Caution with IRAs & Estate Planning

In this Elder Law Minute, Kaye Dent explains how your loved ones could have to pay taxes on the money given to them from your IRAs, but with proper planning with DCEL, there are ways around this.
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Video transcript:
Hi, I'm Kaye DeSelms Dent with Dent Coulson Elder Law, here with an Elder Law Minute for you. These videos are intended to educate you about the Elder Care Journey, which begins earlier in life than you might think. We hope that you find them useful, and if you have further questions, please call us at Dent Coulson Elder Law.
One of the issues that I see pop up repeatedly these days is IRAs in estate planning. IRAs used to be these great kind of dynastic wealth-building tools where you could leave wealth to the next generation. And in 2020, the federal government said, 'That's great that you've been doing that, but that's really not what we intended. It's really for your retirement.' So if you have something left in your IRA when you pass away and you want to leave it to your spouse, great. Your spouse can extend it through their lifetime. But if you're leaving it to somebody else, usually your children, your children are going to have to take it out, usually within 10 years. There are some different rules and there's a five-year period, and it's very complicated, basically.
But what is happening in some cases is that people who have non-taxable estates, in other words, there's not going to be any federal estate tax, probably not any Illinois state tax or Missouri estate tax, there's going to be income tax to the children. Children in their 50s, maybe 60s, who are inheriting IRAs and have to take them out during their working years, possibly during their highest-earning years. They're going to be getting extra income and they've got to pay tax on that if we're talking about traditional IRAs. So, this can be very problematic. In some cases, the issue isn't so much that it's going to be taxed, it's that the beneficiary might be a spendthrift, somebody who would go through the money very quickly. And it is possible to protect the IRAs, not necessarily from the tax consequences, but from the spendthrift by running them through a trust and not leaving them directly to that person.
Also, you have to worry about planning for people with disabilities. So if you've got a disabled child or grandchild or other loved one who's a beneficiary of your IRA, leaving the IRA directly to them might expose their public benefits, whether Medicaid or SSI, to termination. And you don't necessarily want them to lose those benefits. You can leave the money to them through a supplemental needs trust, which could stretch out over their lifetime because that's an exception to the 10-year rule. Benefit them greatly, in addition to the medical and financial assistance they're getting through the government programs.
Again, it's complicated planning with the IRAs, but it can be done and it should be considered if you've got any significant money in IRAs and have any concerns whatsoever about your beneficiaries, whether that they might spend the money too quickly or that they're disabled. If you have these situations, please come consult with us at Dent Coulson Elder Law, and we can help develop a plan that will protect your legacy for your loved ones. Thank you