Passing Down Your IRA or 401(k) Tax-Free with an Inherited IRA

Welcome everyone to today's webinar. This is a joint production of Directed IRA and KKOS Lawyers. I have next to me Ryan Tosto from KKOS Lawyers. He's an attorney. I'm going to introduce him here in a moment. But what we're talking about today is passing down your IRA or 401 tax-free. And to who you want to get it, more importantly. And we're gonna go over all these rules. You've probably heard about inherited IRAs or beneficiary IRAs. Maybe you've heard about the 10-year rule or spousal rollover rules. We want to go over all of that today so you understand how your retirement account's going to pass down. Or maybe you're someone who has a parent that's been deceased, you have an inherited IRA, or you're planning to inherit one soon. We want to make sure you understand those rules. So, Couple things as we get out of the gates here. We do have a slide deck, so you can get the slide deck. It's got quite a bit of information in it. We'll be referring to it off and on as we go through the presentation today.

All right.

Well, let's talk about Ryan. I'm Matt Sorensen. I'm here all the time. You probably know me and are sick of hearing from me. But let's talk about Ryan here for a second. He's been an attorney at KQOS Lawyers for a couple years now. Two or three years?

Almost three. Three next month. Okay. Yeah.

All right. And, uh, he's married, new dad.

Yep. 3-month-old as of tomorrow. All right.

And you do actually sleep. I remember baby sleeps. Okay.

A little bit.

Getting there. Okay.

We're going through a regression.

Oh, dang. Okay. I shouldn't have brought that up.

Yeah.

All right. So, but Ryan's done hundreds of estate plans with clients. This is a common topic. How am I leaving this and passing it on? Um, so I wanted him here to kind of get to that lawyer side of things. And I want to talk about some of the mechanics from the IRA custodian side too, and just make sure everybody has like the best overall picture about how this works. Um, and we'll have Ryan's contact info later if anybody wants to work directly with him.

All right.

So let me give you the roadmap and then we're going to dive into it. So here's the 6 items we're going to be covering today. Inherited IRA versus spousal rollover. What are your inherited IRA options? There's actually a few options that you have, so you could choose. Um, what's the best option? I'm going to tell you what that is. I have an opinion, at least. Um, we'll see if Ryan's differs from mine. Um, then we'll talk about some of the legal requirements about how this passes. There's a lot of confusion and mistakes people make on this, unfortunately, and like what documents control here. So we'll cover that. And then what about minor kids? How should I be thinking about for them and planning there? And then what about some of the tax traps I can fall into if I'm jacking this up or not doing it right? So we want to make sure you understand those and avoid them. All right, so let's just get this started here. And Ryan, why don't we maybe just start off with like a spousal rollover? And maybe if you want to speak to that here for a second. Um, let's say that I'm married, obviously. What would your— would you recommend that I do, that I list my spouse as beneficiary so that we can do a spousal rollover? Maybe explain that rule first.

Right. Yeah, in most cases, the spouse is typically Your primary beneficiary on your IRA. We're going to get into today the mechanics of how do you pass your IRA to who you want it to be, whether that's through a trust, whether that's to your spouse, to your kids directly. There's pros and cons to really all the above, but the simplest, most common, I would assume at least 95+% of people, their spouse is named as the primary beneficiary. Now, if your spouse inherits, It essentially is the most simple way in most cases as well, where they just take your place. Their IRA, their Roth, their traditional, however it was listed previously, you essentially become them. You take their place. We're going to get into— there's some other options, but ultimately, for the most average common scenario, that's kind of what we're dealing with.

Yeah. So, let's say your spouse passes first, you're married. And so, you're their surviving spouse. Well, if they list you as beneficiary, that IRA just goes into your name. It's called a spousal rollover. So, we're going to get into inherited IRAs here, which are different. So, I just want to make sure we're understanding this distinction. This is the one distinction. Everything else is an inherited IRA, okay? Your kids get it, your friend, your whatever, okay? But the first one is, that's unique, is this spousal rollover. The reason that's unique is, Let's say you pass away and let's say you're 65 and let's say your surviving spouse is 55 and they inherit your IRA. Well, it, as a spousal rollover, if they do that, well, it's now their IRA and they're 55. They can't pull money out of it. They still gotta wait till they're 59 and a half. So it's just treated under the rules as if it's their IRA. Now, in most instances, that's actually good. Um, but just understand that if they do a spousal rollover, they have an option of just taking a lump sum. But if they do a spousal rollover, um, it becomes an IRA in their name and the 59½ penalty could be. So that's, I think, the only downside really to it.

Right.

Is if, and you'll know this because you'll have the option, if you're listed as the beneficiary, your spouse predeceases you, you're the surviving spouse, you're not 59½ yet, and you, and you need this money to live off of, let's say, and you're 55, well, you— there's other ways you could take a lump sum. I don't love that, but otherwise you're gonna have this 10% penalty. So there's— so I think that's the only negative is just that 59 and a half, you need the money before then.

Right.

Um, okay, well, let's get to for everyone else. Okay. And this is really what most of what we're going to talk about today is everyone else, spousal rollover, Um, uh, is, is quite simple. Well, let me make one other distinction on a spousal rollover. The other thing is, is you could still do a Roth conversion after you do a spousal rollover. So let's say your spouse passes away with a traditional IRA, you would receive it as a traditional IRA. You could convert it to Roth if you wanted. Once we get to inherited IRAs here in a second, one important distinction is whatever account type you inherit it as, Mm-hmm. traditional or Roth, it's going to stay traditional Roth. You can't do a Roth conversion once an account is an inherited IRA. Okay, so every other beneficiary besides a spouse is going to receive what's called an inherited IRA. And in an inherited IRA, the account stays in the deceased person's name. So it'll be like, you know, directed trust company FBO. Let's see, I died. Matt Sorensen, date of death, This date, and then the beneficiary. So, it's still like attached to that person who passed away. You are the heir though, inheriting it. All right. Now, there's some options on how that money comes out over time. We'll talk about this. Um, but, uh, but, but here's what, what can happen. Okay. From an inherited IRA, I think the first thing that's important to understand is you can take the money. out and there's no 10% early withdrawal penalty, right? So even if, you know, I'm 40 years old, let's say your parent passes away, they leave you an IRA account and you're like, all right, well, I'm 40. I want to start pulling some money out now. There's no 10% penalty. All right. So that's a unique option. There's no early withdrawal penalty. Um, uh, so that's a nice perk, of course, of an inherited IRA. Now, let's go over how to get the money out. Why don't you go through some of the options here on the different ways you can choose? And you have to make a selection on how to get the money out of the inherited IRA.

When the individual that had the IRA passes, you're going to whatever custodian, you're providing the death certificate, you're then opening your own inherited IRA, whether that could be your spouse, it would be rare, whether that's your parents, grandparents. Who knows who gave you that IRA? Once you get to that point, the options essentially are, are they in RMD mode or not? And essentially, we'll get into what qualifies as RMD mode or not in the simplest way. Are they 73 years or older, or are they less when they passed? Were they taking RMDs from that account? So that's kind of one nuance to it, which we'll build on. But once you get the inherited IRA, It's essentially your IRA to decide what you want to do with it within some of the parameters. And one of those is you could just simply take a lump sum. It's, if it is a traditional IRA, just like any traditional IRA, when you pull out of that or distribute from the IRA, it's income in the year you take it out. So, if you had a $300,000 IRA, we're talking an additional $300,000 of income. on top of whatever other income you have or ordinary income you have. So, that could be putting you in one of the higher tax brackets, if not the highest tax bracket, just by not being strategic with what you're doing. So, that's kind of, in most cases, the worst-case scenario. There's the 10-year rule, which is typically the standard. So, typically, you have 10 years to essentially liquidate the entire account. By the time that 10-year passes on December 31st, you need to take everything out of it. As simple as that. Now, throughout that process, you can get strategic with, am I taking out annually a little chunk here and there? Am I required to be taking out annually here and there via those RMDs that you're required to maintain? So, there's just some strategy in how do I make sure that I'm Manage my income. If I'm going to expect to be in a low-income year in year 8, do I take a big chunk then? There's just options in what you can do. There's other rules involved depending on some of the pre-2020 rules as well. But in a nutshell, that's kind of how it is.

Yeah. And I think the lump sum is generally the worst way to do it, whether it's a traditional or a Roth, right? So, let's say you inherited a traditional. Like Ryan said, if you take that full lump sum, let's go with the $300,000 IRA you inherit, that's $300,000 going into taxable income in one year when you could have chunked this. And we know we use that for like Roth conversion strategies, but you could have chunked this inherited IRA over time. If it's a Roth account, you could take the full $300,000 out and there's no tax on that, right? Because you inherited a Roth. Roth, there's no tax when you take the distribution, even in an inherited Roth. But I'm missing the opportunity of growing and compounding that for more tax-free dollars in the future. So I don't like the tax outcome on either, on the lump sum, unless you're like desperately in need of the money. Like maybe you've got creditors chasing you down in your life or whatever. I don't know. You got, there's some, something important where you really have to take a lump sum. Uh, I like how you said that kind of the default or the most common is going to be the 10-year rule.

So.

Let's kind of think about this for traditional versus Roth, 'cause it's interesting how you kind of start. I like that $300,000 account as a good example. Let's say you inherit a $300,000 traditional IRA. So, this is an inherited traditional IRA and you've got 300 grand to pull it out. Now, we're going to get to this RMD issue, by the way, here in a second. This RMD issue has to deal with whether you can take—

RMD.

whether you have to take 1/10 of the money over 10 years, or you can just wait until the 10th year and pull the whole thing out at year 10. So we'll get to that here in a second, but just hang with me for a second. Let's say it's traditional IRA, you inherit it, you're doing the 10-year rule. Well, you may want to chunk some of this over time. Let's say you're 45 and you're still working for the next 15, 20 years. You know, you're in a good income, you're, you know, you're finally at like the upper end of your career, you're making more money, your business is fine. Finally taken off. You know, you're not in your 20s making 20-year-old money or 30-year-old money. You're like, you're, you're making more money. Okay. So now I can start chunking little pieces away each year over that 10-year window with the traditional account. Um, and maybe that's 1/10, however, however you want to do it. But let's, let's flip that though and say you're 60. And it's a traditional IRA and you're still working for another 5 years. Well, you may want to not take anything for that first 5 years, right?

Absolutely.

I don't know. Like, and you may then just take the rest later on. So, everybody's in a little bit different situation. And I think the unique thing on the traditional is thinking about that, what you brought up earlier, just like the tax, how am I going to be taxed on that?

Right. And that's where the strategy comes in. And what I find interesting, just, How can you maximize every dollar of this, minimize as much in taxes as possible, and put your money in the most efficient buckets like these IRAs for as long as possible?

And then now, let's flip it to the Roth, though. If you think about the Roth here, unless you— my strategy on the Roth is don't touch it. Let it go for another 10 years. And I've, you know, I even like thinking about how like, you know, that if I inherit a, and I've talked to many clients that get an inherited Roth IRA and they got another 10-year window, I'm like, if you get a 7% return over the next 10 years and you inherited this $300,000 account, well, you can double that to a $600,000 account in 10 years at a 7% return. So don't touch it. Don't pull any money out. You've got a tax-free bucket that's gonna compound and grow in the most tax-advantageous way than any other investment account you could be using. So, let's not touch the Roth if you don't have to. Let's let that thing compound. So, I think it's a little different on the Roth. Anything you disagree on that or anything else on the Roth you'd say differently?

No, no, I mean, it's exactly the best thing you can possibly have is essentially a Roth after-tax dollars. Let it grow as many, years as possible, as long as you don't need access to those dollars at any point. It's in your favor tax-wise to keep it in the account as long as possible. So, you might as well max out those 10-ish years.

All right. Let's get to this 10-year rule. Okay. So, this is, you know, leave it to Congress to make something super complicated. And frankly, it justifies our existence as tax lawyers some of this time that it's so damn confusing. All right. Inherited IRAs, and this is going to be for traditionals because they have what's called RMD. So, RMD is required minimum distributions. If you have a traditional IRA or traditional 401, once you hit age 73, this age adjusts, you know, it'd be 75 soon, but like once you hit age 73, if you have a traditional IRA or traditional 401, you have to start taking what are called required minimum distributions. You have to start pulling some money out of that account every year. And that's just on anybody's traditional IRA or traditional 401. Well, this 10-year rule, when they passed this, what Congress did is they said, if someone dies with a traditional IRA or traditional 401 and they're in RMD age, 73 or older, they have 10 years to drain it, whoever does an inherited account. So let's say you do an inherited traditional IRA.

Mm-hmm.

Your parents pass away. Let's say they were 75 years old when they passed away. They're in, they're in RMD age. And let's say that you're 50, you inherit this account. All right, well, it's a traditional account. They're on RMD. You have to take 1/10 of that account over time out over that 10-year window. You can still keep investing it for 10 and growing it, but you've got to take a required minimum distribution. because when they died, they were already in RMD, was the rationale and kind of the crappy way they wrote the law and tried to make sense of it. I will just say the retirement industry and Congress, or sorry, the retirement industry after Congress passed this law did not think that was how the law was going to get interpreted. The IRS came out with this interpretation. It's gone back and forth for a number of years. There was relief in 2022 for this to say, if you did it wrong, we don't care. Don't worry about it. We know it was confusing. But this is the rule now. So, I just want to make sure everybody understands that. Maybe you can explain it. Did I get that clear?

It is confusing.

Yeah.

I mean, in the simplest way, if you— how I've always thought about it, and maybe this is not the exact way to think of it, is the IRS, in theory, the whole purpose of RMDs is they eventually want their cut. You've never paid taxes on those dollars before. So, once age 73 hit, they start to get their cut and maybe they get used to getting their cut of your IRA. And now that that person's passed, they eventually just want to continue to get that and liquidate the account. So, maybe that's the simplest way to put it.

That's a good way to put it. I like, they got their hand in the jar, so to speak. They're like, we're here. We've started taking money from this account. They died. We're still taking money from this account. But let's change the facts. Okay. Um, let's go back to that same example, but you had a parent that passes away at age 70 with their traditional IRA. You're 45, you inherit that, um, account. They were not in RMD age. You're good.

Okay.

Because the IRS wasn't taking their cut yet. They didn't get addicted to the, uh, the money coming out of that IRA. So you would have now that 10-year window open. To where you could receive that as a traditional inherited IRA and continue and invest the account without having to take RMD. So, but at year 10, you would have to take full distribution. So, that's where you probably would need to still be strategic though about it.

Right, right.

You may not, you may not want to wait until year 10 on a traditional IRA.

Right. They may not be required distributions, but it's probably wise distributions, or there's some buzzword we can come up with on the spot. But, Yeah. Otherwise, I mean, your $300,000 account could balloon into $450,000 or whatever it may be. And now you're on the hook for all of that in taxes as income. And we'll get into what that looks like.

All right. So, that's the 10-year rule. Now, this does not apply to Roths, okay? Because Roths don't have RMD. All right. So, don't worry about this for the Roth IRAs. This is specific for traditional IRAs. where they begin taking RMD. Now, if you have an inherited IRA already that you inherited from someone before 2020, someone was deceased before 2020 and you received an inherited IRA, you have an old set of rules where you have to take RMD based on your age when you— and it's, which is usually you're younger, so you don't have 10 years. Let's say you're 40 and you inherit the account, you kind of have like a 40-year window. of where you're taking that money out over time. So, the amount you have to take is very low compared to a 10-year window. You have to be taking more, obviously. So, those were called stretch IRAs back in the day, or they still can call them stretch IRAs. It's just like a 10-year limitation now. So, just know there's a little old set of rules if you do have an inherited IRA. We have many at Directed IRA, people before 2020 that passed away and inherited it. The RMD is not a 10-year window. It's the life of the person that inherited the account, their life expectancy. You have to take a small amount every year. Um, but the nice thing I think is we were talking about this, no matter what we're talking about, Roth account, traditional account, in this 10-year window here, if you want to take the money, you can take it whenever you want. No penalty, no tax. A lot of people talk about the inherited Roth IRA is like a tax-free ATM. Because not only does it grow and come out tax-free, you can pull it out whenever you want. Even if I have an inherited IRA and I'm 45, right? If I have an inherited IRA and I'm 45, it doesn't— I don't have to wait till I'm 59 and a half. I want to pull a bunch of money out next year, knock yourself out. No, it's no tax on it. Um, and so you, you really have a lot more access to that account than you would with your own Roth IRA, because I would have to wait till I'm 59 and a half with my own. Roth IRA. Okay. Do we have any questions yet, Jordan, on 10-year rule or lump sum, any of those options yet? Let us know if you have questions. Jordan's here in the chat. The team might be answering some questions in the chat too, but—

Okay. We have one, uh, specifically from, uh, about the 10-year rule related to, from Sue Mayfield. Do you recommend putting the living trust as the IRA beneficiary? And does the trust have to file tax returns every year if the beneficiary is not supposed to get the inheritance?

Why don't you field that one? Listing the IRA, the first— there's a 2-part question there. So, the first question was listing the trust as beneficiary on the IRA?

Yes. Do you recommend putting the living trust as the IRA beneficiary?

It depends. So, the lawyerly answer is usually it depends. But in most cases, kind of back to where we started and where we're leading into, usually the spouse Typically, that's where they would inherit primarily. And then the backup or contingent would be the trust. With inside that trust, that's where you can have all sorts of controls and delays. And it depends then what is within that trust, whether or not we're going to be dealing with any sort of taxation there, or at least on the trust side.

Yeah. And I think if you have a living trust, this is important. We're going to get to this in a second here. What is on the beneficiary designation form is what controls. So, I don't care what you put in your will or your trust. We'll talk about that here in a second. But this beneficiary designation form is important, but you can list the trust as the beneficiary. Now, I'd say the most common is what Ryan mentioned. I'd agree with that, is if you're married, list your spouse and then list your trust second. You could just list your trust first too, though. I'm sure your trust is If you have a spouse, probably list your spouse as your beneficiary first too. So, it's kind of, you get the same outcome in some ways. So, but it's just frankly mechanically easier to list your spouse and just for them to do a spousal rollover. But we do like the trust second, particularly for your kids. So, I would say that's the most common, spouse first, trust second.

Okay.

Or you could just, if you're like, you know what, I might have, my surviving spouse has medical issues or mental issues, I want the trustee of the trust to be involved, then you could just list the trust as the primary directly. And if your spouse is the person that's supposed to receive that IRA, it'll function the same way. They could still receive an inherited IRA. So, All right. Now, what was the second part of that question, though?

Second part of the question was, does the trust have to file tax returns every year if the beneficiary is not supposed to get the inheritance until 10 years later?

Let me, let me answer that because I— it's, it's a little confusing, the question. Yeah, it depends on what they're trying to get at. Let's say you have a trust. Okay. If you have a trust right now and you're living, it doesn't file a tax return. Nobody cares about the trust. It's just a disregarded entity for tax purposes. Once you die, if your trust is going to own assets, even though it's not distributing them to your kids, the trust will be filing a tax return. So, if the trust is going to stay in effect and have control of the assets, then yes, the trust will be filing a tax return, which I think might have been the question.

I feel like that's, yeah, what they were getting at for sure.

And that's not the end of the world. You, you're wanting this control. of what, of what's happening. So, okay, well, let's, because that question hit, um, let's go how your IRA passes at death. And why don't you go over these options here? The question kind of led us into this on how this mechanically works.

Right. Yeah. I mean, the simplest way to pass is obviously you name whoever you want to inherit as the beneficiary. So, if it's your spouse, mechanically, if they're listed, they'll use their death certificate. They'll go to Whatever custodian houses the IRA, and then they'll have the ability to go open an inherited IRA if that's the route they go, or they will go the spousal rollover route. So, that's for more so the spouse. If it's a child, whole different ballgame. It could be where they're then listed as the trust— or excuse me, they're the beneficiary of the trust, which is listed as the beneficiary. And then we're going through the trust and the terms of that. So, Mechanically, the biggest thing is what's on the beneficiary designation form. That trumps everything else. There's all sorts of stories. And I know on the podcast, you guys have brought up some. When you go through school, you hear about all the horror stories and ex-spouses and who knows what. What trumps is what's on the beneficiary designation form, which is why it's prudent to periodically at least review Who's listed as my beneficiary? Do I even have a named beneficiary?

Yeah. And I, I think the, just to put a really important point on this, that is like, for so many people, retirement accounts are some of their biggest piece of net worth. Um, this is a very significant asset for most Americans. And the one document that says who gets it It's not your will and it's not your trust. It is this form that you maybe filled out when you opened the account, or maybe it's a separate form you filled out. You can change it anytime during your lifetime, but you need to list who the beneficiary is going to be. You can list your kids. You can list, you know, let's say you've got 3 kids. You could list them all to get 1/3. You know, you can list a primary beneficiary, your spouse, and contingent beneficiaries if your spouse predeceases you, that then it goes to the contingent. So, it would go directly to your kids. So, you have a lot of options there on how to list it, but what is on that form is what's going to control. And I'll just say this, like I got divorced, I don't know, shoot, how long has it been now? 7 years ago? Okay, it's been a while. But I like had to redo all my beneficiary forms on everything, every retirement account, my HSA, my Roth IRA. I have 2 Roth IRAs. my traditional 401, my Roth 401. Like, I probably did like 7 or 8 just retirement account beneficiary designation forms, let alone your life insurance and your bank accounts. Like, those things are all passing based on the beneficiary designation. So, do not overlook those. Um, we see divorce, remarriage, uh, like, I've— we've ran into the problem with someone who, you know, set up an account and they listed Um, you know, one of their kids, and now they have 2 kids and they never updated to the second kid. You know, a lot of beneficiary forms will say this includes later-born children. Some of them don't, you know, and so it gets really confusing. So just make sure that they're up to date for your specific family situation. Every IRA custodian from Fidelity to Directed IRA, you know, all of us, like, we have a beneficiary update form. As long as you're still living, you'll be able to update that beneficiary designation. Okay, on the trust, just because we did mention that scenario of listing the trust on the beneficiary designation form, the one requirement that if you list a trust as a beneficiary for an IRA, it must be what's called a see-through trust. Okay, and this is from IRS regulations. And a see-through trust basically means The trust document needs to say who gets it. Okay? It basically means we can look through the trust as this trust is its own little thing, but we can look through it and say, who's, here's who gets it. Okay? And we just have to be able to identify in the trust document who, who those people would be. And that could be fine. Like you could list your trust and your trust is pretty straightforward and says, when I die, my spouse gets everything. If, or if I'm single or my spouse is predeceased, My kids, I got 2 of them. They each get 50/50. That's totally sufficient. That's identifiable of who it would be. Even if there's contingencies in it, that's still great. So, all right. Anything you'd add to the trust?

Yeah. I mean, within the trust, I don't know if we're getting into it next, but the perk of a trust beyond some of the main probate avoidance and all that is you You have the ability to control who's getting what, how do they get it, when do they get it. So, within IRAs, there's some predetermined rules. If your kids inherit, it's generally within 10 years. If they're minors, it's a little bit more nuanced. But ultimately, there's still ways that using that trustee who's taken over after you, they can control how distributions are being made. And even after distribution, it doesn't mean the kids— immediately get access to the cash. It can then be still held. Maybe it's not in an IRA currently, but it's still held for their benefit in a more controlled way. So, it's still important to do the right planning via a trust so they're getting it correctly in your eyes.

Yeah. And I think one common thing we've seen over the years is I think the minor child is kind of easy to see. It's like, oh yeah, my 12-year-old couldn't wouldn't know what to do with an IRA if I passed away. Or maybe your grandma or grandpa planning on passing your IRA down to a grandkid and they're, you know, they're 10.

All right, all right.

You're like, okay, yeah, they obviously can't do it. And I think that's pretty apparent. And that's where the trust and the trustee can be helpful in overseeing those assets for their benefit and having a timeframe to distribute them to them. But more importantly, we've seen it with a lot of clients who are like, my kid's in their 20s. And I don't want them to get a big outright distribution. I want them to be able to really live off of this money and enjoy it and to really elevate their entire life, not them to blow it in their 20s or their 30s. And so, how do I do that? And so, we've had a common clause we'll put in our trusts is maybe some of it goes at 25 and some of it goes at 30, or it's even a third at 25, a third at 30, and a third at 35, just so it's not a— big outright distribution that could sometimes wreck some people financially. They could be wasteful with it or not in a position of like financial knowledge and competence to handle that wealth. So, those clauses can definitely be in the trust. And I'll say some other stuff too. If they, and this is just like for a lot of stuff in the trust and why we like 'em, we always recommend a trust for our clients that have assets. Is, you know, what if your heir has a drug or alcohol addiction? You know, you don't want them to inherit your IRA. They're going to drain that thing. They're going to take the lump sum on day one. That money will be gone. And now you've— the problem that they had already of drug or alcohol, you've just thrown like gasoline on the fire. Um, what if they have creditors chasing them down? I don't like that either. The creditor's just going to get all that money. Whereas if it stayed in the trust, it would be protected from that creditor. Um, what are some of the things in the trust though that you think would be helpful and like for people to be considering this anyways? Because I, I think it's kind of like you mentioned probate is, is one good thing. I think for, for IRAs, they don't go to probate anyways, but all your other assets, we can maybe talk about that. But—

Right.

But I think because people's retirement accounts are such a big part of their net worth, Coordinating with your trust is so important so that all these terms and these restrictions and these protections to make sure your wealth passes to your loved ones properly and benefits their life and doesn't harm them is what we're trying— one big thing we're trying to do with the trust. What other things would you add to the trust, though, and that you're talking to your clients about when you're setting it up, like the why, I guess, here?

Yeah. I mean, it is pretty much everything you could possibly think of. In the simplest form, they just want to control how they get it. But some kids, they don't trust, obviously, to have that sum of money just dropped on their plate. And a couple hundred thousand dollars, what are they going to do with it? But a lot of clients are very business-focused or business owners themselves. They like rental properties, like real estate. They're in that world. So, there's usually a lot of controls we're building in that kind of facilitate something in the business or rental world. So, it's good to coordinate that distribution with all of that because that could be then added to additional rental properties and put to use in a more controlled way versus just giving it to the kids. And a lot of our clients, their kids, they learn the perks of having rentals and different investment assets that they can have, but it's really just the control side and maintaining that continuity with all their assets. Yeah.

And you mentioned a couple of other assets that we have commonly at Directed IRA and many Directed IRA— sorry, we have at Directed IRA and at KQS Lawyers where they do own a business or rental properties, even inside or outside their IRA. Well, those types of assets have to go to probate court when you die, even if you have a will. And your retirement account passes outside of probate. As long as you have your beneficiary designation completed, if you don't have a will or a trust or anything, whoever's listed on that form, they automatically will inherit it. Okay? So that's, that is actually a nice thing about retirement accounts, life insurance, bank account, investment accounts. These are what are called payable on death.

Okay?

Whoever's on that beneficiary designation form, it's payable on death. But a lot of other assets in your life, your home, any LLCs you personally own or corporations, these things are all getting probated. All right. If you don't have a trust, those assets, you're going to a court or your loved ones are going to a courtroom, making a request, paying fees, paying way more for lawyers to get those assets probated and approved to pass on to the heirs. Um, so that's where like, The trust is helpful because you could put your home in the trust, your LLCs would own your trust, and now we're avoiding that probate court process on all these other assets. So, the trust is kind of— it encapsulates everything. These retirement accounts and assets that can pass by beneficiary designation form, but also all the other stuff in the trifecta that we always talk about of your business, your rental property, your home, your—

Business.

The land you own, whatever. It's going to own all those things and keep you outside of probate. All right. Well, let me say on estate planning, just so you know, you can work with Ryan if you want. And this, today's episode is brought to you by KQS Lawyers. So, you know, they, he can help you if you need it for getting your estate coordinated, looking at your retirement accounts, other things, making sure beneficiary designation forms are done properly, getting that trust set up, which includes other powers of attorney. And things like that that are all part of a coordinated estate plan. But let's go to questions, Jordan. Let's see what you got question-wise. And if you guys got questions, fire them away. That's what we're here for. We got— we're going to have another probably 10 minutes here.

Yeah.

Andrew Wolf asks, what happens to a rental property or business brought in whole, bought in whole or in part by an inherited IRA after 10 years?

I mean, you'd have to sell it. So, you have 2 options, I guess. Let's go over them. So, let's say you bought real estate, you self-directed, you have a self-directed inherited IRA and real estate or a business. One, you need to sell it by the end of 10 years. And particularly if it was a Roth, right? We want to sell it, no capital gains tax. That'd be smart. But let's say that you can't. Let's say that you're at year 10. Let's say it's the Roth even, and you can't sell it. Well, what can you do? You can take, you can distribute the asset to you personally. So you can do what's called a distribution in kind. So what we do is we'll take the fair market value of the asset at year 10. Let's say you bought it for a million bucks, or let's say $300,000. Let's go back to that $300,000 inherited Roth IRA. We'll say, let's say So, you bought it for $300,000 and now it's worth $600,000, okay? This business or real estate. And, but you don't want to sell it. You're like, ah, it's not the right time to sell. The market for whatever this is not great. I think I'd do better if I could hold it for another 2 or 3 years. Well, we can just distribute it in-kind at the 10-year mark and you do it at the value at that 10 years. Let's say it's $600,000 then. Now, this is, you personally own it. And your basis is $600,000. Let's say you sell it 2 years later for $800,000. Now, you got to pay tax on that $600,000 to $800,000 growth. I didn't have to pay the $300,000 to $600,000 because that was in my Roth. But the $600,000 to $200,000 as I distributed it out of the account because I wanted to go past the 10 years, you would have to pay tax on that growth and that gain.

Awesome.

All right.

This is going to be one of the really situational ones here, so I'm going to go We'll go through it gradually. This is from Lynn Leatherman. It's a good question. If I inherit an IRA from a parent that was over 73 and was taking RMDs at the time of their passing, I understand that I must take RMDs and empty that account by year 10. Will the RMD amount be based on my life expectancy or that of my parent?

This is going to be a traditional account, right? They were, they were in RMD. You're gonna have to pull it out over 10 years. All right. And it's so, but the core question is, is what's the life expectancy table I'm using? It's your age. Okay. So, you use your age. That's the short answer.

Okay.

The reason I, I mean, I guess if you're trying to take the minimal out as possible, that's good because you're going to be younger. So, That's better. Um, but you still are going to have to drain the whole thing at year 10. So if, again, if you're trying to be strategic on the taxes, that might— you might leave yourself a large balance at year 10 to take.

Got it. That was— that's real-time research.

Yeah.

So, all right, we have a question from, uh, anonymous attendee. Uh, if the living trust is listed as a beneficiary, Will the trust be taxed for the full IRA amount at the time the owner passed away?

No. So, because there's no tax on it unless you're over the estate tax exemption, which is almost— is it $16 million now?

Yeah. I mean, married, it's north of $30 million.

Yeah. So, single, $15 million. Married, you can double it up for $30 million. So, if your estate's under that, there's no estate tax. The trust doesn't have income just because it received, it has an inherited IRA.

Mm-hmm.

If, and so what, let me probably clarify a few things. Most trusts are going to say, hey, when I pass away, I've got 2 kids. Let's go to that $300,000 IRA. I want my 2 kids to get my estate 50/50 outright. Okay. I'm 70 years old, my kids are in their 40s. They're, I trust them. I don't need to withhold it unless they got some drug or alcohol addiction or whatever. But otherwise, the asset goes straight out to them. They're not like, you know, kids, they're not like minors. So, this is going to be the most common scenario. Well, each of them are going to have the option to just get an inherited IRA. It's not going to stay in the trust. The trust is only going to hold onto an asset if the kid's a minor or there's some issue with the beneficiary where they've got a creditor or the drug or alcohol addiction or some clause where you don't want that to get distributed out. Otherwise, the trust is going to say, hey, your 2 kids, each of them can go open an inherited IRA and, or they can take a lump sum, but it's out of the trust. It's not going to be in the trust.

Mm-hmm.

So in that sense, the trust doesn't have the asset, it doesn't have income. It's going to go directly to the heir. So, that's going to be the most common. So, if the trust is going to file a tax return, it's only going to be on assets the trust keeps that it does not distribute out to the heirs. But that's the exception, not the norm.

And that's usually with the control that we were kind of talking about. Like, there's a reason we still have it in trust for, Some period of time for some reason.

Yeah. And, but, but even then, let's say you had that where the, the, 'cause you can have an inherited IRA in the name of a trust, um, where there's still a trustee and, you know, governing whether there's distributions or not. And if they're, if let's say they, it's an RMD where they have to start distributing money, well, that money would, would go to the trust. It wouldn't go to the heir. The trust would hold that cash. They could otherwise invest it or hold onto it until whatever condition of restriction of control was met. You know, they went, it's a drug or alcohol thing, and our trust clause says if they get treatment and they resolve the issue and the trustee's determination, they can distribute that out. So, but usually for the way we're doing trusts with clients is you're not going to need to worry about a trust tax return. Unless you have an estate issue where you have minor kids, where, when, from when you've passed, or there's some reason the assets need to stay in the trust to protect the asset rather than distribute to the kid. So most people, you don't have to worry about it. You're not going to be doing a trust tax return. The trust is just the mechanism to get the stuff out. It's going to pass it directly, whether it's an inherited IRA or they're going to deed the house or sell it or transfer the LLCs to the kids. It's really just a, mechanism to move the assets easily.

Okay.

Not a place to hold the assets, collect the income and all that stuff. That was a long answer.

No, I mean, these all necessitate long answers, I feel.

Yeah. I mean, I bill by the hour, you know, so I got pretty good at taking a while to explain stuff.

Let's, let's, let's do a self-directed question.

Okay.

This is from Steven Freisch. How does my self-directed IRA that holds real estate Okay.

So, this will again only apply to a traditional IRA. So, if this is a rental property, your RMD is just going to be typically your cash flow. So, let's say you have the self-directed IRA with the rental property and you're getting rental income. You could use that cash flow to satisfy RMD. Really, once your first year of RMD, you know, let's say you're 73, you're in your first year of RMD, it's kind of about 4% of your account.

Okay.

So if you got a, let's say you got a half a million dollar account, you got to take about $20,000 in RMD that year. Now, if you have multiple IRAs, like maybe you have a brokerage IRA at Schwab and you have a self-directed IRA, a directed IRA that owns real estate, you can satisfy the RMD from the brokerage IRA. Okay. For both accounts. All right. You don't have to take some from the directed one and some from the Fidelity one. So, um, or Schwab, sorry. I always, they're interchangeable, you know?

Yeah.

Um, yeah. So now I have ran into scenarios where a client, um, has owned, let's say raw land.

Okay.

And they don't, there's no income on it and they need to take RMD. Well, what do I do? You're going to need to sell it. If you don't have any other account or other assets in the IRA or a brokerage IRA that you can satisfy the RMD from, You may have to sell the asset. And if that's not something you're willing to do, because again, maybe it's market conditions, it's not the time, you can do an in-kind distribution where you take a portion of the property, you take a tenant in common interest and deed it from the IRA to you. So let's say the property's worth $100,000. Let's say you need to take a $4,000 RMD this year. You could deed yourself a 4% undivided interest from the IRA to yourself personally. And you've basically got the RMD by doing that. That is the nuclear option.

Okay.

I do not recommend that. You're gonna need an appraisal. It's gonna be a pain in the ass, deeds redone. Do not do that unless you have to. I've had to do it. Maybe 2 or 3 times my entire 25-year career almost doing this.

So, it's probably important to plan. I'd like to think you would know this prior to them passing. You would like to think like, if they're getting up there in age, maybe don't lock up my IRA that is potentially already in RMD mode in some illiquid property or investment that I'm not going to be paying the RMDs on. So, It may be somewhat foreseeable that we can avoid that issue.

Um, we have a question from Karen Baumgarten. Karen asks, my SD 401 consists of illiquid assets throwing a solid revenue stream, no kids. Do I designate heirs by individual assets or hire some third-party trustee to manage the distributions?

Ultimately, I think she could go either route. She could distribute each asset to whoever she wants. I think it a little bit depends on her age and where she's at. I mean, life expectancy, if she's later in life, maybe start to consider options with these illiquid investments and figure out what we can do to maybe unwind those a bit. But yeah, I would say the biggest thing is let's do some planning now.

Yeah. I think it kind of depends on like, who do you want to receive these assets when you pass? And I think what I kind of just like unpack a little bit with what Ryan said is like, you know, having illiquid assets is fine. Like, they're— sounds like they're good assets. They're producing income. You like them, right? For you. But do your heirs like them? You know, and this is a conversation we have to have with a lot of our clients at KQS Lawyers. It's like, you're a business owner, but are your kids going to run this business? Oh, you've got 10 rental properties. Are your kids going to like managing 10 rental properties? And they're like, no. Yeah. So like, so let's think about how these assets look to who your heirs are. Now, you might be someone that's like, well, my kid works in the business, of course. Well, yeah, my kids are involved in the rental properties. They've got their own real estate too. Great. They'd probably love to inherit your real estate. But once you can identify who your heirs are and what that dynamic's going to look like, then you can figure out— what you want to do with the assets, 'cause it's really going to depend on them as much as anything. Now, I have had clients, and I'll probably say the distributing assets to specific people, I don't know that I love that. I've had clients do that. I had one client had a very significant self-directed Roth account, like maybe like $5 or $6 million.

Wow.

And he wanted to distribute it to his kids by property. So, he'd be like, and it had, let's say, 8 or 9 properties in it. And it had some notes in it too. And he's like, all right, so this kid's going to get this little basket of these properties and these notes, and this kid's going to get these ones and these ones. And then, when we looked at it, and he's kind of going year to year after it, it's like the value shifted on all this stuff. He ends up selling one, one note gets paid off. And now what he planned for now, 3 years from now, kind of looks pretty dumb because he got super asset specific and he's got new assets in there that he didn't say who's getting what. And it's like, I just don't love that. It sounds good, but you're not dying tomorrow. Like this is, this is going to be fluid. So I like more percentage-based.

Right.

You know, and you could say in the, even you could say in the trust, something like, You know, I want them to actually, I don't want the assets to be liquidated and sold, which is a lot of, a lot of trusts are going to say, hey, whatever, if you own real estate or stocks or whatever, we're just going to sell all those assets and distribute the cash to the heirs. Um, you might say, don't do that. Just distribute the assets specifically to the kids in equal amounts. And then, because you could know what that is when they, when you pass, you can kind of set values on them and then tidy it up with the cash to make sure there's a fair allocation so that if You know, you had 2 properties and one was worth $1 million and one was worth $100,000 and one gets one and the other gets one. It's like, well, that wasn't very fair. You kind of can settle the difference with cash or other assets. So, you can get really specific on this. I tend not to love that unless they're like sentimental assets. Like, you know, this could be like the musical instruments or the guns, or maybe there is a kid involved in a certain business or a property or— you own the boat with the brother and the brother's going to specifically get the boat or whatever, you know, I don't know what it is, but like that, those be specific on the asset. But I think in your retirement account, I've just seen it cause more messes than, than the like goal was intended.

Right. Okay. Um, another anonymous question here. Um, regarding the see-through provision you mentioned when listing the trust, As the beneficiary of the IRA, does the trust have to explicitly state which specific beneficiary gets IRAs, or is typical language allocating the estate in general sufficient?

You want to hit that?

Yeah.

As I understand it, general language in the sense where, like, let's say it says, to my kids per stirpes, which means, like, all my kids get an equal share, that should generally be fine versus, like, a very broad statement. Or listing them by name, that should apply or be allowable.

Yeah, exactly. And you don't have to say, like, the trust doesn't need to say, like, so-and-so gets my IRA. The trust just needs to say, like, if you listed your— so you have your beneficiary designation form and you listed your trust as the beneficiary, like, you know, the Sorensen Living Trust or the Blackbriar Trust, whatever. Like, that's what's listed on the beneficiary designation. Then when you look at the trust, the trust doesn't have to say, oh, this IRA, a directed IRA, goes to John. It doesn't need to say that. What the trust just has to say, what that see-through provision means, is John is the beneficiary. John receives my estate. It doesn't need to say specifically the IRA or reference the IRA. Um, or it could say John and Sally, 50/50, or whatever. It doesn't matter. You just have have to have the name and it be identifiable. Most people's trusts already have that. Like most trusts are like a 99% of trusts are automatically see-through trusts because people want to be clear who's going to get their estate. Sometimes it's not though, where it's the— and you, in fact, you don't even have to list the person's name. They just have to be what's called readily identifiable. Meaning by definition, like, like you could figure out who they are. If it's like you put per stirpes in there, it's not clear who it is. Or there's, you have a provision that says, later-born children are automatically included and the child's name wasn't in there, well, the trust automatically picks them up. So, they're deemed readily identifiable. So, I wouldn't stress too much about that. I would— I have yet to come across a trust that we've done that isn't automatically a see-through trust anyways. So, you'll get that met. But be clear about, obviously, and being a little intentional about making sure the beneficiary designations are updated. And if you have a trust, that's probably part of the— in fact, we should probably talk about funding the trust. So, your trust— so, this is the way the trust works. Your trust is going to say who gets your stuff, right? And then under what conditions. But after you've signed that trust, you have to do what's called funding the trust. Maybe you can explain what like that funding the trust means.

Right. And it's just in the simplest way, it's how do we get everything into it? How do we get it under the trust umbrella? And the 2 main mechanisms are, let's say, with real estate titling assets, you can put title on to be in the name of the trust. So, you would deed your property to the trust versus an account like a life insurance policy, an IRA, a 401. You can't retitle those to be in the name of the trust. What you do is you update the beneficiary. So, you're going to the custodian, which is like Directed IRA or Fidelity or Schwab, and you're updating behind the scenes who inherits the account after you. Yeah.

And a lot of people are like, so do I need to change the name of the account in the trust?

No, no, no, no.

Just update the beneficiary designation form that says when you die, who gets it, and you can just list the trust there. All right, let's maybe take 2 final questions. Okay. You got 2? Yeah.

I mean, and we only got 2 minutes, so see how fast we can.

Okay.

We'll be more concise. And by we, I mean me.

I like this question from Bill Wittig. It's, I have a revocable living trust. My life partner, not formally married, is the beneficiary if I pass first. Please share tax repercussions and anything I should be aware of.

Well, yeah, she's not married to him. She's treated no differently than kids, grandkids, essentially any Other non-spouse in the eyes of the law. She's not married to him, so she wouldn't get that treatment. So, she would have the 10-year rule or any of the other rules we talked about today.

Yeah. And I think anyone that's in that life partner scenario, that's— the tax rules just aren't that great when dying. I mean, there are a lot of great perks under the tax law when you die. And you, and you die married, your spouse gets to inherit a lot of your assets and get something called— well, I guess you still get step-up in basis outside your retirement account, but like this spousal rollover rule doesn't apply. You can't double up the estate tax exemption, um, between your joint assets. So it's a— not that I'm trying to talk you into getting married necessarily, but there are the perks. You're just not going to get them. So, Spousal rollover is one. But the other thing is step-up in basis. You could actually still, your heirs, no matter spouse or not, they can still get a step-up in basis on your assets when you pass. That doesn't really apply to your IRAs, but—

Yeah.

But that's a little perk too. We can go over that. I mean, what I would say is I think some of the most important scenarios for people to plan for with their estate is life partner scenarios because the laws are working against you. Like, you may want your life partner to receive the majority of your assets, but if— but like the law, the default provisions in the law, if you don't have a well-planned estate, is not that— is that they're going to get absolutely nothing. Like, the default provisions are that your spouse, if you have one, if you don't, your kids, if you don't have kids, then your parents.

Yeah.

If your parents have predeceased you, then your siblings. There's this whole order that's just the default in the law on who gets your assets when you don't have an estate plan. So, that's a critical scenario, super, super critical that you have well-planned and coordinated, that you have an estate plan and that your life partner has one too. So, it's like a two-way street and you can be doing them together at the same time to make sure that they're coordinated. The other one would be divorce scenarios, people that have a yours, mine, and ours situation. That's me. Like, I'm divorced, I've got my kids from a prior marriage, my spouse has her kids from a prior marriage. We have assets that are, we got the yours, mine, and ours assets. Like, those can get a little complicated, and without proper planning, stuff gets jacked up, and what you typically have intended and wanted isn't what's going to happen. So, it's a good opportunity, I think, to just think about your estate. Again, inherited IRAs are a big part of that. We do those accounts at Directed IRA. So, let me just show that slide there. If anybody's interested in doing an inherited IRA, if you already have an inherited IRA, you've thought about self-directing it, We do quite a bit of inherited IRAs at Directed IRA. You can book a call with our team to speak to them on how those work and answer any questions that you might have. Use that WEBINAR50 code, that'll save you $50. And if you kind of need to get your shiz together on your estate plan, you're like, I don't know that I've thought this through, these beneficiary designations, who's getting my stuff, my retirement account, my other assets, Ryan is here to help. You can book a call with him. I made him put his email in here. He put his assistant's email. I'm like, put your email in there. Like, shoot me an email.

I'm going to respond to you on your email.

What about phone number too? Why don't we throw a—

Yeah, let's put your cell in there. No, Ryan's assistant's Kennedy too, who's great to work with. But, but yeah, you've got Ryan's personal email there. Don't abuse it.

Shoot me an email.

Don't abuse it. But book a call with them, get your estate plan going, or if any other tax or legal planning you might need, he does comprehensive tax consults as well. We just want to be a resource with you though, whether you're just attending here, Um, to get educated, stay up to speed on what's going on, making sure you're being savvy about how you're managing your finances and building wealth. Um, please make sure you're subscribed to our newsletters so that you get updates on upcoming webinars. This webinar, since you are subscribed to this, you'll be on our newsletter list, right? And you'll get an email when the recording is available. So if you missed any parts of this, you'll be able to catch it, or you want to share with your friends or family.

Okay.

And then the last announcement here, is our Alt Asset Summit is coming up October 22nd, 23rd. That'll be in Costa Mesa, California. Go to altassetsummit.com. 2-day event going through common alternative assets, ways you can invest and grow your wealth outside the stock market. We're going to have some financial advisors there, accountants, attorneys, of course, and then people that have expertise in certain assets, from real estate to oil and gas to crypto to private equity venture, all these different assets. that people invest in outside the stock market, small businesses. We'll be covering that too. Um, so great time, incredible people to go network with as well. So go over to altassetsummit.com to learn more about that event. Thank you everyone for being here. We will see you next time. Until then, stay calm, self-direct on.