If you have a retirement account and a grandchild, you have a wonderful opportunity to do something that could provide that grandchild with tremendous long-term benefit. In other words, income tax deferral can be a tremendous tool to leverage for the benefit of a grandchild. What can you do?

You can direct a percentage of your retirement account to go into a trust for the benefit of your grandchild. If that trust is drawn properly, then the minimum required distributions from that retirement plan can be based on the life expectancy of the grandchild.

What this means is that you can leave some assets to your grandchild in an income tax deferred environment.

Retirement accounts are governed by the beneficiary designation on file with the custodian or plan administrator. Spouses and non-spouses (including children, grandchildren and trusts for their benefit) can be named the beneficiary of all or part of an IRA. The beneficiary has settlement options that they generally must exercise within a certain period of time.

Spouses and non-spouse beneficiaries might elect to rollover these plans so they continue tax deferred. In effect, if you direct a percentage of your IRA to go into a trust for your grandchild’s benefit, then those funds will be able to grow tax deferred.

It is not absolute income tax deferral. The grandchild would be required to take minimum required distributions from the trust which holds a portion of your IRA, but the distributions could be based on their age, and their life expectancy. That’s the key.

So, let’s say a client directs that upon his passing, 10 percent of his IRA (or $100,000) will go into a trust for his grandchild. That $100,000 can grow and the only tax that it is subject to is the income tax due on the distributions that the grandchild must take each year.

But since the grandchild is so young, the distributions, which are based on the grandchild’s life expectancy, can be pretty small. Hence, the income tax bite each year can be pretty small. Hence, over time, these funds can grow tremendously.

So, when that grandchild is in middle age and in the midst of raising a family, the trust you left her, funded with retirement assets, can end up being much much more valuable than when you gave it to her.

This is what we call leveraging income tax deferral. It is a good and powerful planning strategy for anyone who owns a retirement plan and has grandchildren they would like to benefit.

Mark F. Winn, J.D., Master of Laws (LL.M.) in estate planning, is a local asset protection, estate and elder law planning attorney. mwinnesq.com