Can IRAs Be in Trust Accounts?
While you can't put your IRA in your trust, you can name it as the beneficiary of your IRA. Once you die, the assets pass to an Inherited IRA in your name on behalf of the trust, and the trustee then becomes responsible for distributing the assets to the trust beneficiaries in accordance with IRS rules.
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History
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Since the time of the Crusades, when knights going off to battle temporarily entrusted their lands to a third party, trusts have evolved to create a clear distinction between "legal" ownership and "beneficial" ownership. The need for this distinction arose as a result of cases where the third party entrusted with the lands could legally refuse to return them, forcing the original owner to petition the king for fair treatment.
Features
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Today, a trust--a legal entity in its own right--can own and manage assets, receive and distribute income and pay taxes. A trust will name one or more trustees who then must act in accordance with the written trust provisions. Since only individuals with earned income may have IRAs, trusts, along with corporations and other legal entities, are excluded from owning them.
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Benefits
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Trusts can own assets for the benefit of your heirs. By creating a distinction between you and the legal owner of your assets, your trust offers several advantages. If you have a large estate, transferring assets to the trust reduces the size, and therefore the taxability, of your estate. If you have a disabled child, a trust empowers a trustee to manage assets on behalf of the child after your death. If you want to keep the details of your estate private, a trust allows you to bypass a public, expensive or time-consuming probate process.
Effects
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When you name your trust as the beneficiary, the successor trustee(s)--after setting up the Inherited IRA in your name for the benefit of the trust--will distribute the assets to beneficiaries via the trust on a pass-through basis, according to rules enumerated in IRS' Publication 590. While your beneficiaries will have to pay income taxes on the distributions, they will not be subject to the 10 percent early withdrawal penalty.
Considerations
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For "qualified" trusts, that is, trusts which become irrevocable on your death, obey all applicable state laws and name identifiable beneficiaries. Your trustee can spread distributions to the beneficiaries over the life span, as dictated by IRS tables, of the oldest non-spouse beneficiary, as long as you were over age 70 1/2 at the time of your death. For non-qualified trusts, the trustee must complete all distributions by the fifth year following your death regardless of your age, but including annual required minimum distributions if you were over age 70 1/2 at the time of death. Many additional rules and conditions apply; check with a qualified tax adviser for your particular situation.
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- Photo Credit dollars in envelope image by KtD from Fotolia.com to draw a distinction, different paper-clips 1 image by wildman from Fotolia.com
