IRAs and Trusts
Posted Mar 5, 2019 by Joan Keston
Many people and even many financial advisors think that you can’t do trust work involving your IRA accounts. That is not correct, although the type of trust and how it works is different from most trusts.
If you were to transfer ownership of your IRA into a trust, then that act would trigger a complete distribution of the IRA, requiring you to pay all the deferred taxes at one time. Thus, you should never transfer ownership of your IRA into a trust.
However, you can name a trust as the designated beneficiary of your IRA. The trust is not involved at all during the lifetime of the owner of the IRA. It only comes into play after the death of the owner of the IRA and only if it is named as the designated beneficiary of the IRA. Then, when Required Minimum Distributions are made, they are made to the trust and then can pass out of the trust to the beneficiaries that are named in the trust. This kind of trust is called a conduit trust. It enables the beneficiaries named in the trust to stretch the Required Minimum Distributions over the remaining life of the beneficiaries named in the trust. It is important not to confuse designated beneficiaries of the IRA with the beneficiaries named in the trust.
For example, John names his wife, Jane, as the primary designated beneficiary of the IRA, and his Retirement Account Trust as the contingent designated beneficiary of the IRA. If Jane is living when John dies, then she is the designated beneficiary of the trust and can roll it over and rename it as her own IRA. However, if Jane is not living when John dies, then his Retirement Account Trust would be the designated beneficiary of the IRA. John’s 2 children are the beneficiaries of the trust. They would then take Required Minimum Distributions based on their remaining life. Each distribution would be paid from the IRA to the Retirement Account Trust and then outright to John’s children.
The advantage of having a Retirement Account Trust is that the beneficiaries of the trust cannot cash out the IRA, i.e., take distributions of the entire IRA amount. This is a good thing if you want to make sure your kids do not irresponsibly cash out the IRA and pay the taxes immediately. It gives your kids a retirement benefit. It also protects the corpus of the IRA from creditors.
Of course there is more complexity to the terms of the trust, but this is basically how it works.
To learn more about IRAs and Trusts call our office and schedule an appointment. You can also attend our free seminars….visit our website at www.kestonlaw.com, or call us at (910) 509-7121.