When Trust Beneficiaries are Right for Your IRA

Many Individual Retirement Account ("IRA") owners give little thought to naming someone other than a loved one as a beneficiary. It is often a reflex to designate a spouse or child in hopes that your wealth will transfer to your family. However, in some cases, it may make sense to name a trust as a beneficiary.

Those investors who are concerned about the control of the distribution of retirement assets or the protection of intended beneficiaries may want to explore designating a trust as a beneficiary.

Who Should Consider Naming a Trust Beneficiary?

IRAs are great vehicles for accumulating retirement assets and passing on unused assets to family and loved-ones. It is, therefore, only natural that retirees would want to protect those assets beyond death. That means shielding distributions from being mismanaged by any of the following types of beneficiaries:

  • An individual who is involved in a divorce
  • An individual who is financially imprudent
  • An individual who has special needs or is receiving government benefits
  • An individual who has or may be susceptible to creditors

Anyone concerned about one or more of these types of beneficiaries should also consider a trust as it can aid in providing security, where possible, for your assets and, in certain cases, protect the beneficiary. It is important to remember that creating a trust is often time consuming and expensive, and one must consider the tax implications associated with designating a trust as an IRA beneficiary. It is strongly recommended that you retain a seasoned estate planning attorney who has experience drafting these types of trust to help you in this regard.

What Trust Structure is Appropriate?

Once you've determined that naming the trust as a beneficiary is appropriate for you, you should consider its structure. The structure of the trust is very important as it could impact distributions, taxes, and may determine the type of protection provided. IRA beneficiary trusts can be accumulation trusts, or conduit trusts. Below is a helpful breakdown of each structure:

  • Retention or Accumulation Trust: this structure provides that the trust retain the IRA distributions in the Trust, instead of requiring distributions to be paid immediately to the trust beneficiary.
  • PRO: This type of trust is appropriate when seeking to shelter IRA distributions from creditors.
  • CON: The trust may cause income to be taxed at a much higher, trust level tax bracket.
  • Conduit Trust: this type of trust requires IRA distributions to be paid out to the trust beneficiary used in calculating required minimum distributions.

PRO: Stretches payouts over the trust beneficiary's life expectancy, protects against spendthrifts or a government reduction of special needs benefits.

CON: These trusts generally do NOT protect the trust assets from the beneficiary's creditors.

Whether it makes sense for you to name a trust as a beneficiary on your IRA requires careful consideration. If you would like to further discuss this issue please feel free to call us at 516-496-7800.