Paying IRA Proceeds to a Minor Beneficiary
If you have children, you may be considering making them the beneficiaries of your IRA, or individual retirement account. While it is common for people to name minors as heirs, doing so with IRA proceeds may not always have the desired result. Thoughtful planning is required to ensure that your children receive your IRA proceeds according to your wishes.
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UTMA
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The simplest way to bestow your IRA distributions to a minor is through an UTMA account. (It's called an UTMA because it's allowed under the Uniform Transfers to Minors Act.) With this type of account a custodian is responsible for managing and withdrawing all required minimum distributions until the minor reaches the age of majority, which may be 18 or 21 depending on your state. Because minors are usually taxed at a lower bracket than adults, more of your IRA distributions should pass to your beneficiary. A separate UTMA account must be created for each minor beneficiary.
Trust
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If the value of your IRA distributions is large enough to support the cost of drafting and administering a trust, establishing a "family pot trust" may be a good option. This method allows you to choose the custodian of the trust and provide financial coverage for multiple minor beneficiaries. IRA payout schedules are determined by the Internal Revenue Service and may be cut short when based on the lifespan of a "remainder beneficiary," or significantly older adult beneficiary who would inherit in the case of the death of all minor beneficiaries.
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Conduit Trust
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To avoid the potential problem of a shortened payout schedule inherent with a standard trust, IRA holders may consider establishing a conduit trust. These trust accounts require that each distribution from the inherited IRA either pass to the minor beneficiaries or be spent on their behalf by the trust custodian. In addition, the payout schedule is based on the age of the oldest minor beneficiary -- bypassing the issue of a "remainder beneficiary."
Considerations
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Leaving your IRA payouts to a minor should always be considered with an eye toward the future. While states do not allow minors to inherit IRA distributions until they come of legal age, an UTMA account will not prevent a 21-year-old from inheriting and potentially squandering many thousands of dollars. Likewise, if one minor beneficiary receives a full scholarship to college, the remaining IRA proceeds may be better allocated towards the remaining beneficiaries, which is permissible with a family pot trust. Consult an attorney before making a minor the beneficiary of your IRA.
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References
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