Naming Trusts as Beneficiary of your IRA
Be aware of the tax and estate planning complications created by naming trusts as IRA beneficiaries. They are not for everyone. However, there are certain IRA owners who should be setting up trusts as IRA beneficiaries. Those situations are detailed below. There are times when naming a trust as your IRA beneficiary may be the only solution, and that is when it should be used. It should not be used haphazardly because “my attorney told me to do it” or because you were told it would save taxes. There is no tax benefit that can be gained with a trust that cannot be gained without one. Therefore, you would only use trusts for personal (non-tax) reasons. Examples of non-tax reasons are: to restrict access in some way, such as when the IRA beneficiary is a minor, disabled, incompetent, or unable to make his or her own decisions; to assist in the management of the trust funds; in second marriage situations; or for creditor protection (although many states now protect IRAs).
Trusts as IRA beneficiaries create unique problems and tax complications even when executed perfectly. IRA trusts cannot provide the panacea of tax and personal solutions that many IRA owners are looking for. There are trade-offs and consequences. Consider this paragraph a disclaimer and warning.
Don’t name trusts as IRA beneficiaries unless you are certain of what you’re doing and it’s the only solution. Even then, most of these trusts are poorly drafted and cause more problems than they are worth.
Overview of IRA Trusts
Large accumulations in IRAs and other retirement accounts have created interest in naming trusts as beneficiaries, in order to better control post-death distributions and restrict access to beneficiaries who might otherwise squander large inherited IRAs.
Instead of naming a person (for example a child or grandchild) as a direct beneficiary on the account, a trust would be named. The trust beneficiary would be the child, grandchild or other person that the IRA owner wants to receive the IRA. There could also be one income beneficiary and other beneficiaries who receive what’s left after the income beneficiary dies.
Trusts are not for everyone though. The main purpose is to control or protect post-death distributions from the inherited IRA or retirement plan. If that is not the intention, then a trust may not be appropriate.
If the trust is appropriate, it must qualify under the various IRS rules in order for the oldest trust beneficiary to be able to use their own life expectancy for computing post-death required distributions (the stretch IRA concept). If the trust does not qualify, the stretch IRA option is lost.
This is a technical area and there are things you should think carefully about before making any decisions. The first consideration is what is the reason for naming the trust as beneficiary? The next is how to name the trust as beneficiary. Lastly what must be done to by the beneficiary after the death of the IRA owner. All of these questions should be answered with absolute certainty prior to embarking on this journey.
- Reasons to Leave Assets in the Company Plan
- Separate Account Rules for Multiple IRA Beneficiaries
- Naming Trusts as IRA Beneficiaries
- The Power of the Stretch IRA
- Common Mistakes in Setting up Inherited (Stretch) IRAs
- IRA Beneficiary Form Mistakes
- How to Use the IRA Beneficiary Form to Build Referrals
- IRA Beneficiary Selection
- Post-death instructions for family
- What to look for in IRA Custodial Documents
- The Pension Protection Act of 2006
- American Taxpayer Relief Act of 2012
- How the Health Care Taxes Will Impact IRAs
- Deducting IRA Losses: Six Tests to Pass
- Supreme Court Rules Defense of Marriage Act (DOMA) is Partially Unconstitutional
- Avoiding Once-per-Year IRA Rollover Disasters
- Company Plan Loan Horror Stories
- Super-Sized Fees for IRA and Plan Private Letter Rulings
- Estate Tax Planning for 2013 and Later Years
- Increased Estate Exemption May Create Two Other Problems
- Net Unrealized Appreciation
- 5 NUA Mistakes You Cannot Afford to Make
- What You Need To Know About Special 10-Year Averaging
- Series of Substantially Equal Periodic Payments to Avoid the 10% Early Distribution Penalty
- How to Eliminate Future Retirement Taxes
- Who Should and Who Should Not Convert (Roth IRAs)
- Re-characterizing Roth IRA Conversions
- IRA Rules You MUST Know
Disclosure: This is a complicated IRS rule and we’re not endorsing using or not using the 72t distribution method. Consult tax and legal council before making any decisions about applying this rule to your accounts