Kiss Your IRA Goodbye if You Leave it to a Spendthrift Child

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Planning Attorney

They say the first generation earns it; the second generation preserves it and the 3rd generation squanders it. What generation are you? What generation are your children? As a parent you may want to leave your IRA to your son or a child. How should you make out the beneficiary designation form especially if you are widowed? The dilemma for many parents is that a child of theirs is a spendthrift. He or she has never been good at handling money and parents are afraid he or she will just blow whatever is left to them.

There are many clients who are in precisely your situation. You have two options.

The first is to simply designate him/her as the beneficiary of your IRA. If you do, he or she will be required to take minimum distributions based on his/her age, even though not yet 59 ½. He/she will have to pay income tax as he/she makes the withdrawals. The downside of this approach, (naming a child as direct beneficiary) is that he/she can withdraw more than the minimum annual distribution. He/she can withdraw the entire amount all at once, paying significant income taxes sooner, and he/she might end up blowing their entire inheritance.

The second option, one that I think could put your mind at ease as well as protect your son or daughter from himself/herself, is for you to create an IRA Stretchout Trust. This will allow you to limit your son’s withdrawals. The IRA Stretchout Trust is a legal instrument and numerous variables must be considered when setting it up. It’s a terrific alternative to giving your hard earned IRA to a spendthrift child. Meet with an experienced elder law/estate planning attorney to investigate this option.

To discuss your NJ Estate Planning matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com.  Please ask us about our video conferencing consultations if you are unable to come to our office.