Stretch IRAs: Cutting-edge planning or
accidents waiting to happen?

By Dick Duff RWD Enterprises

Stretch or multigenerational IRA thinking isn't new. After all, who wouldn't want (for self and family) a tax-sheltered asset protection plan blessed by the IRS, Congress and the states — over scores of years, no less! Ed Slott, who has just written an interesting book about stretch IRA planning, would surely devote his creative energies elsewhere if all this and more weren't true.

Yet, there is much evidence that stretch IRAs in practice are a myth-even a downright lie, as Ed Morrow exclaims in his wonderful article in Retirement Planning Magazine.I'd probably refer to such IRA planning as more of a joke. There are a lot of good intentions here, but I'm worried that eventually there will be lawsuits when all goes awry.

Let me explain, and set the stage.

Harold is your client and owns a $1 million IRA. Like most IRA owners, his account is invested in mutual funds and securities (at Last Chance Brokerage Co.). Harold has been reading about stretch IRAs and IRA beneficiary planning. He has even called his investment person who assures everything should be taken care of under Last Chance's beneficiary form (and custodial agreement).

But, Harold can't even find his beneficiary designation form. Last Chance won't permit a customized arrangement. His estate planning lawyer recommends that the IRA beneficiary be changed to Harold's revocable trust. Harold's CPA doesn't think the lawyer knows much about this stuff. And you've just listened to a Webinar indicating that ABC Ins. Co. has come out with a state-of-the-art IRA annuity. Of course, their product has all the stretch bells and whistles you'd ever want; it even includes a "restricted" payout possibility.

It's no surprise that Harold is confused. And, you as well.

Here's the point. As Ed Morrow puts it, "A stretch IRA promise is often deceptive, if not an outright lie." If so, then which "liar" does Harold believe? Does the last liar have a chance? Could you and ABC end up holding the bag?

Essentially, what Harold wants is clear (if only he knew how to express things):

* Consider a self directed IRA for part of this money

* Mandate the stretch after he dies (restrict beneficiaries to mostly required minimum IRA distributions (RMDs)

* Give fixed, indexed, variable and increasing lifetime income options and joint and survivor possibilities (with full or partial rights of commutation)

* Have an "RMD annuity" option — something not known yet in the IRA marketplace

* Name a successor beneficiary (for what's left after a primary or contingent beneficiary dies)

* Not give too much beneficiary control for fear that that will cause attachment by their creditors

* Not include IRA values in his beneficiaries' taxable estates

* Have an independent overseer or trust protector who specializes in small IRA see-through trusts (and who doesn't charge high fees)

* Be assured that his instructions will be followed and not discarded in a heap

* Assure payment to a minor beneficiary's guardian or custodian

* Deal with (a) a spousal rollover option, (b) the possibility of a spouse's remarriage, (c) generation skipping tax planning, (d) trust language that adapts to IRA thinking, (e) an attorney-in-fact to make last minute changes, (f) the possibility of a simultaneous death, and (g) much, much more.

Of course, Harold wants everything done at minimal cost. Why pay attorneys, accountants, multiple income tax return costs and trustee fees forever if you don't have to?

The bottom line: Harold wants more than he can have. His advisors are promising more than they can deliver. And when this happens, it's a recipe for failure. You don't want to be around when everything hits the fan.
Essentially, there are four competing possibilities for anyone's stretch IRA or IRAN plan. They are:

1. An IRA custodian's beneficiary form and its often arcane choices

2. An IRA Trust Co.'s program which probably isn't much better

3. A "see-through" trust with its traps and high administration expenses. (These should be written by lawyers who specialize in this overwhelmingly complex area)

4. IRA annuity carriers who won¡|t assume trust powers and whose beneficiary forms are weak at best. (Just ask your favorite insurer what they'll do if a beneficiary wants the money now, instead of RMDs over the next 60 years or so. You probably won't like the answers.)

The message is clear: Before you make your next multi-generational IRA or IRAN sale, take heed. Is the stretch a lie or even a joke? Will someone's beneficiaries pay you a visit when everything falls apart?

There is hope. The perfect stretch IRA hasn't been invented yet. But it can be, it must be and it will be. With literally millions of dollars rolling into IRAs every day, it can't be any other way.

Richard W Duff, J S, CLU, is a financial advisor in Denver. He is the author of numerous books and reports on estate planning and annuities, including his comprehensive manual, “The IRA Gold Book, Financial Solutions for Clients With Significant IRAs.