Revocable living trust versus multi-generational IRA

December 10, 2013

By Dr. Harold Wong
Sound Money 

During the past three years, I have heard many questions about the need for a Revocable Living Trust (RLT), especially from those whose major assets are their IRAs (or other retirement plans such as 401ks or 403bs) and their primary house. This article will compare the advantages and disadvantages of the RLT versus the multi-generational IRA.

The RLT package typically includes: will, living will, durable powers of attorney, as well as the RLT. The will is used to specify the wishes of the deceased as to who gets what assets. The living will designates someone to make medical decisions and the durable power of attorney designates someone to make medical decisions if one is incapacitated. The RLT specifies details, such as a desire that the kids inherit one third of the assets at no earlier than age 30; one third of the assets at 35; and the remaining one-third of the assets at age 40.

For most families, the major reason they purchase a RLT is to avoid probate. An IRA, whether a traditional, Roth, or MGIRA, also avoids probate. One simply lists the primary and contingent beneficiaries on the beneficiary form and the asset goes directly to them, avoiding probate.

There are no income tax benefits to a RLT. One reports the income on one’s tax return (while alive) just like the assets were in your personal name. After you die, most estate planning attorneys distribute the assets within the year you die to the heirs. If you have substantial IRA assets and the IRA assets are titled in the name of the RLT, you have eliminated the possibility of a MGIRA. If the IRA assets are not titled in the name of the RLT, most estate planning attorneys have a “Pourover” provision in the will. This means that all assets not in the name of the RLT will “Pourover” to the RLT and be distributed according to its wording.

Example: You have $500,000 in your IRA and two kids, age 32 and 30. Upon your death (or the death of the last spouse if married), the $500,000 will shortly become $250,000 in each child’s bank account. This will certainly push them into a higher tax bracket and up to 40 percent can be lost (between federal, state, and local income tax).

In contrast, if we set up the MGIRA, only a tiny portion (less than 2 percent) would become immediately taxable. The rest would compound over their lifetime, and the two kids would only have to distribute the Required Minimum Distribution (RMD) each year (based on each child’s age), per the IRS actuarial table. This is why the MGIRA can turn that $500,000 into $1-2 million of income over the two kids’ lives. If we add the Roth IRA provision, it can turn that into as much as $3 million of tax-free income.

The RLT gives you no asset protection. This is a shock to most people. Once you die, and the RLT distributes your assets, the liquid assets are sitting in your kids’ bank or brokerage accounts. If there’s a divorce or lawsuit, they can lose half or even all the assets.


Even if your two children had $1 million each in their MGIRA, they could declare bankruptcy and none of the creditors (except the IRS if taxes are owed) could seize the assets.

Most of the public purchase the RLT, not realizing that there are NO income tax benefits or asset protection. In contrast, a MGIRA gives you these benefits. However, if there are complex issues, such as provisions for a special needs child, OR substantial assets outside of IRAs and other retirement plans, a RLT may be needed. © Harold Wong 2013


Dr. Wong can be reached at 480-706-0177 or at

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