Should I name my Trust as the beneficiary of my IRA?
Quick Answer
Sometimes, and it is one of the easiest things to get wrong. Naming a trust as IRA beneficiary can be exactly right where a beneficiary needs protection, and it can accelerate taxes badly if the trust is not drafted for the purpose. This is a decision to make with your attorney and your tax professional together, not from a form at the custodian.
Why this is not a routine designation
Retirement accounts are different from everything else in your plan.
They pass by beneficiary designation, not by your will or your trust’s terms. And they carry income tax that has not been paid yet, so who inherits and how they are required to withdraw determines the tax bill.
Get it wrong and a beneficiary can face a far larger tax hit than necessary.
When naming a trust makes sense
A beneficiary receiving means-tested benefits. An IRA paid outright to someone on Medicaid or SSI can end those benefits. A properly drafted special needs trust preserves them.
A minor. Minors cannot manage an inherited account, and without a trust a court may control it until eighteen and then hand over the balance.
A beneficiary with creditors, addiction, or spending problems. The trust holds and controls rather than paying out in full.
A blended family. Where you want a surviving spouse supported during life with the remainder reaching your own children.
Control over timing. Where you want distributions staged rather than immediate.
When naming individuals directly is usually better
Where your beneficiaries are competent adults who can inherit outright, naming them directly is simpler, cheaper, and often more tax efficient.
A surviving spouse in particular has options available to them as a direct beneficiary that are generally not available through a trust.
The drafting point that matters
If a trust is going to be an IRA beneficiary, it has to be drafted for that job. There are specific requirements, and a trust that does not meet them can cause the account to be paid out on a much faster schedule than necessary, accelerating income tax.
A general revocable living trust is not automatically suitable. This is precisely where a generic document causes an expensive problem, and where families discover the issue only after the death, when nothing can be changed.
The rules changed and keep changing
The landscape for inherited retirement accounts shifted significantly in recent years, and most non-spouse beneficiaries now face a much shorter withdrawal window than the old lifetime stretch.
I am not going to state the current rules as though they are fixed, because they have moved more than once and there are exceptions for certain beneficiaries. This is exactly the area to check current rules against your actual situation.
What to do this week
Pull your beneficiary designations and read them. All of them.
Confirm the named people are alive, that contingent beneficiaries are named, and that nothing names an ex-spouse. Then confirm what they say matches what your will or trust says, because the designation wins every time.
That review is one of the highest-value hours in estate planning and almost nobody does it.
Your next step
Before naming any trust as beneficiary of a retirement account, schedule a complimentary 15-minute Strategy Session at 404-549-5001.
Nothing here is tax advice, and rules for inherited retirement accounts change. Confirm current treatment with us and your tax professional before acting.
More is on our Estate Planning page.
Related questions
- What are Beneficiary Designations?
- What is a Special Needs Trust and how can I benefit from it?
- Does Georgia have an estate or inheritance tax?
- What does “funding your trust” mean?
This page is presented for educational purposes only and nothing on it should be treated as legal advice. What applies to you is very fact specific to your situation and your family. Our attorneys are licensed in Georgia and Michigan. This area of law has frequent statutory and policy changes.
Looking to find an experienced estate lawyer in the Georgia area who is skilled in asset protection and estate plan preparation? Shannon Pawley is an attorney in Georgia with expertise in estate planning and asset protection. Shannon can provide assistance with creating an estate plan to include making a will and how to establish a trust properly. If you have questions about asset protection or questions about making an estate plan, reach out to Shannon and she will be glad to help answer all the estate planning questions you might have!
