Some of the most generous provisions of the tax code are those that permit beneficiaries of IRAs and other qualified retirement plans to defer income tax on the plans until time of withdrawal.
This allows the IRA or qualified plan to grow significantly more than if it were subject to tax on gains each year.
Another generous provision of the tax code permits beneficiaries to withdraw only a minimum amount from IRAs or qualified plans each year.
By taking only these “required minimum distributions” a beneficiary can stretch out distributions over the better part of his or her lifetime, resulting in further deferral of income tax on the amount remaining in the plan.
Unfortunately, most beneficiaries fail to take advantage of this latter provision and withdraw all of the IRA or qualified plan funds immediately, losing the significant tax advantages of tax-deferred growth.
One way to avoid this is to name a trust as beneficiary of the IRA or qualified plan. A properly drafted trust not only permits the stretch out, but also ensures maximum income tax deferral.