Should You Name a Trust as an IRA Beneficiary?

A question asked by some clients is whether they should name a trust as a beneficiary to their Individual Retirement Account (IRA). The answer depends largely on your specific circumstances. There are some potentially beneficial reasons for leaving IRA funds to a trust. The main benefit is for someone who cannot, or should not, be trusted with the money in the account. For example, if the beneficiary is a minor child, it may make sense to designate a trust as a beneficiary so a young is not suddenly flush with a large amount of money from your IRA. Other scenarios where naming a trust as a beneficiary is when someone who would receive the IRA funds has a track record of poor spending or they have a spouse of a 2nd marriage.

As you can see from the examples described above, naming  a trust as an IRA beneficiary is a protection strategy. It is intended to shield your assets from misuse or poor use by someone who stands to receive those funds.

What Type of Trust Should Be Named as an IRA Beneficiary?

If you decide that naming a trust as an IRA beneficiary makes sense in your particular situation, be sure to sit down with an experienced trust and estate planning attorney in St. Charles to discuss the proper protocols to follow. A key factor in properly naming a trust as an IRA beneficiary is for trust preparers to insert proper IRA terms so the trust doesn’t become legal fiction or conflict with IRS rules, according to Bankrate.com.

Another important factor is the type of trust you name as the IRA beneficiary. For example, you could name a “conduit trust” as the beneficiary. This would allow the IRA to remain tax deferred which would stretch the Required Minimum Distributions over the lifetime of the trust’s beneficiary (e.g., a young child or grandchild).  The ability to continue tax-deferred growth over a long period is a fantastic benefit.  However, a conduit trust requires that all Required Minimum Distributions be distributed immediately outright to the beneficiary.  This means that these forced distributions would be exposed to creditor claims. In addition, a conduit trust is prohibited from withdrawing retirement account proceeds in order to accumulate them inside the trust. So is there a better option?

Enter the “accumulation trust.”

This type of trust is allowed to receive an IRA’s Required Minimum Distributions and then use the discretionary authority designated in the trust to make distributions. Utilizing an accumulation trust therefore allows IRA distributions to be kept within the trust and accumulated rather than being immediately distributed to the beneficiary.  This means the trust assets will enjoy protection from creditor claims.

Remember, if you proceed with this trust planning strategy, the governing provisions of the trust are incredibly important. Specifically, in order to be able to use the life expectancy of the principal beneficiary to calculate Required Minimum Distributions, the accumulation trust agreement must expressly prohibit trust distributions to anyone who is older than individual used for calculating Required Minimum Distributions. So this means if you use a young child or grandchild for the Required Minimum Distributions calculation, spouses and/or any older siblings would not be eligible for beneficiary designation.  The trust assets can never pass to any older sibling or relative which may be contrary to your wishes.  Another limitation to be aware of is that only individuals can be named beneficiaries. This means you cannot name a charitable organization as a beneficiary, which may hinder how you want your funds to be utilized when you pass on.

Speak to a St. Charles Trust and Estate Planning Attorney Today

As you can see, properly setting up a trust as an IRA beneficiary can become quite complicated.  We are here to help.  Polaris Law Group takes pride in offering an effective, full-service experience to our clients. If you want to ensure that you and your family are properly cared for, contact Polaris Law Group’s experienced trust and estate attorneys, Scott Stork and Raymond Chandler today. Scott and Raymond are seasoned estate planning attorneys and are members of the National Network of Estate Planning Attorneys, the National Academy of Elder Law Attorneys, and Elder Counsel. Schedule a meeting by phone or by filling out a quick contact form today.

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