FAQs: IRA and Trust Basics

FAQs: IRA and Trust Basics

Presented by Steve Meier

 

Q: Can I name a trust as beneficiary of my IRA?

A: Yes. But you should never transfer ownership of your IRA to your trust.

 

Q: Why would I name a trust as beneficiary of an IRA?
A: Here are a few reasons to consider:

 

  • If you wish to control the timing, purpose, or amount of funds a child will receive, a trust may be a good solution, especially for minor children. Rather than relying on your child to handle the funds as you would, naming a trust helps ensure that IRA proceeds are paid out over an extended period of time.

  • If you have a child who is a spendthrift or married to a spendthrift, a trust can help protect the retirement account against creditors.

  • If you worry that your child might get divorced and you want to keep the retirement account out of the divorce proceedings, a trust may help protect the IRA (and, for that matter, other assets you are considering leaving to your son or daughter).

     

Q: Why are other people telling me that I can’t name a trust as beneficiary of an IRA?

A: This issue has remained unclear for many years. Today, however, the IRS has specific rules in place for naming a trust as beneficiary of an IRA. An attorney can help you draft a trust document that satisfies these requirements, as well as your planning goals.

 

Q: How do distribution rules apply to trusts?

A: Up until 2019, if a trust met certain IRS requirements, it could take distributions from the IRA over the lifetime of the oldest beneficiary. The Setting Every Community Up for Retirement (SECURE) Act removed the ability of most individuals to stretch distributions from an inherited IRA over their lifetime. Instead, most individuals and trusts will need to withdraw the entire account balance within 10 years of the death of the IRA owner. The cost-benefit analysis of tax deferral versus control of distributions will determine whether a trust is an appropriate beneficiary option for an IRA. There are individuals who may, under an exception, be able to stretch IRA distributions over their lifetime. An attorney can help you determine if one or more of your beneficiaries may meet an exception, and what effect naming a trust as beneficiary could have on the beneficiary’s tax deferral.

 

It’s imperative that individuals who named a trust as the beneficiary of an IRA prior to the implementation of the SECURE Act review their current estate plan with an attorney to determine how the act may affect the distributions from the IRA to the trust. In some instances, trusts drafted prior to the SECURE Act may be obsolete, resulting in a distribution pattern that works against the original intent of the trust.

 

Naming a charity or other nonperson trust beneficiary may complicate the distribution scenario; an attorney can help you navigate this and other considerations when drafting your trust.

 

Q: How does the trust control the beneficiaries’ access to the IRA assets?

A: Although IRS rules govern the timing of distributions from the IRA to the trust, the trust document itself controls how the IRA proceeds (as well as other trust assets) will benefit the trust beneficiaries. As you work with your attorney to draft your trust, you can decide when, in what amount, and for what purpose your beneficiaries will receive the IRA funds.

 

Q: What about estate taxes?

A: If retirement plans comprise a large portion of your estate, it’s wise to seek the advice of an attorney or tax professional in order to determine the tax impact of naming a trust as your IRA beneficiary.

 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to make sure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

 

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Steven Meier is a financial advisor located at. 430 North Rangeline Road Carmel, IN 46032.  He offers advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, a Registered Investment Adviser. He can be reached at 317-688-9500 or at [email protected]

 

 

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