Key Considerations for Naming a Trust as IRA Beneficiary

Individual retirement accounts (IRAs) have grown in popularity since they were first introduced in the 1970’s. IRA’s are useful tools often used to grow assets without paying current income tax and to transfer these assets on to the next generation. These accounts now hold over $11 trillion of assets, which is more than 1/3 of all retirement assets in the US.

The IRA, upon the death of the account owner, passes on to whoever he or she named in the IRA beneficiary designation. The most common designations are to individuals. However, a trust can also be named as an IRA beneficiary and can sometimes be a better option than naming an individual.

Reasons to Name a Trust

1. Working around beneficiary ownership limitations. For minor children or perhaps someone with special needs who receives government benefits and cannot have assets in his or her name, setting up a trust for their benefit and having this trust be the beneficiary of the IRA can make a lot of sense.

2. Solving for second marriage or other family structures. An IRA owner may want RMD’s to benefit his spouse during their lifetime and then have the rest go to his own children. If the IRA owner makes the spouse the beneficiary, there is no guarantee his children would benefit. But by putting the IRA in a trust, both of his goals can be obtained.

3. Limiting a beneficiary’s access. Naming a trust as an IRA beneficiary can allow the owner to insure the beneficiary doesn’t withdrawal all of the account at once.

4. Naming successive beneficiaries. If an IRA owner names an individual as a beneficiary, that beneficiary can then name their own beneficiaries of the inherited IRA. If a trust is the beneficiary, the IRA owner can control successor beneficiaries beyond the first.

5. Providing creditor protection. A person’s own IRA has some degree of protection from creditors, but that isn’t always the case for inherited IRA’s.

6. Funding estate plans structured to minimize estate tax.

For more information on benefits and other key items to consider, read the full article here.

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