Think Twice Before Naming a Trust as an IRA Beneficiary | Ed Slott and Company, LLC

Think Twice Before Naming a Trust as an IRA Beneficiary

Many individuals are advised by their attorneys to set up a trust. There are a lot of good reasons to have a trust. But you really have to think twice before naming a trust as the beneficiary of an IRA. Read that sentence again – think twice before naming a trust as the beneficiary of an IRA. When that happens, who is the beneficiary of the IRA? It is the trust.

Why is this important? Let’s say you have three children. They are all responsible adults; they even have jobs and their own homes. You could name them as the equal beneficiaries of your IRA. At your death, they would inherit the IRA and timely split it into three separate inherited IRAs. They would each be able to take required distributions (RMDs) from their own inherited IRA using their own age.

Contrast this with naming a qualifying trust as the beneficiary of the IRA. Your children are the beneficiaries of the trust. You now have only one beneficiary of your IRA – the trust. At your death only one inherited IRA is set up for the trust. When it comes time to take an RMD, it will be calculated on the age of the oldest trust beneficiary – the oldest child – since it is a qualifying trust. The RMD is paid from the inherited IRA to the one beneficiary – the trust. The trustee of the trust will then make distributions to the children in accordance with the terms of the trust. Your children will likely be prevented from setting up their own inherited IRAs. They will not control the investments of the inherited IRA. They cannot take distributions whenever they want. They are not the IRA beneficiaries. The trust is.

Let’s change the example a little. The trust will split into three sub-trusts, one for each child. That should change things, right? Maybe. If the master trust is named as the sole beneficiary, nothing changes. If the sub-trusts are named as the IRA beneficiaries, then each child can use his own life expectancy. Nothing else changes.

Let’s change the example again. The trust says collect all your assets, then distribute them and terminate the trust. You still have to go through all the above steps until the trust terminates. Then, if you are lucky, your IRA custodian will allow the trustee of the trust to have the title on the inherited IRA account for the trust changed to an inherited IRA account for the trust beneficiary. This change in title cannot change how RMDs are calculated. If all trust beneficiaries are using the age of the oldest trust beneficiary, they must continue using that age.

Using a trust as an IRA beneficiary adds a lot of complexity to your estate plan. If you can trust your children, maybe you should name them directly on the IRA beneficiary form instead of naming a trust.
 



- By Beverly DeVeny and Jared Trexler

 

Receive Ed Slott and Company Articles Straight to Your Inbox!
Enter your email address:

Delivered by FeedBurner

 


Content Citation Guidelines

Below is the required verbiage that must be added to any re-branded piece from Ed Slott and Company, LLC or IRA Help, LLC. The verbiage must be used any time you take text from a piece and put it onto your own letterhead, within your newsletter, on your website, etc. Verbiage varies based on where you’re taking the content from.

Please be advised that prior to distributing re-branded content, you must send a proof to [email protected] for approval.

For white papers/other outflow pieces:
Copyright © [year of publication], [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] Reprinted with permission [Ed Slott and Company, LLC or IRA Help, LLC - depending on what it says on the original piece] takes no responsibility for the current accuracy of this information.

For charts:
Copyright © [year of publication], Ed Slott and Company, LLC Reprinted with permission Ed Slott and Company, LLC takes no responsibility for the current accuracy of this information.

For Slott Report articles:
Copyright © [year of article], Ed Slott and Company, LLC Reprinted from The Slott Report, [insert date of article], with permission. [Insert article URL] Ed Slott and Company, LLC takes no responsibility for the current accuracy of this article.

Please contact Matt Smith at [email protected] or (516) 536-8282 with any questions.

 

Find members of Ed Slott's Elite IRA Advisor GroupSM in your area.
We neither keep nor share your information entered on this form.
 

I agree to the terms and services:

You may review the terms and conditions here.