MDNews - Long Island

HERE'S WHAT YOU SHOULD KNOW ABOUT NAMING A MINOR A S AN IR A BENEFICIARY. CAN A CHILD inherit an IRA? The answer is yes, though they cannot legally own the IRA and its invested assets. Until the child turns 18 years old (in some states the age is 21), the inherited IRA is a custodial account, managed by an adult on behalf of the minor beneficiary. IRA owners have good intentions when they name minors as benefi- ciaries. Their idea is to "stretch" a la rge Roth or traditiona l IR A . Distributions from the inherited IRA can be scheduled over the expected lifetime of the young beneficiary, with the possibility that compounding will partly or fully offset them. Those good intentions may be disregarded, however. When IRA minor beneficiaries become legal adults, they have the right to do whatever they want with those IRA assets. If they want to drain the whole IRA to buy a car or fund an ill-conceived start-up, they can. How can you have a say in what happens to the IRA assets? You could create a trust to serve as the IRA beneficiary, which is an intermediate step before your heir takes possession of the assets as a young adult. In other words, you name a trust as the beneficiary of your IRA, and your child or grandchild as a beneficiary of the trust. When you have that trust in place, you have more control over what happens with the inherited IRA assets. The trust can dictate the how, what and when of the income distribution. Perhaps you specify that your heir gets $10,000 annu- ally from the trust beginning at age 30. You can include language that mandates that your heir take distributions over their life expectancy. You can even stipulate on what the money should be spent. A trust is not for everyone. The IRA needs to be large enough to warrant creating one, as the process of trust creation can cost several thousand dollars. No current-year tax break comes your way from implementing a trust, either. In lieu of setting up a trust, you could simply name an IR A custodian. In this case, the term "custodian" does not refer to a giant investment company, but a person you know and have faith in and who you authorize to make investing and distribution decisions for the IR A. You can name one person as the custodian and another as the successor custodian. What if you designate a minor as the beneficiary of your IR A, but fail to put a custodian in place? If there is no named custodian, or if your named custodian is unable to serve in that role, then a trip to court is in order. A parent of the child or another party who wants guardianship over the IR A assets will have to go to court and ask to be appointed as the IR A custodian. You should a lso recognize that the Ta x Cuts & Jobs Act reshaped the "kiddie tax." This is the federal tax on a minor's net unearned income. Required minimum distributions (RMDs) from inherited IR As are subject to this ta x. A minor's net unearned income is now taxed at the same rate as trust income rather than at the parents' marginal tax rate. This is a big change. Income tax brackets for a trust or a child under age 19 are now set much lower than the brackets for single or joint filers or heads of household. A 10 percent rate applies for the first $2,550 of taxable income, but a 24 percent rate plus $255 of ta x applies at $2,551. There is a 35 percent rate plus $1,839 of tax for $9,151 and a 37 percent rate plus $3,011.50 of tax for $12,501 and up. While this is a negative for middle-class families seeking to leave an IR A to a child, it may be a positive for wealthy families. The new kiddie tax rules may reduce the child's tax liability when compared with the old rules. One last note: If you want to leave your IR A to a minor, check to see if the brokerage holding your IR A a llows a child or a grandchild to be an IR A beneficiary. Some brokerages do and others do not. Dave B. Rao is the founder of R AO Wealth Partners. He focuses his practice on helping to advise physicians, corporate executives and business owners on their unique financial situations. For more information, visit raowp.com. n Dave Rao to a Child? BY DAVE RAO Should You Leave Your IRA Our firm does not render legal or tax advice. This article was written for our firm and provided courtesy of MarketingPro. Investments in securities and insurance products are: NOT FDIC-INSUR ED/ NOT BA NK-GUA R A NTEED/MAY LOSE VA LUE Rao Wealth Partners is an independent firm with securities offered through Summit Brokerage Services Inc., member FINR A and SIPC. Advisory services are offered through Summit Financial G roup Inc., a registered investment adviser. Summit is an independent broker-dealer with client assets held at First Clearing LLC (a wholly owned Wells Fargo subsidiary). Summit and its affiliates are under separate ownership from any other named entity 1 2❱❱❱❱❱ F I N A N C I A L C H E C K U P

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