Getting Stretch IRA Treatment With An A-B Trust by Michael Kitces

Michael Kitces discusses the ‘A-B Trust Strategy’ for minimizing estate taxes by effective planning. A common issue with A-B trust planning involves those trusts that are funded primarily by a retirement account such as an IRA which then prompts “stretch IRA treatment.”

Fortunately, though, the “see-through” trust rules do allow at least some types of A-B trusts to still obtain stretch IRA treatment, particularly in the case of bypass trusts or (properly drafted) QTIP marital trusts, even when created as a testamentary. On the other hand, naming marital trusts or even revocable living trusts outright can result in a total loss of stretch treatment for an inherited IRA.

In addition, it’s notable that even where the see-through trust rules do allow for the stretch of an inherited IRA, the income tax treatment will often be less favorable than naming beneficiaries outright (due to the compressed trust tax brackets). As a result, anytime an A-B trust is being considered as the beneficiary of an IRA or other retirement account, it’s crucial to weigh the non-tax (and potential estate tax) benefits against the likely income tax disadvantages!

Continue reading the full post to learn about all the types of trusts that may qualify as IRA beneficiaries: Getting Stretch IRA Treatment When Using An A-B Trust As An IRA Beneficiary

Posted by Allison Trupp, Associate Editor, Wealth Strategies Journal