Here's an interesting article from Jamie Downey of the Boston Globe. You can read the article by clicking on this link.
Her basic premise is that unless adequate planning is done, IRAs, 401Ks, and other qualified retirement plans, when inherited by one's children or grandchildren, can be subject to combined federal income, federal estate, and state income taxes of over 70%.
Her recommended strategy is to "Stretch" the IRA or 401K. This is a great idea. It is accomplished by naming your beneficiaries directly on the beneficiary designation form. This allows tax deferred growth over the beneficiaries life-time, generally referred to as a "Stretch". As a side note, great care needs to be taken in naming beneficiaries on the beneficiary designation form. While a full discussion is beyond the scope of this blog post, realize that you should consult an estate planning attorney or tax advisor prior to filling out your beneficiary designation form.
While it may not be hard to create a stretch, Stretch IRAs are very rare in practice. Why? Because most beneficiaries elect to withdraw the IRA or 401K, and just pay the taxes. This ruins the Stretch, and forces all taxes to be due immediately, making Uncle Sam the real beneficiary of the IRa or 401K.
To avoid this scenario, it is imperative that you leave your IRA or 401K to a Stretch IRA Trust, rather than outright to your beneficaries. A Stretch IRA Trust is a trust that ensures that your beneficiares will receive the full "Stretch" benefit, and will not pull the money out early. This will avoid your beneficiary exposing themselves to a great deal of unnecessary taxation.
For more information on the Stretch IRA Trust, please read my article The Stretch IRA Trust: Don't Let the IRS and Creditors be the Beneficiary of your IRA or 401K. You can find a copy of the article here: Download Stretch IRA Trust .
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