IRAs have been around for decades. You may have had your IRA for years. Maybe many years ago, when you established your IRA, you named a trust as the beneficiary and haven’t thought a lot about it since. You likely spent both time and money drafting the trust and were careful to name the trust on your IRA beneficiary form. Here are some reasons why it might be worth it to reconsider that decision.
Your estate planning needs have changed.
The federal estate tax exemption is much higher now than in previous years. Portability is now available for the estate tax for married couples. These changes mean that the federal estate tax is now a concern for a very small percentage of estates. If you named a credit shelter trust as your IRA beneficiary as part of an estate tax planning strategy when the exemption was much lower, you may no longer need that trust.
You never really needed a trust.
Think back. Why did you name your trust as your IRA beneficiary? Was there a good reason? “My attorney told me to” is not enough. After a little investigation and thought you may now decide that you never really needed a trust in the first place.
You did need a trust but your situation has changed.
Maybe you had good reason to name a trust but now the situation has changed. Perhaps the trust was set up for a minor child and that child has now grown up. Time passes quickly, and the trust which was once a good strategy is now no longer needed.
Trusts add another area of complexity to an area that is already complicated enough.
Trusts offer control over your IRA assets after your death. While this may sound like a desirable thing to you, there is a tradeoff. Trusts are complicated and things get even more complex when they are named as IRA beneficiaries due to the special tax rules for IRAs. There are many ways to go wrong. It may be worth it to reconsider whether your objectives with a trust could be met with another strategy.
Trust tax rates are high
In 2017, for a married couple filing jointly, the 39.6% tax rate kicks in when taxable income exceeds $470,700. For a trust, the 39.6% tax rate kicks in when trust taxable income exceeds only $12,500! If income from the IRA will be taxable to your trust, that is a serious tax hit. This alone makes it worth it to at least ask the question of whether a trust is still the right choice as your IRA beneficiary.
Your spouse wants a spousal rollover.
For many spouse beneficiaries, a spousal rollover to their own IRA is a good strategy. However, to use this strategy a spouse must be named outright as the beneficiary on the IRA. Many taxpayers have gone to the IRS to get relief when a trust is named as the IRA beneficiary and the spouse wants to do a spousal rollover. While some have been successful, this is an expensive process and a positive outcome is not guaranteed. If you want your spouse to have the option to do a spousal rollover, you may want to reconsider naming your trust as your IRA beneficiary.
Making the Right Decision for You
Are trusts the wrong IRA beneficiary for everyone? Absolutely not. For some, they are a powerful strategy. However, they do come with some downsides. That is why even if you named your trust as your beneficiary years ago, now may be the time to give some thought as whether that is still the right choice for you. If you are unsure, it may be a good idea to discuss your situation with a knowledgeable advisor.