Should Your Trust Be Named As Beneficiary of Your IRA?

Qualified accounts, such as IRA’s and 401(k)’s for example, are often a significant part of a family’s estate. How these accounts are passed at death can have a significant impact on not only the manner of distribution to our beneficiaries but the amount of taxes ultimately owed.

One option for distributing your account would be to name the intended recipients as beneficiaries directly on the account beneficiary form at the financial institution that holds the account.  The account or share of the account will then go directly to the named beneficiary without court supervision. Although this may be a simple planning strategy, it may not be the best strategy if asset protection is a concern. Following a recent Supreme Court decision, an inherited IRA may have less creditor and bankruptcy protection depending on which state you live in.

By naming a trust as the beneficiary of your IRA, you can retain some of the control on how the account is distributed after your death. If the trust is carefully drafted to qualify as a designated beneficiary, your beneficiary may be able to “stretch” the IRA payments over a longer period. If the trust is not considered a designated beneficiary, the funds may be required to be withdrawn from the account over a five-year period or over the life expectancy of the account owner depending on whether the account owner died before or after reaching age 70.5.

For the IRS to look through the trust and consider your beneficiaries as designated beneficiaries, your trust must satisfy four elements:

  1. The trust must be a valid trust under state law;
  2. The trust must be irrevocable, or by its terms become irrevocable upon the death of the original IRA owner;
  3. The trust’s underlying beneficiaries must all be identifiable as being eligible to be designated beneficiaries;
  4. A copy of trust document must be provided to the IRA custodian by October 31st of the year following the year of the IRA owner’s death.

If your trust satisfies these elements, your beneficiaries will be considered designated beneficiaries and they will be able to stretch their IRA payments over longer periods.

As this is a complex and highly sophisticated planning strategy, please consult with your estate planning attorney, CPA and/or financial advisor to discuss if this option is right for you.