Trust as IRA Beneficiary

Does it make sense to name a trust as a primary or contingent beneficiary for an IRA? My understanding is no, because of the loss of deferral of more than 5 years due to non person. An estate planning attorney for a client is recommending it.



The deferral is not lost if the trust is qualified per p. 39 of Pub 590. If the trust meets the requirements, the life expectancy of the oldest individual trust beneficiary can be used for all individual trust beneficiaries. A non individual trust beneficiary would result in loss of this benefit.

There may be other reasons to name a trust as either primary or contingent IRA beneficiary. Creditor protection and control of a beneficiary’s spendthrift tendencies are two of those reasons. Estate taxes and state inheritance taxes might be others. If the trust is named as contingent beneficiary, the primary can execute a full or partial disclaimer to the trust after the owner passes.

Note that even a trust that fails to meet qualification requirements can receive IRA RMDs over the remaining non recalculated life expectancy of the owner IF the owner passes on or after the required beginning date. The 5 year rule only applies to deaths prior to the RBD.

Bottom line is that a trust should only be used if there are specific perceived benefits of doing so. The successor trustee needs to understand the issues regarding IRAs and all other trustee duties.



Trusts can be a good thing as an IRA beneficiary. If someone has a beneficiary in mind who is likely to cash out the IRA immediately, naming a trust can prevent that and force distributions over life expectancy.

If a beneficiary could have creditor problems or an unstable marriage, the trust as a beneficiary could prevent an untimely loss of the asset.

If an individual does not have sufficient assets to fund a Bypass or exemption trust, the IRA can be named as a contingent (more likely) or primary beneficiary.

There are many good reasons to name a trust, but as Alan says, the IRA owner needs to understand why they’ve chosen that beneficiary choice.



The reasons for leaving IRAs in trust rather than outright are the same as the reasons for leaving other assets in trust rather than outright. It keeps the inheritance from being included in the beneficiary’s estate, and it better protects it against the beneficiary’s potential creditors (including spouses). Depending on the situation, the beneficiary can be given almost complete control, or no control at all, over the trust.

Bruce Steiner, attorney
NYC
also admitted in NJ and FL



Bruce,
Can the IRS place a lien on trust assets in the same manner as other assets? Are they equally inclined to do so? What about state taxing authorities, eg. NYS?



If a trust doesn’t pay its fiduciary income taxes (or any other taxes it might owe, such as payroll taxes if it has employees), the IRS or the state taxing authorities can seize the trust’s assets in the same way that they could seize the assets of an individual who did not pay his/her taxes.

Under Section 6324, the IRS also has a lien for estate taxes for 10 years on the entire gross estate. That includes nonprobate assets such as IRAs, regardless of whom they are payable to.



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