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Protect your heirs: Trusts help some beneficiaries avoid tax trap

Once the grief and emotional strain lessens, young adult beneficiaries of a parent's estate will face many decisions. Whether families in Nevada enjoy substantial wealth or maintain the average funding of an individual retirement account, experts suggest using trusts as one way to maximize the actual dollars that end up in their children's wallets.

Regardless of age and life experience, the impulse to just pay the costs and take a lump sum of cash isn't unusual. Someone who inherits a six-figure account, especially if under age 40, reportedly often gives in to the temptation to draw the whole amount instead of taking the payments over a lifetime. The big tax bill that results is disregarded.

Financial experts report there are options to stall the immediate cash-out. One way is to name a trust as the beneficiary instead of one or more individuals. That way, the trustee must distribute the money however you choose. With care that the named trustee is capable of following very strict Internal Revenue Service regulations, a qualifying trust will provide for your heirs on the schedule you determine to be the right one.

A separate account for more than one beneficiary is an option if a trusteed IRA is chosen. Also, at a stipulated age the account can be turned over to that inheritor. This fairly new estate planning invention is also known as an individual retirement trust. With this plan, the institution providing the IRA is the trustee, distributing assets as the owner specified. Heirs must get the IRS-required distribution each year, but you can stop any payment over and above that minimum. Alternatively, the trustee can be allowed to use discretion for additional amounts.

There are many trust planning options to keep some control over your contribution to your heirs' financial futures. Gaining a clear understanding of the pros and cons of each is vital to solid planning. An experienced review of your particular circumstances will help in minimizing the taxes and fees, keeping more dollars available to your family.

Source: The Wall Street Journal, "Protect your heirs from an IRA tax trap" Glenn Ruffenach, Apr. 28, 2014

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