Can an IRA Be Owned by a Trust?

A trust can be used with an IRA to transfer assets.

In 1974, Congress passed the Employee Retirement Income Security Act (ERISA). This act was enacted to help individuals save for retirement and thus, Individual Retirement Agreements (IRAs) were created. Because these agreements are designed to aid an individual's retirement planning, no entity such as a trust can own an IRA. However, there are some uses of trusts in regards to IRAs that can help with retirement planning.

Considerations

There are three common reasons to consider having a trust as owner of an IRA. The first is to avoid probate, which can be a lengthy legal process. However, because an IRA has named beneficiaries, those assets pass directly to the beneficiaries without the probate process. Another reason is to ensure that the assets pass to the proper beneficiaries. IRAs, though, also include beneficiaries which determine the distribution of the funds. The last reason is to avoid taxes. Unfortunately, taxes are due whenever a distribution is made from an IRA.

Beneficiaries

Properly naming both primary and contingent beneficiaries can solve many of the issues associated with estate planning. Beneficiaries should be those individuals or entities to which you wish to leave the assets. It is also important to name contingent beneficiaries in case the primary beneficiary predeceases you. If you do not name any beneficiaries or the primary beneficiary does pass prior to your own death, then your estate will most likely receive those assets, and the assets will be subject to probate. Because life events like the death of a spouse, a divorce or the birth of a child occur, you should review your named beneficiaries every few years.

The IRA Trust

While a trust cannot own an IRA, it can be named as a beneficiary. The most effective type of trust for an IRA beneficiary is the IRA trust. This is designed specifically for the heir(s) of the IRA. Its only assets are that of the IRA. This is a good solution if you do not wish to have your named beneficiary receive a lump-sum distribution. The taxes are much greater on a lump sum than if the beneficiary were to receive smaller distributions over time. If you do not trust the beneficiary to use the funds properly, you can specify how the IRA trust makes distributions.

Living Trusts

If you make a living trust a beneficiary of an IRA, then it must take a lump-sum distribution which. The entire sum is subject to income taxes, which could substantially increase the amount of estate taxes owed. Once the trust is settled, the assets are treated just like any other asset of the trust and distributed to the trust's specifications. Naming a living trust as beneficiary is typically not an effective way to minimize taxes or efficiently distribute an IRA's assets. Consult a financial advisor or estate planning attorney prior to naming a trust as beneficiary of your IRA to understand the pros and cons of the decision.

References

• Congressional Research Service: Summary of the Employee Retirement Income Security Act (ERISA); Patrick Purcell et. al; May 2009
• Wall Street Journal; Avoiding Stumbles With 'Living' Trusts; Karen Damato; May 2009
• American Institute of CPAs; Living Trusts and the Emergence of the Qualified Retirement Plan Inheritance Trust; July 2008