Home|Our Services|Our Philosophy|Client Center|Planning Ideas|Resources|Disclosure|Contact Us

Financial Briefs

More Articles  Printer Friendly Version

 

Trust As IRA Beneficiary: Not Crazy

You may have heard that you can't name a trust as a beneficiary of your IRA—but in fact that is a perfectly legal option for IRA owners. But whether you should do it is a completely different story and requires further analysis.

IRAs can be complicated enough on their own without bringing a trust into the equation. And if you do name a trust as a beneficiary and then make a mistake with your account, the tax consequences could be devastating—so proceed with extreme caution. You'll need to work with an attorney experienced in these matters.

Why would you want to name a trust as your IRA beneficiary? It's not a tax-saving move and indeed could increase your tax bill. Still, there are valid reasons for using this planning technique. The primary benefit is protection against the IRA assets being squandered or attached by creditors. For example, you might want to pass money in an IRA to someone who is under age 21 and may not have much experience handling financial affairs or to a family member who is known to be a spendthrift. Having the account pass into a trust could enable a trustee to control how the money is distributed.

In a similar vein, you might intend to provide IRA funds to your spouse in a second or third marriage, but without shortchanging your children from an earlier marriage. In that case, you might leave the assets to a trust that pays out income to support a surviving spouse for life, with the remainder going to the children.

In any of these cases, naming a trust as your IRA beneficiary could be helpful—though, again, you'll need to work with an attorney with specialized knowledge of trusts and estate planning. Having the proper language in documents for the IRA and the trust is crucial.

One key aspect of such an arrangement is that the trust you name as IRA beneficiary should have people—and not an institution or your estate—as its beneficiaries. That could enable those beneficiaries to use "stretch IRA" planning techniques to lengthen the amount of time that assets can utilize an IRA's tax advantages. Although required minimum distributions (RMDs) still will have to happen, they'll be based on the life expectancies of the ultimate beneficiaries. The younger they are, the longer the money can be shielded from taxes. If more than one nonspouse beneficiary is named in a trust, the age of the oldest living beneficiary must be used. Consider separate trusts for each nonspouse beneficiary.

A variation on this theme calls for naming your spouse as the primary beneficiary and the trust as the contingent beneficiary. Such a setup provides greater flexibility because the surviving spouse may roll over the inherited IRA assets into his or her own IRA as part of post-mortem estate planning.


Email this article to a friend


Index
How Now, Dow Jones Industrials?
Five Steps When You Inherit Assets
Getting A High Tax Grade For Higher Education Credits
Five Retirement Questions To Answer
Q's And A's About Financial Aid
One Last Shot At A Tax Exemption
Taking Socially Responsible Investing To The Next Level
How You Can Manage Risk Aversion
Don't Be Caught Red-Handed By The Wash Sale Rule
When To Disclaim An Inherited IRA
Tax Reform Outlook: Cloudy, With A Chance Of A Law
Sowing Tax Seeds For Capital Gains
Grandparents Can Become Big Spenders For Their Offspring
Sticking With The Fundamentals
What Would Estate Tax Repeal Mean?

This article was written by a professional financial journalist for William Howard & Co. Financial Advisors, Inc. and is not intended as legal or investment advice.

©2017 Advisor Products Inc. All Rights Reserved.
© 2017 William Howard & Co. Financial Advisors, Inc. | International Place II | 6410 Poplar Avenue, Suite 330, Memphis, TN 38119 | All rights reserved
P: 901-761-5068 | F: 901-761-2217 |
Disclosure | Privacy Policy | Contact Us