How to Name a Trust as Beneficiary of an IRA
One of the most popular ways to save for retirement is an individual retirement account (IRA). While the money is there to fund retirement, there’s always the chance you’ll pass away before all the money is taken out, meaning you have to plan for what happens to that money after you are gone. Designating a trust as your IRA beneficiary is one option. This strategy gives you maximum control over the distribution of your assets after you die, but it requires careful planning.
When you set up an IRA with a brokerage, you’ll generally be asked to designate a beneficiary. This is where you would enter the trust as your beneficiary, should that be the option you choose. The online portal for a financial institution should have instructions for changing your beneficiary if you have a new trust.
If you need help, you can always call the help line of the financial institution or go into a branch office, if applicable. Naming a trust as a beneficiary does require careful planning, so consider finding a financial advisor to help you.
Naming a trust as the beneficiary of your IRA gives you much more control over the funds. Trusts allow for written instructions on how and when the money should be paid out.
This can be helpful in the event that you name someone other than your spouse as the beneficiary of your IRA — for example, a child, grandchild, or another family member. Plus, designating a trust as the beneficiary of your IRA allows you to enjoy the tax benefits of an IRA, while still maintaining maximum control of your funds.
This strategy is also beneficial to those who want to leave their IRA to a beneficiary who may need some extra oversight: a minor child, a frivolous spender, or an individual with special needs.
It also may be the right choice if the beneficiary has issues with debt, is going through a marital dispute or divorce, or is experiencing another extenuating financial circumstance. Naming a trust as your beneficiary also protects the funds from creditors, another boon for this estate planning strategy.
Naming a trust as a beneficiary of your IRA probably isn’t the best choice if you want your retirement nest egg to go to your spouse. Spouses who inherit IRAs are able to roll the deceased’s IRA into theirs, tax-free. So if this is the case, save yourself the headache and simply designate your spouse as your IRA beneficiary.
There are several requirements to designate a trust as the beneficiary of your IRA.
- It must be a valid trust under state law.
- The trust must be irrevocable (or will become so upon your death)
- The trust’s beneficiaries must be individuals. So you can’t, for instance, designate a charity as the recipient of your IRA via the trust.
- The trust’s trustee must provide a trust document or certified list of beneficiaries to the IRA’s custodian or trustee by Oct. 31 the year following your death.
Drawbacks of this tactic include the cost of structuring and maintaining trust, as well as the complexities involved. Designating a trust as the beneficiary of your IRA is much more complicated than simply naming a beneficiary of your IRA. As such, the margin for error is high.
Additionally, you will lose the ability for a spouse to roll over the IRA into their own, tax-free — which in turn negates some of the tax benefits. If you didn’t designate a trust as the beneficiary and the IRA funds simply rolled over, the tax-advantaged account would grow at a much faster rate.
Another potential pitfall? The size of your IRA. If it’s not exceptionally large, the cost of drawing up and maintaining the trust could take a huge bite out of the potential windfall for your heirs.
Keep in mind that if you name several recipients in the trust, the required disbursements will be calculated based on the oldest beneficiaries’ age. (Remember, you are required to begin receiving IRA disbursements at age 70 .) Also worth noting: Just because a trust is named as the beneficiary of an IRA doesn’t mean the funds are moved into the trust. In fact, they shouldn’t be. Rather, they stay in the IRA to take advantage of the account’s tax benefits until dispersion of the funds begins.
To set up a trust as the beneficiary of your IRA, you’ll need to meet with an estate planning attorney with experience in this area; more specifically, one who is familiar with inherited IRAs. You also may consider meeting with a specialized tax advisor.
Designating a trust as the beneficiary of your IRA is a viable estate planning option in certain circumstances, such as for those who wish to leave their IRAs to individuals other than their spouse, or those wishing to leave assets to a minor child or disabled heir. It’s a complicated process, so work with a qualified professional to make sure it’s done correctly.
Alternately, those who want their IRAs to go to their spouse should simply name that individual as their IRA beneficiary. In this case, the spousal rollover benefit far outweighs the control that a trust as a beneficiary affords you.
- A financial advisor can help with many matters relating to estate planning and wealth management. Finding the right financial advisor that fits your needs doesn’t have to be hard, though. SmartAsset’s free tool matches you with financial advisors in your area in 5 minutes. If you’re ready to be matched with local advisors that will help you achieve your financial goals, get started now.
- Make sure to name an executor in your will, and make it someone you trust. Carrying out your wishes is their job.
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