When to Name a Trust as your IRA Beneficiary

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IRAs are popular choices as a retirement vehicle, today holding over $11 trillion in assets, estimated to comprise more than one-third of all retirement assets. What’s interesting is that naming trusts as IRA beneficiaries has become more common.

Jim Lorenzen, CFP®, AIF®

Most everyone knows required minimum distributions (RMDs) must begin at age 72.  The size of each year’s RMD is based on an age and life expectancy factor shown in tables published by the IRS (Roth IRAs are not subject to the RMD requirement).   What few realize is that the way the tables are calculated, there will be money over in the IRA at death if only RMDs are withdrawn each year.  In fact, if the IRA has a high rate of return, it’s even possible for the IRA to have actually grown in value.  So far, not bad.

IRA assets, of course, do not pass under the terms of your will or trust – they pass to whoever is named as beneficiary.  But, a trust can be named as beneficiary, then the assets are maintained in a separate account; and, there may be times when this makes sense:

Your beneficiary is a minor or someone with special needs –  A minor cannot legally own an IRA.  Someone with special needs maybe shouldn’t be a beneficiary if they’re likely to lose access to government benefits if s/he owns assets in his/her own name.

Second marriages –  An IRA owner may wish to benefit a surviving spouse during his/her lifetime and have the remainder pass to the owner’s own children.

Successive beneficiaries – When your beneficiary inherits your IRA, s/he can name his/her own beneficiaries.  These may or may not be the successors the original owner intended.

Limiting/controlling access to funds – Beneficiaries can decide how much they want to take without regard to their purpose.  An IRA owned by a trust will be subject to the terms of the trust.

Creditor protection –  While a regular IRA does have some degree of creditor protection, those protections don’t always carry over to an inherited IRA, according to a 2014 Supreme Court ruling in Clark v. Rameker, 134 S. Ct. 2242.  The court ruled that inherited IRAs do not qualify as exempt from claims of creditors as “retirement funds” under the Federal Bankruptcy Code.  An IRA owned by a trust, however, is not considered to be owned by the beneficiary and does have some protection.

Loss of the “Stretch” – The SECURE Act has all but eliminated the stretch IRA for non-spouse beneficiaries.  They’re now faced with the 10-year rule, which we’ve talked about before.  Post-death RMDs for a trust named as beneficiary will be calculated under either the stretch, 10-year, or 5-year rule, depending on the trust and beneficiary characteristics.  It depends on whether the trust qualifies as a conduit trust, an accumulation trust, a see-through trust and whether the beneficiaries are non-individuals, regular beneficiaries, or part of what’s now called “eligible designated beneficiaries”.   Be sure to talk with your estate planning attorney – which rule applies is not always clear.

As you can see, the beneficiary choices can be important considerations.  It’s good to talk with your team of professionals.

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Jim Lorenzen, CFP®, AIF®

Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.  IFG helps specializes in crafting wealth design strategies around life goals by using a proven planning process coupled with a cost-conscious objective and non-conflicted risk management philosophy.

Opinions expressed are those of the author.  The Independent Financial Group does not provide legal or tax advice and nothing contained herein should be construed as securities or investment advice, nor an opinion regarding the appropriateness of any investment to the individual reader. The general information provided should not be acted upon without obtaining specific legal, tax, and investment advice from an appropriate licensed professional.

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Jim Lorenzen is a CERTIFIED FINANCIAL PLANNER® professional and An Accredited Investment Fiduciary® in his 21st year of private practice as Founding Principal of The Independent Financial Group, a fee-based registered investment advisor with clients located in New York, Florida, and California. He is also licensed for insurance as an independent agent under California license 0C00742.

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