If you have a significant amount of money in an IRA, you may be concerned about what happens to it when you die. Until recently, an IRA was simply cashed out within five years after death of the account-holder, incurring very large tax brackets in your estate. Further, the longer the IRA lasts, the more money it earns, so it's in the best interests of your family to keep your IRA around for as long as possible.
One solution to this is turning your IRA into a stretch IRA, and guaranteeing its long-term viability with an IRA stretch trust.
Before we get to the IRA stretch trust, however, we should define a stretch IRA. When an IRA is set up, you name a person as its beneficiary after your death, usually your spouse. Once this happens, they then name a new beneficiary, usually a child. At that point, they can either cash out the IRA, accepting the tax loss and receiving a large lump sum, or they can choose to stretch it out by only taking out the minimum yearly amount required by the IRS life expectancy tables to avoid excess accumulation penalties.
With the latter option, this becomes a “stretch” IRA, allowing the IRA to grow for decades. Later, once your spouse dies and your child inherits control of it, they have the same option. They can cash it out, taxes and all, or keep taking out the minimum amount for the length of their lifespan. Plus, they can then name their own spouse or children as beneficiaries, and so on, continuing to stretch it over the course of generations.
The problem with this is, what if your child decides to take all the money at once rather than allowing it to grow? While they'd have this right, for your IRA to provide to generations to come, you'd need to prevent this. By designating a trust as the beneficiary for your stretch IRA, and providing detailed instructions to the trustee on how the money is to be paid out to your descendants, you can help prevent this sort of short-sighted action.
Creating an IRA stretch trust also can better shield it from many types of legal action, such as bankruptcy and divorce settlements, protections that may or may not be available with a personally-inherited IRA . Further, the trustee can still be allowed leeway to disperse more funds in the case of emergency or any other good reason.
Basically, by naming a properly drafted IRA stretch trust as beneficiary, you can guarantee that the money you earned and saved can be put to work for your family for generations to come. It can potentially pay out millions to future generations that it never could have otherwise.