by Brent Ripley
Many people mistakenly name their family trust as a beneficiary of their IRA or 401(k) account.
But wait! You thought this was what your trust was for, right? Shouldn’t your trust be the owner or beneficiary of all your assets? Not necessarily, especially if tax savings are a priority.
A trust can be an efficient beneficiary of your IRA account, but it should be specifically drafted for that purpose, and only under certain circumstances. The overwhelming majority of family trusts are not drafted to account for retirement plans.
The simple truth is, it may be better to leave your IRA out of your trust altogether.
This is because IRA accounts are non-probate anyway, and are transferred according to their beneficiary designations. This means you do not need a trust to avoid probate when it comes to your IRA.
If you leave your IRA to your trust, it’s unlikely to receive the full benefits of special “stretch IRA” tax treatment. If it isn’t distributed and taxed outright to your heirs upon your death, your youngest child will likely have to take minimum distributions according to your oldest child’s life expectancy tables. Either way, the result is heavy, unnecessary taxation of the potential inheritance.
One disadvantage to naming heirs directly as beneficiaries of an IRA is the fact that they can immediately withdraw it once you pass away. This will result in immediate tax consequences that the heir may not fully appreciate or plan for. A specially drafted IRA Trust can help in this situation by restricting the circumstances under which the IRA can be accessed, often until the heir has reached a certain age.
It should be noted that many IRA custodians (the brokerage or investment company where the IRA is invested) have expanded and detailed beneficiary forms that allow you to leave the account restricted or unrestricted and divided among as many beneficiaries as you want. Other custodians accept detailed beneficiary designations that have been specially drafted by an attorney. Using these methods, you can restrict IRA blowout potential without a trust, as long as the custodian is willing to administer the restrictions.
Trusts are powerful tools, and should be the cornerstone of any meaningful estate plan – but be careful. Used improperly they can cause big problems.
If you have any concerns about your IRA and how it is to pass to your heirs, contact us at 801-342-9275 or visit us at http://www.jamestownlawgroup.com.
Brent Ripley is an estate planning attorney with Jamestown Law Group and is a partner with Jamestown Wealth Management, a Utah Registered Investment Adviser.