Designating a Trust as an IRA or Retirement Plan Beneficiary

There are many reasons you may consider naming a trust as beneficiary of your retirement plan or IRA. The most common reasons are: 1) The beneficiary is a minor or is disabled (special needs). 2) The beneficiary is not financially responsible, and you want to retain control over the distributions after your death. Some other common reasons include asset protection, estate planning, and charitable gifting.

If your goal is to pass on the tax deferral benefits of your retirement accounts to your beneficiaries, or to ensure that your beneficiaries don’t spend their inheritance all at once, the trust must be structured properly. The trust must satisfy IRS rules qualifying it as a “look through” or “see through” trust, thereby allowing for required minimum distributions (RMD) to be paid out over the beneficiary’s life expectancy. If not structured properly, the trust may be required to liquidate the retirement plan and distribute the assets within 5 years from the owner’s death, with all distributions being subject to taxes. In some instances, immediate taxation of the entire retirement plan or IRA may be triggered.

There are two types of trusts that are used: conduit trusts and accumulation trusts. A conduit trust is simpler and more widely used. It distributes the RMD through a trustee. An accumulation trust is more complex and allows the trustee to hold on to the RMD in the trust, so it grows with the principal.

It is important to get help from advisors and estate planning attorneys with experience in setting up trusts that satisfy all IRS requirements. It isn’t difficult to name a trust as a beneficiary, but care must be taken, and it must be done correctly. The following article has some good information about naming trusts as beneficiaries of retirement accounts. Please click here to read "Naming a Trust as a Beneficiary of Retirement Accounts."

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