If the named beneficiary predeceases you in death, you change the named beneficiary or have a contingent beneficiary. What if the beneficiary at their death is below the estate tax exemption, but has unrealized capital gains? Won’t they lose the step up in basis on any assets in the irrevocable trust? Many people have a majority of their net worth outside of their house in traditional IRAs or 401(k)s or similar deferred compensation plans and if left to a trust with beneficiaries other than an EDB has to be withdrawn within 10 years. Trust tax rates are extremely compressed, so if the distributions from the traditional IRA are retained within the trust, there’s a very high cost if the beneficiaries aren’t already in one of the top tax brackets. If the money is distributed to the beneficiaries to avoid the high trust tax rates, then you lose the asset protection anyway within 10 years.
That’s not a good idea for many reasons.
What if one of the named beneficiaries predeceases the original poster, or has a taxable estate (with the inclusion of the inherited assets plus the income and growth thereon), has a creditor problem, gets divorced, outlives his/her spouse and remarries, or goes into a nursing home and might otherwise get Medicaid?
It’s penny wise and pound foolish.
Statistics: Posted by newparent7 — Wed Feb 12, 2025 9:56 pm