In addition to leaving assets, including IRAs and 401(k)s, to heirs, you can also leave assets to a trust. When you first open an IRA, you are asked to designate a beneficiary. However, over time you may find yourself wanting to change that designation. You may also be doing sophisticated estate planning that involves having a trust as the beneficiary for your IRA.
KTVA.com’s recent article, “How to Name a Trust as Beneficiary of an IRA,” discusses some of the important elements of naming a trust as an IRA beneficiary. Naming a trust as a beneficiary requires careful planning, so work with an experienced estate planning attorney.
Naming a trust as the beneficiary of your IRA gives you much more control over the funds because trusts permit written instructions for how and when the money should be paid out. Designating a trust as the beneficiary of an IRA also lets you enjoy the tax benefits of an IRA, while still maintaining maximum control of funds.
This is also a good move for a person who wants to leave their IRA to a beneficiary who may need some additional direction, like a minor child or a person with special needs. Naming a trust as your beneficiary also shields the funds from creditors—a great estate planning strategy.
However, naming a trust as a beneficiary of your IRA probably isn’t a great idea or the best choice, if you want your retirement savings to go to your spouse. Spouses who inherit IRAs are more likely able to roll the deceased’s IRA into their IRA account, tax-free, especially if younger than age 70½. In that instance, designate your spouse as your IRA beneficiary.
There are several requirements to designate a trust as the beneficiary of your IRA. They include the following:
- It must be a valid trust under state law;
- The trust must be irrevocable (or become so upon your death);
- The trust’s beneficiaries must be individuals; and
- The trustee must provide a trust document or certified list of beneficiaries to the IRA’s custodian or trustee by October 31st of the year after your death.
However, there are some drawbacks to doing this: the expense of structuring and maintaining the trust and designating a trust as the beneficiary of your IRA, is much more complicated than simply naming a beneficiary of your IRA.
You also forfeit the ability for a spouse to roll over the IRA into their own IRA tax-free. This cancels out some of the tax benefits, because if you didn’t designate a trust as the beneficiary—and the IRA funds just rolled over—the tax-advantaged account would grow more quickly.
Keep in mind that just because a trust is named as the beneficiary of an IRA, doesn’t mean the funds are transferred to the trust—they shouldn’t be. Instead, they should remain in the IRA to take advantage of the account’s tax benefits, until dispersion of the funds starts.
Talk with an experienced estate planning attorney who has helped other clients use trusts with their IRA and other retirement accounts. You want to be sure to avoid tax issues both for your estate and your heirs.
Reference: KTVA.com (July 15, 2019) “How to Name a Trust as Beneficiary of an IRA”