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Roth IRAs as an estate planning tool to provide for grandchildren

Many District of Columbia residents include their grandchildren in their estate plans.  They attempt to figure out a way to leave something to their grandchildren that could provide for them for a number of years while achieving one of most important goals of estate planning -- limiting any tax liability for the beneficiary or heir.  A Roth IRA could be a good choice.

This type of IRA puts the income tax burden for the current value of the account on the person who opened it.  The grandchild or grandchildren who inherit the account will then not be liable for any income tax for the duration of their lives.  This could mean a grandchild could retain the entire balance of the account, which could provide for them for many years -- especially if the beneficiary continues to let the account grow over the years.

Current law requires a beneficiary to take certain required minimum distributions from the account no later than Dec. 31 of the year in which the owner of the account passes away.  Therefore, the younger a beneficiary is when his or her grandparent passes away, the smaller his or her required minimum distributions will be since distributions are calculated based on the life expectancy of the beneficiary.  If an individual is concerned that his or her grandchild will simply empty the account when it is inherited, a trust could be named as the beneficiary, and stipulations may be made as to when distributions actually reach the intended heir.  The trust would still have to take minimum distributions at certain times, but the money would be held by the trust until the trust's beneficiary is eligible for distribution from the trust.

Other issues need to be considered before using a Roth IRA as an estate planning tool.  Understanding what documents will best carry out a District of Columbia resident's wishes could require some research and assistance.  Knowing there are numerous options to achieve an individual's estate planning goals can provide peace of mind that family members will be cared for long after he or she passes away.

Source: investingdaily.com, "Integrating IRAs into Estate Plans", Bob Carlson, Sept. 25, 2014

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