Individual retirement accounts and 401k’s (we’ll refer to all retirement vehicles as IRAs in this article) are a fantastic way for people to save money throughout their lifetime to support their retirement and to transfer wealth to the next generation. Trusts are versatile, effective estate planning tools that can meet a wide range of needs, such as transferring wealth, avoiding probate, minimizing tax burden, and protecting assets.

One option for naming beneficiaries for your IRA is to leave the account to a certain type of trust, commonly referred to as a Retirement Plan Trust or a Standalone Retirement Trust. This trust allows you to combine the tax-advantaged growth of an IRA with the many potential advantages trusts offer, especially if it is not in the best interest of your beneficiaries to receive their inheritance right away, or in a lump sum, or if you have asset protection / divorce concerns for your beneficiaries.

IRA Beneficiaries

When you establish an IRA, you have the option to name primary and contingent beneficiaries. A beneficiary is the individual, group, or entity designated to inherit the funds in your account when you pass away.

When designating beneficiaries, it is essential to consider the rules for required minimum distributions. The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE ACT) requires that the entire balance of an inherited IRA be distributed or withdrawn within ten years of the original owner’s death.

There are exceptions to the 10-year rule. If a surviving spouse, a minor child of the deceased owner, a disabled or chronically ill individual, or an individual who is not more than ten years younger than the deceased account holder inherits the IRA, they may not be held to the ten-year rule. These eligible designated beneficiaries typically have longer than ten years to take distributions.

A Trust as Beneficiary

When you name a trust as a beneficiary for your IRA, the trust will inherit the account upon your death. When you write the trust documents, you can designate how and when you want the IRA assets to be distributed to your beneficiaries. There are also asset protection benefits to naming the trust as beneficiary.

Using a trust as an estate planning tool can be especially helpful if you have beneficiaries who would benefit from not having access to all the IRA funds at once. Some examples may include minor children, people who receive government benefits due to special needs and need to take care not to exceed income limits, people who may not manage money well, or those in a difficult marriage.

In addition to designating who receives IRA assets in the trust, you can also designate under what conditions they will receive these funds. For example, people who find themselves in complex family relationships or who may need added protection from creditors may only receive their inheritance in installments or under certain conditions.

Another potential advantage of naming a trust as the beneficiary of an IRA is the option to name a series of beneficiaries, even after the original benefactor has died. For example, if you name primary and successor beneficiaries for your IRA, you determine who inherits the IRA. You also decide who the backup beneficiaries are, in case your primary beneficiaries predecease you.

Once you die and your IRA assets pass to your beneficiaries, they will decide who will inherit the assets from them. While they are only required to take the required minimum distributions, they can take much larger distributions. With a trust, you can name successor beneficiaries for distributions that are made after your death.

Potential Disadvantages of Naming a Trust as an IRA Beneficiary

A spouse who is named a beneficiary of an IRA can directly roll the IRA into their own account, potentially taking advantage of tax benefits. Spouses cannot directly roll IRAs into their accounts if a trust is named as a beneficiary.

Establishing a Retirement Plan Trust that meets you and your loved one’s needs can be an essential part of creating a comprehensive estate plan. However, retirement trusts are quite complex and must be structured with great attention paid to the applicable laws. Your Katzner Law Group estate planning attorney can help you consider all your options and develop a plan that meets your needs. We have extensive experience in planning for retirement assets.

You can schedule a call with us or reach out to us directly at 855.631.3457 to learn more about how best to plan today to protect those most important to you.