Many clients have used an individual retirement account to help build a healthy retirement income portfolio. Those clients who own a large IRA but no longer need the funds for retirement will be looking to reduce taxes and increase the amount of wealth they can pass on to their heirs. A Stretch IRA is a tool that can increase wealth for beneficiaries over several generations.
What is a stretch IRA? 
Clients may have a traditional IRA that is funded on a pre-tax basis and taxed when distributions are made. Or they may have a Roth IRA funded on an after-tax basis and not taxed when distributions are made.
Either can be used to create a Stretch IRA for one or more designated beneficiaries. The "stretch" in the IRA anticipates that when the client passes away, the beneficiaries will take distributions from their inherited IRA over their individual life expectancies, s-t-r-e-t-c-h-i-n-g out the value of the distributions to their heirs.
Is a stretch IRA right for your clients?
There are primarily two Stretch IRA designs: (1) a simple stretch; and (2) a generational stretch. When your client passes away, either IRA will be subject to income tax and (potentially) estate tax. If a client wants to protect the full value of the IRA for heirs, he or she can add the protected stretch to their planning. The protected stretch uses life insurance proceeds to pay the income and estate taxes on either IRA, enhancing long-term benefits for your client's heirs.
The simple stretch IRA can be established when the client attaches one or more beneficiary designations on the IRA. The children would typically be primary beneficiaries; grandchildren or others would be contingent beneficiaries. When the client passes away, the designated beneficiaries will inherit the IRA.
What your clients should know about a simple stretch IRA
Although the client anticipates that the designated beneficiaries will stretch an inherited IRA over their individual life expectancies, there are no restrictions on distributions from a simple stretch IRA. If the designated beneficiaries prefer not to spread distributions over their life expectancies, they can liquidate the inherited IRA after they receive it. If they do so, they will pay income tax and may also pay estate tax on the liquidation of a traditional IRA. Liquidation of a Roth IRA will be tax-free when properly structured.
The generational stretch IRA can be established prior to the client's death by naming a conduit trust as the beneficiary of the IRA for the benefit of the client's primary and contingent designated beneficiaries. Under the terms of the conduit trust, a subtrust is established and named for each child or grandchild.
An IRA beneficiary designation form should be completed and filed with the pertinent information on each child's subtrust. Copies should be given to the client's financial and legal advisors. Upon the death of the client, distributions from the trust will be made to each separate subtrust and paid to the beneficiary in accordance with the terms of the trust.
Deborah Moon, Esq., CLU, is director, advanced markets for Sun Life Financial, Wellesley Hills, Mass. She can be reached at 
