BY DEBRA VERNI
Do you have a good reason to name a trust as
beneficiary of your IRA?
Do you have a child with a disability? Is this
a second marriage and you want to make sure
your kids get their fair share? Do you have a
beneficiary that is a minor or can’t be trusted
with money? These are all good reasons to name
a trust as the beneficiary of your IRA.
Right now, you are thinking, “I have a trust,
why don’t I just name my current trust as
beneficiary?” Stop. You should not make your
irrevocable or revocable trust for that matter
the beneficiary of your IRA. Because of potential
income tax implications, a separate trust must
be created to receive your retirement benefits.
A separate trust for your IRA benefits can be
created in three ways.
1. As a stand alone trust created while you are
alive to receive your IRA benefits when you die,
2. A subtrust of a revocable trust you create
while you are alive that holds the retirement
asset as well as others, or
3. A subtrust of a trust created by a will.
Leaving an IRA to a trust is different than
putting other assets into a trust after death.
There is no quick fix for errors in beneficiary
designations for retirement accounts. You
should always seek legal advice from an attorney
that understands complicated inherited
IRAs.
A stand alone revocable IRA trust established
during your lifetime that is funded at your death
makes amendments easier and increases the
likelihood that your trustee will understand the
complexities of administering the trust after
your death. Separate share trusts can also be
established in the IRA trust for each of your
children and or beneficiaries.
The IRA will be stretched over the individual
life expectancies of each beneficiary and most
importantly, if the beneficiary dies before the
IRA is exhausted you can direct where the
money will go after your beneficiary’s death.
Your beneficiary cannot control who inherits the
balance of the IRA after their death.
A classic example is mom leaves a $500,000
IRA to her son, outright and their IRA plan permits
them to name successor beneficiaries. The
son then moves it into a stretch IRA, stretches it
over his life expectancy and starts taking yearly
distributions. Her son dies a few years later leaving
the IRA to his wife who then remarries and
leaves it to the new husband. What about your
grandkids? If mom left the $500,000 IRA to her
son in an IRA trust, at her son’s death the trust
document directs where the money goes, not to
the wife, but to the grandchildren.
IRA trusts also have potential for protection
against divorce as well as creditor protection
and bloodline protection.
Verni is a principal of the Herzog Law Firm
in Saratoga Springs.
Photo Courtesy Herzog Law Firm