Should You Name a Trust as a Beneficiary of Your IRA?
So you have an IRA, and it has some value to it. Like other things that you may own, it’s an asset that needs to be planned for when you pass. Those IRAs may not automatically go to your beneficiaries, and in some cases, may be subject to creditor claims. How do you protect your IRA in an estate plan?
The IRA Trust
IRAs can be included in a common type of revocable trust. As we have previously discussed, a revocable trust is one that you can alter or amend during your lifetime, so it has flexibility. There is also great asset protection—although IRAs are generally exempt from creditors during your lifetime, they are not once the assets are inherited by beneficiaries. Putting the IRA in a trust keeps the creditor protections of the IRAs, even after they are inherited.
Under trust documents, the trustee can be the only person who has discretion to use or distribute the assets for the protections afforded by an IRA trust to be effective. The beneficiaries of the trust must be people—not charities or corporate entities. That is because tax issues for IRA payouts are based on life expectancy and aging.
The Rules and Benefits of the Trust
The IRA trust is done by naming your IRA trusts as the beneficiary of your IRA, as opposed to individual people, which are normally designated in an IRA. If setup properly, the IRA trust will even allow someone who receives government benefits to protect those benefits—that is, the assets in the IRA won’t be counted as assets that could disqualify someone from receiving government benefits.
The trust documents can limit how much someone can receive from the IRA after you pass. This can avoid rapid liquidation and spending of assets by beneficiaries who you may not trust to be financially responsible, and can save them from tax penalties that could accrue from their decision to quickly use IRA assets left to them.
For larger estates, a trust that slowly and methodically distributes trust assets can ensure that the assets last for generations to come, thus protecting grandchildren from the risk that parents may quickly liquidate and spend an IRA.
Difficult familial issues can be dealt with as well. For example, if your IRA goes to your spouse when you pass, there is nothing that would prevent your spouse’s new family (if he or she remarries) from using those assets, or inheriting them when your spouse passes. But an IRA trust can specifically dictate that if your spouse passes, your IRA assets go to other beneficiaries. This can also be a way of planning for those situations when you may not want a spouse’s parents accessing your IRA funds.
There are other ways to accomplish the goals that an IRA trust can offer, such as simply setting up a trust for each beneficiary and putting the IRA assets into those so that the tax benefits of each beneficiary can be based on their individual ages.
Make sure all of your assets are protected and planned for. Contact Tampa estate and business attorney David Toback to discuss a comprehensive estate plan for your family.