Should You Leave Your IRAs to a Trust?

09 Feb 2017

Reasons to Name a Trust as Your Ira Beneficiary:

#1 Minor. If a minor (under 18 or 21 depending on state law) is named as the IRA beneficiary, it provides a reason to name a trust because minors are not able to make tax elections like IRA distribution decisions. Even if your beneficiary is not a minor, you may want the trust to provide for someone who is not physically or mentally able to care for themselves or to handle money.

#2 Second Marriage. A trust may be used as the IRA beneficiary when you want to control the ultimate disposition of your IRA. This is often the case in a second marriage situation. You may want to leave your spouse the annual IRA income, but after their death you want to make sure that the IRA goes to your children and not to those from a prior marriage. The trust you would use in these situations is called a QTIP (Qualified Terminable Interest Property) trust.

#3 Creditor Protection. A trust can be used to enhance creditor protection. Many states may not provide creditor protection for IRA beneficiaries. A trust can also protect IRA assets in the case of divorce.

#4 Control. Control with the right motivations is a good reason to name a trust as beneficiary. A trust allows you to control your IRA funds from the grave to be sure your beneficiaries, particularly if they are vulnerable, receive the maximum benefit.

Reasons Not To Name a Trust as Your Ira Beneficiary:

#1 Trusts add another are of complexity to an area that is already complicated enough.

Trusts are complicated and things get even more complex when they are named as IRA beneficiaries due to the special tax rules for IRAs. There are many ways to go wrong.

#2 Trust tax rates are high. In 2017, for a married couple filing jointly, the 39.6% tax rate kicks in when taxable income exceeds $470,700. For a trust, the 39.6% tax rate kicks in when trust taxable income exceeds only $12,500! If income from the IRA will be taxable to your trust, that is a serious tax hit.

#3 Your spouse wants a spousal rollover. For many spouse beneficiaries, a spousal rollover to their own IRA is a good strategy. However, to use this strategy a spouse must be named outright as the beneficiary on the IRA. Many taxpayers have gone to the IRS to get relief when a trust is named as the IRA beneficiary and the spouse wants to do a spousal rollover. While some have been successful, this is an expensive process and a positive outcome is not guaranteed. If you want your spouse to have the option to do a spousal rollover, you may want to reconsider naming your trust as your IRA beneficiary.

#4 Control. If clients simply want to control the IRA well past their death without a strong reason, a trust can accomplish this. If this is the only reason they are creating the IRA trust, there may be a high cost. May times, “control” is not the best plan for good family relations down the road.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for individualized legal advice. Cornerstone Financial Strategies and LPL Financial do not provide legal advice or services. Please consult your legal advisor regarding your specific situation. This material was prepared by IRA Help, LLC.

Copyright © 2016 IRA Help, LLC

Reprinted with permission

IRA Help, LLC takes no responsibility for the current accuracy of this information.


Brad Berger
Brad Berger

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