Distributing an IRA to a Trust Beneficiary
Choosing a beneficiary for your individual retirement account, or IRA, is a relatively simple decision for many people. Married persons usually list their spouse as their primary beneficiary and their kids as secondary. But those with larger balances in their IRAs or with special estate planning objectives may choose to designate a trust as the beneficiary for their IRA. While this is perfectly acceptable, it does require special consideration and planning to be done effectively.
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Instructions
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Select the type of trust that you want to use as your beneficiary. Most estate planning experts recommend that any trust used as an IRA beneficiary be a pass-through, or conduit, entity. This means that the trust itself is not taxed, but that all monies and income that come from the trust are taxed directly to the trust beneficiaries. This is because the income tax rates for trusts are considerably higher than for individuals; they are, in fact, among the highest tax rates for any type of taxable party in our tax code. Irrevocable trusts such as second-to-die life insurance trusts would not be appropriate for this, since no money can be taken out of them under any circumstances. This type of trust is designed to reduce estate taxes for wealthy persons by gifting assets into the trust and then using those assets to purchase a large life insurance policy to pay for estate taxes. Ensure that the trust will grant the trustee authority to pass all money and assets through the trust to the beneficiaries.
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Choose your trust beneficiaries according to your estate plan. You may still want your spouse to be the primary beneficiary, but remember that IRA money that passes into the trust must be distributed based upon the life expectancy of the oldest beneficiary of the trust. Therefore a trust might be an appropriate choice if you want to leave your IRA money to your children or other minor relatives who cannot manage or take constructive reciept of the distributions.
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Name your spouse directly if you plan to leave your IRA to her so that she can roll your IRA directly into hers. However, if you have divorced and remarried, then a trust beneficiary could dictate that your current spouse receives the distributions from your IRA as long as she lives, with the remaining balance passing to the ex-spouse.
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Tips & Warnings
The IRS has four main requirements for any beneficiary trust that must be satisfied for the trust to be valid. First, the trust must be valid under state law. Second, it must become irrevocable upon the death of the grantor, or creator of the trust. Third, it must have clearly identifiable beneficiaries, meaning that the people can easily be found. Lastly, the IRS must get a copy of the trust document by October 31 the year after the IRA owner dies.
