Strange Bedfellows: Trusts as IRA beneficiaries

Question: I recently created a living trust as part of my estate plan. Should I name my living trust as the beneficiary of my IRA?

Answer: There are several good reasons why you might consider naming a trust as the beneficiary of your IRA. For example, if your heir is a minor or is disabled or a spend thrift or is vulnerable to financial predators, then naming your trust as the beneficiary of your IRA can help protect your heir and your assets.

However, IRAs and trusts make strange bedfellows. When you make a trust the beneficiary of your IRA or a company-sponsored retirement plan, you need to be very careful. One of the main benefits of inheriting an IRA is the ability to stretch the IRA’s required distributions over the expected lives of the beneficiaries. If you aren’t careful, naming a trust as the IRA beneficiary can eliminate this benefit. Here are some things to consider before you decide to name a trust as your IRA beneficiary.

1.    Use an attorney who has experience in the arcane space where trusts and IRAs intersect.

2.    Confirm that your IRA custodian will accept your trust as beneficiary. Not all do and not all customer service representatives are well informed, so request a copy of your IRA custodial agreement and review it carefully with your attorney. 

3.    The living trust you use in your estate plan may include provisions that work against your IRA beneficiaries. Instead of using that trust, consider creating a testamentary trust, or a trust that comes into effect upon your death, specifically for the purpose of inheriting the IRA. The name of this trust must be provided to the IRA custodian by October 31st of the year following the death of the IRA creator.

4.    Only individuals get the benefit of stretching IRA required distributions over their expected lifetimes. If one of your trust beneficiaries is not an individual (a charity, for instance), then all the beneficiaries may be required to take their full IRA distributions by the end of the fifth year following the death of the IRA creator.

5.    Assuming the trust beneficiaries are individuals, one of them (usually the oldest) becomes the “designated beneficiary” for calculating the IRA’s required minimum distribution. All the other individual beneficiaries will be required to take distributions based on the life expectancy of the designated beneficiary. If you have multiple beneficiaries and desire to allow them to each stretch their distributions over their individual life expectancies, you may want to consider creating a separate trust for each beneficiary.

6.    Avoid language that would make your trust liable to pay other estate debts and expenses. Doing so could result in your estate (a non-individual) being seen as one of the IRA’s beneficiaries, effectively eliminating the stretch benefit for your other beneficiaries.

7.    Give careful consideration to who will be the trustee of the trust. The trustee should understand the importance of protecting the stretch benefits of the IRA and where to turn for help—presumably the attorney.

IRAs and trusts make strange bedfellows. While there may be good reasons to name a trust as the beneficiary of your IRA, make sure you get the legal help you need to protect your heirs and your assets in the process.

 

Steven C. MerrellMBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to steve@montereypw.com.