An IRA may not be placed into a trust while the account owner is alive. An IRA also may not be owned by more than one person. The IRA owner can name a trust as a beneficiary of an IRA. Just because you can do this, does not mean it is a good idea, says the article “Naming Your Trust as an IRA Beneficiary” from The Press of Atlantic City. The IRA owner could also take all of the funds and deposit them into a trust, but that would be another bad idea. Why? It is because all of the funds withdrawn would be subject to income tax.
Therefore, why would anyone want to name a trust as the beneficiary for an IRA?
- If you want an heir, like a second spouse, to inherit the income but not the balance of the principal after you have died. This is done so the second spouse cannot name their children as the beneficiary, instead of the original account owner’s children.
- If you are concerned with the ability of heirs to manage your IRA funds wisely, a trust can be the beneficiary and you can set the terms with which the heirs can have access to the funds.
- Minor children cannot be direct beneficiaries of an IRA, and a disabled child may become ineligible for government benefits, if he or she receives an inheritance directly.
- If you want your IRA funds to be inherited by grandchildren instead of children, a trust is the way to go.
- If creditor protection is a concern under the laws of your state, a trust would keep the IRA funds from being tapped by claims of creditors.
Here is why you would NOT want to name a trust as the beneficiary of your IRA:
- There are no tax benefits to having the trust inherit your IRA.
- Trusts have expenses. Trustee fees and tax rates on funds left inside the trust, but not in the IRA, may be substantially higher than personal income tax rates, depending on the beneficiary.
- The trust will have to keep going long after your own death. That means tax returns must be filed, fees paid, and the trustee must maintain the trust.
- Some companies that hold IRAs do not allow trusts to be beneficiaries of IRAs. Before you get into figuring out if this is the right route for you, find out first if your custodian will permit it.
There are many other facts to consider before deciding to name a trust as the beneficiary of an IRA. Speak with your estate planning attorney to see if it is a suitable solution for you and your family.
One of the main goals of our law practice is to help families like your plan for safe, problem free, and successful transfer of assets to the next generation. Call our office today to schedule a time for us to review your estate plan and identify the best strategies for you and your family to ensure your legacy of love and financial security. Our office is located in Santa Ana, CA but we serve all of California including Irvine, Orange, Tustin, Newport Beach, and Anaheim.
Reference: The Press of Atlantic City (February 13, 2020) “Naming Your Trust as an IRA Beneficiary”