Naming a Trust as Your IRA Beneficiary

As assets and family continually grow, so too does the need for more robust estate planning. This may eventually lead to the creation of a revocable trust and a question: should I name this trust as a beneficiary to my IRA?

Before diving into the details, we will go through a quick overview of current distribution rules for inherited IRAs. Generally, for non-spousal individuals, the account must be fully depleted within 10 years. It is also important to recognize that there are two different sets of distribution rules for IRAs owned by a trust. Both rules have their own merits and drawbacks and the specific rule to follow will be dependent on the language within the trust.

Accumulation Trust – An Accumulation trust is treated as the ultimate beneficiary of the IRA. As such, any distributions get to stay within the trust.

Conduit Trust – A Conduit trust gets looked through for the distribution rules to the trust beneficiaries. Any IRA distribution must be passed along to the trust beneficiary as they are made.

Considerations

• Complexity – Creating a trust to hold inherited assets adds a layer of ongoing complexity. There are rules set forth in the trust for distributions, access to assets, and control of the trust that must be followed. Additionally, as a separate entity, a tax return must be filed and potentially further administrative burdens. Review the totality of the assets that would be placed in trust to be sure the trust is warranted.
• Creditor Protection – Federal laws provide significant protection for IRAs when the account is still owned by the original owner, but those protections vanish for inherited IRAs. In the event there is some concern about bankruptcy or liability risk for a beneficiary, then passing the IRA to trust would create an additional layer of protection.
• Spendthrift Protection – Trusts provide guidelines and the potential of an impartial arbiter to make judgements on the need for a distribution of assets to the beneficiary. If there are concerns about an inheritor receiving unfettered access to the IRA, then having a trust in place as owner may inhibit any excessive distribution.
• Income Taxes – For any pre-tax inherited IRA, income is created upon a distribution. Trusts have a progressive tax rate system just like individuals, but the brackets are significantly narrower and reach the top rate very quickly. For this reason, it is important to review the potential taxes for the trust and the trust’s beneficiary when deciding both the IRA beneficiary and the type of trust to utilize.
• Coordination/Flexibility – Ultimately, the IRAs are one piece of the whole picture. Having separate individuals named as beneficiaries may simplify the transition of the account, but the account and overall assets will grow/shrink over time, or beneficiaries may get added/removed. These changes may cause a deviation from intentions that could require more diligent oversight and frequent changes. Funneling everything through the trust, creates a single point to be reviewed and updated if needed.

The landscape for inherited IRAs has changed over the past few years and the importance of continual review remains. This is not only to ensure the plan remains aligned with the intention, but that any rule changes also get appropriately addressed. Please contact your JMG advisor with any questions that you might have. We invite you to share this article with others who may also find it helpful.

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