Our Services For Implementing “Lange's Cascading Beneficiary Plan” Include:
If you choose to have our office draft your plan, you can expect the following services.
A conference with a qualified estate attorney who will:
- Describe your options.
- Present our recommendations.
- Draft your plan.
- Guide you through the mechanics of changing your IRA or retirement plan beneficiary forms.
- Provide a “plain English” written explanation of the document that acts as the beneficiary designations of your retirement plan.
- Provide a “primer” for the surviving spouse describing what he or she should do at the death of the IRA owner.
The unique attributes of this strategy is that it will work in practically all states and the final legal document stands independent of your will or living trust. Ideally, there would be a well-coordinated estate plan that incorporates all your assets, but the described beneficiary designation will blend seamlessly with the vast majority of wills and living trusts including:
- I love you wills or living trusts (where the couple leaves each other everything and at the second death, it goes to the children equally).
- Wills and/or living trusts that include a “B” or unified credit shelter trust that says income to spouse, remainder to children after spouse dies. Or similar wills and trusts that also incorporate “disclaimer” language.
Many retirement plans, such as Westinghouse's 401(k) plan, will not allow a non-spouse to “stretch” an IRA after the death of the retirement plan owner. Solution: Take the money in the restricted 401(k) or 403(b) or 457 plan or other qualified plan and roll into an IRA that will allow a “stretch” after the death of the IRA owner.
A few smaller IRA providers (more likely local banks and credit unions) will have restrictions that will limit the heirs' ability to take advantage of all the features in the plan. Solution: Encourage them to change their policies or consider taking your money elsewhere.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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